Exhibit 99.5
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 2004
FDIC Insurance Certificate Number 19877
BANK OF ASTORIA
(Exact Name of Issuer as Specified in its Charter)
Oregon | 93-0571291 | |
(State of Incorporation) | (IRS Employer Identification No.) |
1122 Duane Street, Astoria, Oregon
97103
(Address of principal executive offices)
(503) 325-2228
(Issuer’s telephone number)
Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the practicable date: Common Stock, $1.25 Par Value; 2,358,940 shares outstanding at April 30, 2004.
BANK OF ASTORIA
TABLE OF CONTENTS
Page Number | ||||
PART 1 | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (unaudited): | |||
Condensed Balance Sheets – March 31, 2004 and December 31, 2003 | 3 | |||
Condensed Statements of Income – Three months ended March 31, 2004 and 2003 | 4 | |||
Condensed Statements of Cash Flows – Three months ended March 31, 2004 and 2003 | 5 | |||
Condensed Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2004 and 2003 | 6 | |||
Notes to Condensed Financial Statements | 7-10 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16 | ||
Item 4. | Controls and Procedures | 16 | ||
PART II | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 17 | ||
Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 17 | ||
Item 3. | Defaults Upon Senior Securities | 17 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 17 | ||
Item 5. | Other Information | 17 | ||
Item 6. | Exhibits and Reports on Form 8-K | 17 | ||
SIGNATURES | 18 |
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK OF ASTORIA
CONDENSED BALANCE SHEETS (Unaudited)
($ in thousands, except share data)
March 31, 2004 | December 31, 2003 | |||||
ASSETS | ||||||
Cash and cash equivalents: | ||||||
Cash and due from banks | $ | 5,581 | $ | 5,833 | ||
Interest-bearing deposits at the Federal Home Loan Bank | 3,600 | 194 | ||||
Total cash and cash equivalents | 9,181 | 6,027 | ||||
Investment securities available-for-sale | 40,232 | 46,807 | ||||
Federal Home Loan Bank stock | 489 | 302 | ||||
Loans held for sale | 127 | 55 | ||||
Loans, net | 95,581 | 95,501 | ||||
Premises and equipment, net | 3,408 | 3,350 | ||||
Other real estate | 664 | 687 | ||||
Certificates of deposit purchased from other financial institutions, net | 223 | 418 | ||||
Accrued interest and other assets | 1,472 | 1,718 | ||||
Total assets | $ | 151,377 | $ | 154,865 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Liabilities: | ||||||
Deposits: | ||||||
Demand | $ | 23,462 | $ | 22,780 | ||
Interest-bearing demand | 74,584 | 71,968 | ||||
Savings | 10,657 | 10,388 | ||||
Time | 26,437 | 27,611 | ||||
Total deposits | 135,140 | 132,747 | ||||
Short-term borrowings | — | 7,000 | ||||
Accrued interest and other liabilities | 764 | 547 | ||||
Total liabilities | 135,904 | 140,294 | ||||
Stockholders’ Equity: | ||||||
Common stock (par value $1.25); 10,000,000 shares authorized; 2,350,840 issued and outstanding (2,343,840 in 2003) | 2,948 | 2,930 | ||||
Surplus | 4,834 | 4,736 | ||||
Retained earnings | 7,129 | 6,532 | ||||
Accumulated other comprehensive income | 562 | 373 | ||||
Total stockholders’ equity | 15,473 | 14,571 | ||||
Total liabilities and stockholders’ equity | $ | 151,377 | $ | 154,865 | ||
See accompanying notes.
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK OF ASTORIA
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
($ in thousands, except share data)
Three months ended | ||||||
March 31, 2004 | March 31, 2003 | |||||
Interest and dividend income: | ||||||
Interest and fees on loans | $ | 1,753 | $ | 1,787 | ||
Taxable interest on investment securities available-for-sale | 292 | 260 | ||||
Nontaxable interest on investment securities available-for-sale | 74 | 57 | ||||
Interest on demand deposits at Federal Home Loan Bank | 2 | 18 | ||||
Dividends on Federal Home Loan Bank stock | 4 | 4 | ||||
Total interest and dividend income | 2,125 | 2,126 | ||||
Interest Expense: | ||||||
Deposits | 217 | 290 | ||||
Total interest expense | 217 | 290 | ||||
Net interest income | 1,908 | 1,836 | ||||
Loan loss provision | 75 | 75 | ||||
Net interest income after loan loss provision | 1,833 | 1,761 | ||||
Noninterest income: | ||||||
Service charges on deposit accounts | 114 | 115 | ||||
Gains on sales of mortgage loans, net | 9 | 46 | ||||
Other | 53 | 43 | ||||
Total noninterest income | 176 | 204 | ||||
Noninterest expense: | ||||||
Salaries and employee benefits | 639 | 623 | ||||
Occupancy, net | 169 | 185 | ||||
Other | 294 | 291 | ||||
Total noninterest expense | 1,102 | 1,099 | ||||
Income before income taxes | 907 | 866 | ||||
Provision for income taxes | 310 | 314 | ||||
Net income | $ | 597 | $ | 552 | ||
Basic earnings per common share | $ | .25 | $ | .24 | ||
Diluted earnings per common share | $ | .25 | $ | .24 | ||
See accompanying notes.
4
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK OF ASTORIA
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
Three months ended | ||||||||
March 31, 2004 | March 31, 2003 | |||||||
Net cash provided by operating activities | $ | 1,124 | $ | 511 | ||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities and calls of securities available-for-sale | 6,809 | 2,700 | ||||||
Purchases of investment securities available-for-sale | — | (4,279 | ) | |||||
Purchases of Federal Home Loan Bank stock | (182 | ) | — | |||||
Proceeds from sales of investment securities available-for-sale | 22 | 396 | ||||||
Net (increase) decrease in loans | (258 | ) | 1,379 | |||||
Acquisition of premises and equipment | (65 | ) | (101 | ) | ||||
Proceeds from sales of other real estate | — | 152 | ||||||
Decrease in certificates of deposit purchased from other financial institutions | 195 | — | ||||||
Other | — | 2 | ||||||
Net cash provided by investing activities | 6,521 | 249 | ||||||
Cash flows from financing activities | ||||||||
Net increase in deposits | 2,393 | 5,903 | ||||||
Net decrease in short-term borrowings | (7,000 | ) | — | |||||
Stock options exercised | 116 | 41 | ||||||
Net cash provided (used) by financing activities | (4,491 | ) | 5,944 | |||||
Net increase in cash and cash equivalents | 3,154 | 6,704 | ||||||
Cash and cash equivalents at beginning of the period | 6,027 | 12,656 | ||||||
Cash and cash equivalents at the end of the period | $ | 9,181 | $ | 19,360 | ||||
See accompanying notes.
5
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK OF ASTORIA
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
($ in thousands)
Common Stock | Surplus | Retained earnings | Accumulated other income (loss) | Total shareholders equity | |||||||||||
Balances at December 31, 2002 | $ | 2,903 | $ | 4,558 | $ | 5,572 | $ | 597 | $ | 13,630 | |||||
Comprehensive income: | |||||||||||||||
Net income | — | — | 552 | — | 552 | ||||||||||
Other comprehensive income: | |||||||||||||||
Unrealized gains on investment securities available-for-sale of approximately $97 (net of income taxes of approximately $38) | — | — | — | 59 | 59 | ||||||||||
Total comprehensive income | — | — | — | — | 611 | ||||||||||
Stock options exercised | 5 | 36 | — | — | 41 | ||||||||||
Balances at March 31, 2003 | $ | 2,908 | $ | 4,594 | $ | 6,124 | $ | 656 | $ | 14,282 | |||||
Balances at December 31, 2003 | $ | 2,930 | $ | 4,736 | $ | 6,532 | $ | 373 | $ | 14,571 | |||||
Comprehensive income: | |||||||||||||||
Net income | — | — | 597 | — | 597 | ||||||||||
Other comprehensive income: | |||||||||||||||
Unrealized gains on investment securities available-for-sale of approximately $315 (net of income taxes of approximately $126) | — | — | — | 189 | 189 | ||||||||||
Total comprehensive income | — | — | — | — | 786 | ||||||||||
Stock options exercised | 18 | 98 | — | — | 116 | ||||||||||
Balances at March 31, 2004 | $ | 2,948 | $ | 4,834 | $ | 7,129 | $ | 562 | $ | 15,473 | |||||
See accompanying notes.
6
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 2004 (UNAUDITED)
1. Basis Of Presentation
The accompanying condensed unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results anticipated for the year ending December 31, 2004. For additional information, refer to the financial statements and footnotes for the year ended December 31, 2003.
The presentation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Certain amounts in 2003 have been reclassified or restated to conform to the 2004 presentation. All dollar amounts, except share and per share data, are shown in thousands.
2. Stock-Based Compensation
At March 31, 2004, Bank of Astoria (the Bank) has two stock-based employee and director compensation plans. The Bank accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Accordingly, no stock-based compensation cost is reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
The following illustrates the effects on net income and earnings per common share if the Bank had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” to stock-based compensation for the three months ended March 31, 2004 and 2003:
2004 | 2003 | |||||||
Net income, as reported | $ | 597 | $ | 552 | ||||
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related income tax effects | (6 | ) | (2 | ) | ||||
Pro forma net income | $ | 551 | $ | 550 | ||||
Earnings per common share: | ||||||||
Basic – as reported | $ | .25 | $ | .24 | ||||
Basic – pro forma | $ | .25 | $ | .24 | ||||
Diluted – as reported | $ | .25 | $ | .24 | ||||
Diluted – pro forma | $ | .25 | $ | .24 |
7
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 2004 (UNAUDITED) (CONTINUED)
3. Investment Securities
At March 31, 2004 and December 31, 2003, investment securities available for sale consisted of the following:
Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||
March 31, 2004 | ||||||||||||
U.S. Government and agency securities | $ | 22,667 | $ | 538 | $ | 26 | $ | 23,179 | ||||
State and municipal securities | 9,491 | 293 | — | 9,784 | ||||||||
Mortgage-backed securities | 6,410 | 131 | — | 741 | ||||||||
Money market fund | 728 | — | — | 728 | ||||||||
$ | 39,296 | $ | 962 | $ | 26 | $ | 40,232 | |||||
December 31, 2003 | ||||||||||||
U.S. Government and agency securities | $ | 29,184 | $ | 488 | $ | 136 | $ | 29,536 | ||||
State and municipal securities | 9,832 | 215 | — | 10,047 | ||||||||
Mortgage-backed securities | 6,837 | 66 | 12 | 6,891 | ||||||||
Money market fund | 333 | — | — | 333 | ||||||||
$ | 46,186 | $ | 769 | $ | 148 | $ | 46,807 | |||||
4. Loans and Reserve for Loan Losses
The composition of the loan portfolio at March 31, 2004 and December 31, 2003, was as follows:
March 31, 2004 | % of gross loans | December 31, 2003 | % of gross loans | |||||||||||
Commercial and agricultural | $ | 13,673 | 14 | % | $ | 11,803 | 12 | % | ||||||
Real Estate: | ||||||||||||||
Commercial | 74,925 | 77 | % | 75,970 | 78 | % | ||||||||
Construction/lot | 3,302 | 3 | % | 3,584 | 4 | % | ||||||||
1-4 family residential property | 2,994 | 3 | % | 3,505 | 4 | % | ||||||||
Consumer | 2,436 | 3 | % | 2,309 | 2 | % | ||||||||
Loans, gross | 97,330 | 100.00 | % | 97,171 | 100.00 | % | ||||||||
Less: | ||||||||||||||
Reserve for loan losses | (1,532 | ) | (1,461 | ) | ||||||||||
Deferred loan fees | (217 | ) | (209 | ) | ||||||||||
(1,749 | ) | (1,670 | ) | |||||||||||
Loans, net | $ | 95,581 | $ | 95,501 | ||||||||||
Transactions in the reserve for loan losses for the three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended March 31, | ||||||||
2004 | 2003 | |||||||
Balance at beginning of period | $ | 1,461 | $ | 1,263 | ||||
Loan loss provision | 75 | 75 | ||||||
Loans charged-off | (5 | ) | (38 | ) | ||||
Recoveries of loans previously charged-off | 1 | 3 | ||||||
Balance at end of period | $ | 1,532 | $ | 1,303 | ||||
8
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 2004 (UNAUDITED) (CONTINUED)
5. Non-Performing Assets
Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. The following table presents information with respect to non-performing assets at March 31, 2004 and December 31, 2003:
2004 | 2003 | |||||||
Loans on non-accrual status | $ | 1,309 | $ | 1,023 | ||||
Loans past due 90 days or more but not on non-accrual status | — | — | ||||||
Other real estate owned | 664 | 687 | ||||||
Other: Certificates of deposit purchased from other financial institutions, net | 223 | 418 | ||||||
Total non-performing assets | $ | 2,196 | $ | 2,128 | ||||
Percentage of non-performing assets to total assets | 1.45 | % | 1.37 | % |
6. Certificates Of Deposit Purchased From Other Financial Institutions ($ In Thousands)
At December 31, 2001, the Bank had $4,634 invested in certificates of deposit purchased from other financial institutions (the purchased certificates). These funds had been invested through a broker and held in safekeeping for the Bank by a trust company. In October 2001, the Bank discovered that the assets of the trust company had been placed in receivership and discontinued recording interest income at that time. During 2001, the Bank recorded a loss of $10, which represents the deductible related to an insurance policy that management believes may substantially cover any losses incurred on settlement of the purchased certificates.
During 2002, the Federal Deposit Insurance Corporation (the FDIC) required the Bank to write off 5% of the balance of the purchased certificates and to reserve an additional 10%. Accordingly, in 2002 the Bank charged-off $695 related to these regulatory requirements. The purchased certificates are shown net of the reserve in the accompanying condensed balance sheets. During 2003 and the first quarter of 2004, the Bank received $3,716 in cash distributions from the receiver as a partial recovery of its investment. Accordingly, the accompanying March 31, 2004 and December 31, 2003 balance sheets include $223 and $418, respectively, relating to the purchased certificates. The receiver continues to review the accounting and other records of the broker to determine the extent to which the Bank will be able to recover its investment. Accordingly, the Bank is unable to estimate the final amount, if any, it will recover from its investment in the purchased certificates. The receiver has indicated that it anticipates additional amounts may be distributed in the future, but the timing and amount of any potential future distributions are not yet known.
9
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 2004 (UNAUDITED) (CONTINUED)
7. Basic and Diluted Earnings Per Share
Following is information regarding the calculation of basic and diluted earnings per share for the three months ended March 31, 2004 and 2003:
Three months ended March 31, 2004 | ||||||||
Net Income (Numerator) | Shares (Denominator) | Per Share Amount | ||||||
Basic earnings per common share – income available to common stockholders | $ | 597 | 2,347,367 | $ | .25 | |||
Effect of assumed conversion of stock options | — | 27,457 | ||||||
Diluted earnings per common share | $ | 597 | 2,374,824 | $ | .25 | |||
Three months ended March 31, 2003 | ||||||||
Net Income (Numerator) | Shares (Denominator) | Per Share Amount | ||||||
Basic earnings per common share – income available to common stockholders | $ | 552 | 2,322,830 | $ | .24 | |||
Effect of assumed conversion of stock options | — | 14,375 | ||||||
Diluted earnings per common share | $ | 552 | 2,337,205 | $ | .24 | |||
10
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($ in thousands)
The following discussion should be read in conjunction with the Bank’s unaudited condensed financial statements and the notes thereto as of March 31, 2004 and the operating results for the three months ended, included elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this report may constitute forward-looking statements within the definition of the “safe-harbor” provisions of the Private Securities Reform Act of 1995. Such forward-looking statements are based on reasonable assumptions by management within its current knowledge of the Bank’s business and operations. These forward-looking statements are subject to significant uncertainties which could cause actual results to differ materially from those set forth in such statements. Forward-looking statements can be identified by words such as “believe,” “estimate,” “anticipate,” “expect,” “intend,” “will,” “may,” “should,” or other similar phrases or words. Readers are cautioned not to place undue reliance on forward-looking statements. The Bank does not intend to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of the report or to reflect the occurrence of unanticipated events other than in its periodic regulatory filings.
Critical accounting policies and estimates
The Bank’s accompanying condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the reserve for loan losses. The Bank’s reserve for loan losses methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing a reserve for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Bank’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Bank’s markets, including economic conditions and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Bank adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. Management may report a materially different amount for the loan loss provision in the statement of operations to change the reserve for loan losses if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Bank’s condensed financial statements and the accompanying notes presented elsewhere herein, as well as the portion of this Management’s Discussion and Analysis section entitled “Loan Loss Provision”. Although management believes the levels of the reserve as of both March 31, 2004 and December 31, 2003 were adequate to absorb losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
11
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ($ in thousands)
Financial Condition
Total assets at March 31, 2004 were $151,377, a $3,488, or 2.25% decrease over total assets of $154,865 at December 31, 2003. Net loans outstanding increased $152 to $95,708 at March 31, 2004 compared to $95,556 at December 31, 2003. The investment portfolio decreased 14.05% from $46,807 at December 31, 2003 to $40,232 at March 31, 2004. This decrease was due primarily to a number of investments which were called during the first quarter. At March 31, 2004 total deposits were $135,140, compared to $132,747 at December 31, 2003. Bank borrowings decreased $7,000 from December 31, 2003 to March 31, 2004, funded primarily by the investment calls described above.
Results Of Operations - Three Months Ended March 31, 2004 And 2003
Net Income
Net income for the three months ended March 31, 2004 was $597 compared to $552 for the three months ended March 31, 2003. Return on average assets (ROA) for the three months ended March 31, 2004 was 1.57% compared to 1.59% for the same period in 2003. Return on average equity (ROE) for the three months ended March 31, 2004 was 15.90% compared to 15.82% for the same period in 2003.
Net Interest Income
Net interest income for the three months ended March 31, 2004 increased $72, or 3.92%, from the comparable period in 2003. Average earning assets for the quarter ended March 31, 2004 were $142,568 versus $129,241 for the quarter ended March 31, 2003. The 10.31% increase in average earning assets was offset by a 62 basis point decrease in the yield on average earning assets. The yield on average earning assets decreased from 6.58% for the quarter ended March 31, 2003, to 5.96% for the same period in 2004.
Average interest bearing liabilities for the quarter ended March 31, 2004 were $116,002 versus $104,679 for the quarter ended March 31, 2003. The Bank’s average rate paid on interest-bearing funds for the three months ended March 31, 2004 decreased to 0.75% from 1.11% for the quarter ended March 31, 2003. Net interest margin, which was 5.68% for the quarter ended March 31, 2003, decreased to 5.35% for the comparable period in 2004.
The declining interest rate environment has continued to affect the Bank’s net interest margin. From September 2002 through September 2003, the prime rate fell from 4.75% to 4.00%. Because many of the Bank’s loans have a variable or floating rate feature, as rates decreased, so did the yield on these loans. The average yield on loans for the quarter ended March 31, 2004 was 7.17%. This compares to 8.26% for the same period during 2003. However, as evidenced by the 36 basis point decrease in its average rate paid on interest-bearing funds, the Bank has been able to offset the reduction in interest income by reducing the rates paid on its interest bearing liabilities. This reduction in interest expense has allowed the Bank to limit the decrease in its margins between the periods.
12
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ($ in thousands)
Average Balances and Average Rates Earned and Paid
The following table sets forth the average balance sheets of Bank of Astoria for the three months ended March 31, 2004 and 2003 along with an analysis of net interest earnings for each major category of interest earning assets and interest bearing liabilities, the average rate paid in each category, and net yield on earning assets.
For the quarter ended March 31, | ||||||||||||||||||||
2004 | 2003 | |||||||||||||||||||
Average Balance | Interest Income (Expense) | Average Yield | Average Balance | Interest Income (Expense) | Average Yield | |||||||||||||||
Assets | ||||||||||||||||||||
Loans | $ | 97,735 | $ | 1,753 | 7.17 | % | $ | 86,514 | $ | 1,787 | 8.26 | % | ||||||||
Taxable securities (2) | 32,899 | 297 | 3.61 | % | 26,853 | 260 | 3.87 | % | ||||||||||||
Tax exempt securities (1) | 9,659 | 73 | 3.02 | % | 5,797 | 57 | 3.93 | % | ||||||||||||
Federal funds sold and deposits in banks | 2,275 | 2 | 0.35 | % | 10,077 | 22 | 0.87 | % | ||||||||||||
Total earning assets | 142,568 | 2,125 | 5.96 | % | 129,241 | 2,126 | 6.58 | % | ||||||||||||
Reserve for loan losses | (1,505 | ) | (1,293 | ) | ||||||||||||||||
Cash and due from banks | 5,197 | 4,065 | ||||||||||||||||||
Premises and equipment – Net | 3,417 | 3,425 | ||||||||||||||||||
Accrued interest and other Assets | 2,605 | 3,570 | ||||||||||||||||||
Total assets | $ | 152,281 | $ | 139,008 | ||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Interest bearing demand deposits | $ | 72,347 | 89 | 0.49 | % | $ | 65,163 | 116 | 0.71 | % | ||||||||||
Savings deposits | 10,542 | 6 | 0.23 | % | 8,555 | 8 | 0.37 | % | ||||||||||||
Time deposits | 26,886 | 104 | 1.55 | % | 30,961 | 166 | 2.14 | % | ||||||||||||
Other borrowings | 6,227 | 18 | 1.16 | % | — | — | ||||||||||||||
Total interest bearing liabilities | 116,002 | 217 | 0.75 | % | 104,679 | 290 | 1.11 | % | ||||||||||||
Demand deposits | 20,977 | 19,176 | ||||||||||||||||||
Other liabilities | 283 | 1,188 | ||||||||||||||||||
Total liabilities | 137,262 | 125,043 | ||||||||||||||||||
Stockholders’ equity | 15,019 | 13,965 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 152,281 | $ | 139,008 | ||||||||||||||||
Net Interest Income | $ | 1,908 | $ | 1,836 | ||||||||||||||||
Net interest spread | 5.21 | % | 5.47 | % | ||||||||||||||||
Net interest income to earning assets | 5.35 | % | 5.68 | % | ||||||||||||||||
(1) | Yields on tax-exempt securities have not been stated on a tax-equivalent basis. |
(2) | Average yields on investment securities were completed using historical cost balances. This does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. |
13
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ($ in thousands)
Analysis of Changes in Interest Income and Expense
The following table shows the dollar amount of increase (decrease) in the Bank’s interest income and expense for the quarter ended March 31, 2004 and attributes such variance to “volume” or “rate” changes.
2004 compared to 2003 | ||||||||||||
Total Increase (Decrease) | Amount of Change Volume | Rate | ||||||||||
Interest income: | ||||||||||||
Interest and fees on loans | $ | (34 | ) | $ | 917 | $ | (951 | ) | ||||
Investments and other | 33 | 151 | (118 | ) | ||||||||
Total interest income | (1 | ) | 1,068 | (1,069 | ) | |||||||
Interest expense: | ||||||||||||
Interest on deposits: | ||||||||||||
Interest bearing demand | (27 | ) | 68 | (95 | ) | |||||||
Savings | (2 | ) | 9 | (11 | ) | |||||||
Time deposits | (62 | ) | (276 | ) | 214 | |||||||
Other borrowings | 18 | 18 | — | |||||||||
Total interest expense | (73 | ) | (181 | ) | 108 | |||||||
Net interest income | $ | 72 | $ | 1,249 | $ | (1,177 | ) | |||||
Loan Loss Provision
At March 31, 2004, the reserve for loan losses was 1.57% of total gross loans, as compared to 1.50% at year end 2003 and 1.53% at March 31, 2003. The loan loss provision was $75 for the three-month period ended March 31, 2004, compared with $75 in the first quarter of 2003. The provision resulted from management’s regular quarterly assessment of overall credit quality, loan growth and economic conditions in relation to the level of the reserve for loan losses. This assessment reflects a continued sound credit quality profile, with low delinquent loans, modest net loan charge-offs and stable non-performing assets. At this date, management believes that its reserve for loan losses is at an appropriate level under current circumstances and prevailing economic conditions.
Noninterest Income
Non-interest income for the three months ended March 31, 2004 showed a $28, or 13.73%, decrease over the same period in 2003. This decrease is primarily composed of a $37 decrease in gains on the sale of mortgage loans.
Noninterest Expense
Non-interest expense for the three months ended March 31, 2004 increased only $3, or 0.27%, as compared to the same period in 2003, as the Bank’s efficiency ratio improved to 52.9% in 2004 as compared to 53.9% in the prior year quarter.
Income Taxes
The Bank’s income tax provision for the three months ended March 31, 2004 remained relatively constant as compared to the same period one year ago due to only a modest increase in pre-tax income between the quarters.
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PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ($ in thousands)
Liquidity And Sources Of Funds
The Bank’s primary sources of funds for liquidity purposes are customer deposits, maturities and calls of investment securities, sales of available for sale securities, loan repayments, advances on lines of credit from correspondent banks and from the Federal Home Loan Bank, and purchase of federal funds. The Bank can anticipate the availability of funds from scheduled loan repayments, maturities of securities, and from borrowed funds. Customer deposits, calls of investment securities and unscheduled payments of loans are influenced by the interest rate environment, the condition of the economy, competition and other factors. As of March 31, 2004, the Bank had $12,648 in available borrowings from the Federal Home Loan Bank of Seattle and $5,500 in available borrowings from correspondent banks.
Management anticipates that the Bank will rely primarily on deposit growth, maturities of investment securities, sales of available for sale securities, and loan repayments to meet its liquidity needs. Borrowings are also used to provide for short-term liquidity needs.
Liquidity may be affected by the Bank’s routine commitments to extend credit. Historically a significant portion of such commitments (such as lines of credit) have expired or terminated without funding. In addition, a certain portion of total commitments pertain to various construction projects. Under the terms of such construction commitments, completion of specified project benchmarks must be certified before funds may be drawn.
Capital Resources
Shareholders’ equity totaled $15,473 at March 31, 2004, an increase of $902, or 6.19%, over December 31, 2003. This change is comprised of net income of $597, an increase of $116 due to the exercise of stock options, and a net increase in unrealized gains on securities of $189. Book value per share at March 31, 2004 was $6.58 compared to $6.22 at December 31, 2003.
The Bank is required by federal regulations to maintain certain capital ratios. Rules define the relevant capital levels for five categories, ranging from “well capitalized” to “critically undercapitalized.” An insured depository institution is deemed to be “well capitalized” if it has a total capital to risk weighted assets ratio of at least 10%, a Tier 1 capital to risk weighted assets ratio of at least 6% and a Tier 1 capital to average assets ratio of at least 5%.
The most recent notification from the FDIC categorized the Bank as “well capitalized.” The following are the Bank’s capital ratios at March 31, 2004 and December 31, 2003:
March 31, 2004 | December 31, 2003 | To Be Well Capitalized | |||||||
Tier 1 capital to average assets | 9.79 | % | 9.42 | % | 5.00 | % | |||
Tier 1 capital to risk weighted assets | 13.52 | % | 12.84 | % | 6.00 | % | |||
Total capital to risk weighted assets | 14.77 | % | 14.09 | % | 10.00 | % |
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PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)($ in thousands)
Off-Balance Sheet Arrangements
A schedule of significant off-balance sheet commitments as of March 31, 2004 is as follows:
Commitments to extend credit | $ | 28,393 | |
Standby letters of credit | 43 |
See Note 10 to the Notes to Consolidated Financial Statements included in Item 7 of the Bank’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003 for a discussion of the nature, business purpose, and importance of off-balance sheet arrangements.
Contractual Obligations
As of March 31, 2004, the Bank has entered into the following contractual obligations listed below:
Payments Due by Period | |||||||||||||||
Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | |||||||||||
Time deposits of $100,000 and over | $ | 6,919 | $ | 4,602 | $ | 1,481 | $ | 836 | $ | — |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management considers interest rate risk to be a market risk that could have a significant effect on the financial condition of the Bank. There have been no material changes in the reported market risks faced by the Bank since the end of the most recent fiscal year-end that have not been included in this discussion.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Bank’s disclosure controls and procedures (as defined in section 13(a) - 14(c) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with the participation of the Bank’s Chief Executive Officer, Chief Financial Officer and several other members of the Bank’s senior management within the 90-day period preceding the filing date of this quarterly report. The Bank’s Chief Executive Officer and Chief Financial Officer concluded that the Bank’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Bank in the reports it files or submits under the Act is (i) accumulated and communicated to the Bank’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Controls: In the quarter ended March 31, 2004, the Bank did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in the Bank’s reports filed under the Act is recorded, processed, summarized and reported within the time periods specified by the SEC. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all to permit the preparation of financial statements in conformity with accounting principles generally accepted in the United States.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Bank is not a party to any material legal proceedings at this time. Further, the Bank is not aware of the threat of any such proceedings. From time to time, the Bank is involved in various claims and legal actions arising in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Change in Securities – None to be reported
Use of Proceeds – None to be reported
Issuer Purchases of Equity Securities – None to be reported
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to be reported
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported
ITEM 5. OTHER INFORMATION
None to be reported
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 | Certification of Chief Executive Officer | |
31.2 | Certification of Chief Financial Officer | |
32 | Certification Pursuant to Section 906 |
(b) Reports on Form 8-K:
The Bank filed a report on Form 8-K on January 28, 2004 in regards to release of the Bank’s fourth quarter and year end results for 2003.
The Bank filed a report on Form 8-K on April 14, 2004 in regards to release of the Bank’s first quarter 2004 earnings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BANK OF ASTORIA
/s/ Cheri J. Folk | Dated this 14th day of May 2004 | |
Cheri J. Folk | ||
President and Chief Executive Officer |
/s/ Julie M. Adelman | Dated this 14th day of May 2004 | |
Julie M. Adelman | ||
Vice President & CFO |
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