United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10QSB
{x} QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2003
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from ________________to__________________
Commission file Number 0-21885
Advance Financial Bancorp
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 55-0753533
- -------------------------------- --------------------------------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1015 Commerce Street, Wellsburg, WV 26070
-----------------------------------------
(Address of principal executive offices)
(304) 737-3531
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subjected to such filing requirements for the past 90 days. Yes__x__ No____
State the number of shares outstanding for each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.0667 per share
Outstanding at November 12, 2003: 1,398,427
Transitional Small Business Disclosure Format ( check one):
Yes_____ No__x__
Advance Financial Bancorp
Index
Page
Number
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Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet( Unaudited) as of
September 30, 2003 and June 30, 2003 3
Consolidated Statement of Income (Unaudited)
For the Three Months ended September 30, 2003
and 2002 4
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months ended September 30, 2003 and
2002 5
Notes to the Unaudited Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis 8-14
Item 3 - Control and Procedures 15
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Default Upon Senior Securities 16
Item 4 - Submissions of Matters to a vote of Security Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 17
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, JUNE 30,
2003 2003
------------- -------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from banks $ 2,317,272 $ 2,906,568
Interest bearing deposits with other institutions 1,776,449 13,163,753
------------- -------------
Total cash and cash equivalents 4,093,721 16,070,321
------------- -------------
Investment securities:
Securities held to maturity (fair value of $14,242,672 and $15,298,606) 14,087,631 15,086,475
Securities available for sale 11,288,661 11,394,701
------------- -------------
Total investment securities 25,376,292 26,481,176
------------- -------------
Mortgaged-backed securities:
Securities held to maturity (fair value of $15,969,777 and $18,751,018) 16,066,720 18,642,532
Securities available for sale 7,610,094 8,979,898
------------- -------------
Total mortgage-backed securities 23,676,814 27,622,430
------------- -------------
Loans held for sale 2,518,114 5,687,708
Loans receivable, (net of allowance for loan losses
of $1,275,031 and $1,095,822 ) 253,507,750 229,239,547
Office properties and equipment, net 4,977,291 5,069,073
Federal Home Loan Bank Stock, at cost 2,578,000 1,679,400
Accrued interest receivable 1,500,282 1,447,525
Goodwill 4,700,472 4,700,472
Other intangibles, net 1,664,820 1,709,413
Other assets 2,419,590 2,193,526
------------- -------------
TOTAL ASSETS $ 327,013,146 $ 321,900,591
============= =============
LIABILITIES:
Deposits $ 265,194,698 $ 272,828,932
Advances from Federal Home Loan Bank 32,500,000 20,000,000
Other Borrowings 7,200,000 7,200,000
Advance payments by borrowers for taxes and insurance 422,535 507,049
Accrued interest payable and other liabilities 1,156,313 1,276,657
------------- -------------
TOTAL LIABILITIES 306,473,546 301,812,638
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value; 500,000 shares
authorized, none issued -- --
Common stock, $.0667 par value; 3,000,000 shares
authorized 1,626,675 shares issued 108,445 108,445
Additional paid in capital 10,499,002 10,467,559
Retained earnings - substantially restricted 12,225,547 11,705,306
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (228,944) (250,634)
Unallocated shares held by Restricted Stock Plan (RSP) (205,732) (206,756)
Treasury Stock (228,248 shares at cost) (2,233,265) (2,233,265)
Accumulated other comprehensive income 374,547 497,298
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 20,539,600 20,087,953
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 327,013,146 $ 321,900,591
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 3,908,300 $ 3,178,795
Investment securities - taxable 140,348 79,914
Investment securities - nontaxable 111,984 76,987
Interest-bearing deposits with other institutions 8,971 42,258
Mortgage-backed securities 203,306 123,564
Dividends on Federal Home Loan Bank Stock 10,845 8,668
----------- -----------
Total interest and dividend income 4,383,754 3,510,186
----------- -----------
INTEREST EXPENSE
Deposits 1,505,250 1,383,869
Advances from Federal Home Loan Bank 310,170 292,738
Other Borrowings 78,493 --
----------- -----------
Total interest expense 1,893,913 1,676,607
----------- -----------
NET INTEREST INCOME 2,489,841 1,833,579
Provision for loan losses 321,000 49,200
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,168,841 1,784,379
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 205,924 152,590
Income from loan servicing activity 81,102 66,235
Gain on sale of loans 132,817 94,926
Loss on sale of repossessed assets (13,370) (12,539)
Other income 99,370 102,529
----------- -----------
Total noninterest income 505,843 403,741
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 745,887 614,726
Occupancy and equipment 272,439 251,811
Professional fees 41,443 36,016
Advertising 50,706 26,795
Data processing charges 130,238 79,017
Amortization of intangible asset 44,593 --
Other expenses 408,562 347,476
----------- -----------
Total noninterest expenses 1,693,868 1,355,841
----------- -----------
Income before income taxes 980,816 832,279
Income taxes 326,445 306,899
----------- -----------
NET INCOME $ 654,371 $ 525,380
=========== ===========
EARNINGS PER SHARE - NET INCOME
Basic $ .49 $ .39
Diluted $ .48 $ .39
DECLARED DIVIDEND PER SHARE $ .15 $ .12
See accompanying notes to the unaudited consolidated financial statements.
4
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net Income $ 654,371 $ 525,380
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 204,050 87,212
Provision for loan losses 321,000 49,200
Gain on sale of loans (132,817) (94,926)
Loss on sale of repossessed assets 13,370 12,539
Origination of loans held for sale (12,089,588) (7,654,419)
Proceeds from the sale of loans 15,391,999 8,327,992
Increase in other assets and liabilities (243,047) 363,707
------------ ------------
Net cash provided by operating activities 4,119,338 1,616,685
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Maturities and repayments 1,000,000 --
Investment securities available for sale:
Purchases -- (2,004,133)
Maturities and repayments 480 2,300,550
Mortgage-backed securities held to maturity:
Maturities and repayments 2,504,769 135,440
Mortgage-backed securities available for sale:
Purchases -- (1,000,050)
Maturities and repayments 1,268,977 1,310,210
Purchase of Federal Home Loan Bank Stock (898,600) --
Net increase in loans (24,589,203) (4,210,749)
Purchases of premises and equipment (29,483) (906,701)
------------ ------------
Net cash used in investing activities (20,743,060) (4,375,433)
------------ ------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits (7,634,234) 7,535,903
Net increase in short term borrowings 12,500,000 --
Net change in advances for taxes and insurance (84,514) (156,289)
Cash dividends paid (134,130) (106,044)
------------ ------------
Net cash provided by financing activities 4,647,122 7,273,570
------------ ------------
(Decrease) increase in cash and cash equivalents (11,976,600) 4,514,822
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,070,321 11,770,440
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,093,721 $ 16,285,262
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 1,899,841 $ 1,688,127
Income taxes $ 485,000 $ 285,000
See accompanying notes to the unaudited consolidated financial statements.
5
ADVANCE FINANCIAL BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Advance Financial Bancorp (the
"Company"), includes its wholly-owned subsidiaries, Advance Financial Savings
Bank (the "Bank") and the Bank's wholly-owned service corporation subsidiary,
Advance Financial Service Corporation of West Virginia. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments, which are, in
the opinion of management, necessary for a fair statement of results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the fiscal year ended June 30, 2004 or any other
period.
These statements should be read in conjunction with the consolidated statements
of and for the year ended June 30, 2003 and related notes which are included on
the Form 10-KSB (file no. 0-21885).
NOTE 2 - EARNINGS PER SHARE
There were no convertible securities that would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
Effective for shareholders of record as of November 10, 2003, the Company issued
a three for two stock split. The stock split was done in the form of a stock
dividend. The effects on EPS have been included for the comparative periods in
the accompanying financial statements.
Three Months Ended
September 30
(Unaudited)
2003 2002
-------------- ----------
Weighted-average common shares outstanding 1,626,675 1,626,675
Average treasury stock shares (228,248) (228,248)
Average unearned ESOP and RSP shares (50,795) (63,572)
--------- ---------
Weighted -average common shares and
common stock equivalents used to
calculate basic earnings per share 1,347,632 1,334,855
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 24,675 -
--------- ---------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,372,307 1,334,855
========= =========
6
NOTE 3 - COMPREHENSIVE INCOME
Other accumulated comprehensive income consists solely of net unrealized gains
and losses on available for sale securities. For the three months ended
September 30, 2003 and 2002, comprehensive income totaled $531,620 and $664,955,
respectively.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that by
requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of this interpretation apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this interpretation has not and is not expected to have a material effect on the
Company's financial position or results of operations. In October, 2003, the
FASB decided to defer to the fourth quarter from the third quarter the
implementation date for Interpretation No. 46. This deferral only applies to
variable interest entities that existed prior to February 1, 2003.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, and general economic conditions.
The Company conducts no significant business or operations of its own other
than holding all of the outstanding stock of the Advance Financial Savings Bank
(the "Bank"). As a result, references to the Company generally refer to the Bank
unless the context indicates otherwise.
OVERVIEW
- --------
On October 21, 2003, the Company's Board of Directors approved a three for two
(50%) stock split in the form of a stock dividend. The stock split is effective
for holders of record as of November 10, 2003. After the stock split, the
outstanding shares of the company increased 466,142 shares to 1,398,427. The
earnings per share calculations for September 30, 2003 and 2002 have been
restated to reflect the stock split.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND JUNE 30, 2003
- -------------------------------------------------------------------------
The Company's total assets increased by approximately $5,113,000 to $327,013,146
at September 30, 2003, from $321,900,591 at June 30, 2003. Net loans increased
by approximately $24,268,000. The increase in net loans was primarily funded by
a combined decrease in interest bearing deposits, investment securities and
mortgage-backed securities of $16,438,000. Also, net loans were funded by an
increase in short-term advances from the Federal Home Loan Bank ("FHLB").
Short-term advances from the FHLB increased $12,500,000 during the period to
fund loan demand and to replace the loss of approximately $7,600,000 in
deposits.
Interest-bearing deposits with other financial institutions decreased
$11,387,000 to $1,776,449 at September 30, 2003 from $13,163,753 at June 30,
2003. The decrease in funds was used to fund the company's increased loan
demand. Investment securities decreased $1,105,000 to $25,376,292 at September
30, 2003 from $26,481,176 at June 30, 2003. This decrease was due primarily to a
called FHLB bond. The proceeds from this called security were used to fund the
increased loan demand. Mortgage-backed securities decreased $3,946,000 to
$23,676,814 at September 30, 2003 from $27,622,430 at June 30, 2003. The
decrease was due to accelerated principle repayments on higher yielding
securities due to the low interest rate environment during the period ended
September 30, 2003.
Loans held for sale decreased $3,170,000 to $2,518,114 at September 30, 2003
from $5,687,708 at June 30, 2003. The decrease is indicative to an increase in
interest rates on fixed rate 1-4 family mortgages and the related decrease in
customer demand for these mortgages.
Loans receivable, net increased $24,268,000 to $253,507,750 at September 30,
2003 from $229,239,547 at June 30, 2003. The increase in net loans consists
primarily of 1-4 family mortgages, net construction loans, automobile dealer
floor plan loans, and indirect automobile loans which increased $11,380,000,
$1,920,000 $1,678,000 and $9,554,000, respectively. The increase in 1-4 family
mortgages include approximately $6,695,000 in fixed rate loans that were added
to the Bank's portfolio during the period and $4,685,000 in adjustable rate
loans as these products became attractive as a result the Bank's competitive
pricing and as a result of the favorable interest rate changes during the
period. Net construction loan increases were evenly split at $960,000 each for
1-4 family and non-residential mortgages. The increase in construction loans is
due to the demand created by the anticipation of near future interest rate
increases in mortgage products. The increase in dealer floor plans and indirect
automobile loans is primarily the result of new relationships the Company has
developed over the last six months with the creation of an Indirect Loan
Department within the Business Division of the bank. The success of the
department is indicated by the substantial growth in both floor plan and
indirect auto lending. Future growth in these areas will depend upon the local
economy, competition from other institutions and the manufacturers' incentive
programs, as well as, the Company's evaluation of the risk level involved.
FHLB stock increased $898,600 to $2,578,000 at September 30, 2003 from
$1,679,400,at June 30, 2003. The increase is primarily due to the required
purchases of stock as a result of the corresponding increase in outstanding
advances. During the three month period ended September 30, 2003, the Company
increased their advance total by $12,500,000.
8
Deposits decreased $7,634,000 to $265,194,698 at September 30, 2003 from
$272,828,932 at June 30, 2003. The decrease is primarily in money market demand
deposits and Jumbo and "special term" term certificate of deposit products.
Money market accounts with balances in excess of $10,000 have decreased
$1,855,000 during the period as customers continue to search for higher yields
on their investments in equities or other investment vehicles. The money market
accounts have been utilized by some customers as a "parking" mechanism as they
wait for an increase in the interest rate cycle and stability in the equity
markets. Jumbo and "special term" certificates of deposit decreased $5,429,000
during the period due to similar customer sentiments. These types of
certificates are generally the highest cost of funds of this Company, and as
such, the need for this deposit funding is evaluated based upon the availability
of alternative funding sources and other factors. At this time, the Company's
strategy is to not offer the higher yields on these certificates, but will
instead borrow on a short-term basis from the FHLB at a significantly reduced
rate. This funding approach could change in future periods depending upon the
local demand for loans, the local market or other factors such as management's
consideration of interest rate risk.
Advances from the FHLB increased $12,500,000 to $32,500,000 at September 30,
2003 from $20,000,000 at June 30, 2003. This increase is currently applied to
the Bank's Open Repo Line of Credit with the FHLB. For the period ended
September 30, 2003, the average rate paid on the line was 1.23%. It is the
Company's intent to continue to use the short term advances offered by the FHLB
until such time as local market conditions, the interest rate market and other
management factors dictate.
Stockholders' equity increased approximately $452,000 to $20,539,600 at
September 30, 2003 from $20,087,953 at June 30, 2003. This increase was the
result of net income of $654,000 for the period and the recognition of shares in
the Employee Stock Ownership Plan and Restricted Stock Plan of $55,000. These
increases were offset by a decrease in the net unrealized gain on securities of
$123,000 and by the payment of cash dividends of $134,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2003 AND 2002
- -------------
Net interest income increased $656,000 or 35.79%, to $2,490,000 for the three
months ended September 30, 2003 from $1,834,000 for the comparable period ended
2002. The increase in net interest income resulted primarily from an increase in
the average volume of the underlying principle balances in interest earning
assets and liabilities. The net interest spread for the three months ended
September 30, 2003, decreased to 3.12% from 3.21% for the comparable period
ended 2002. The 9 basis point decrease in the net interest rate spread for the
current three month period was primarily due to a 100 basis point decline in
average yields on assets which was offset by a 91 basis point decline in average
cost of funds. The increase in investment and mortgage-backed securities as a
result of the deposit assumption of The Second National Bank of Warren's
Steubenville, Ohio branches in February 2003 has contributed to a decline in the
net interest margin and net interest spread of the Company. See "Average Balance
Sheet" for the three-month periods ended September 30, 2003 and 2002.
The provision for loan losses increased $272,000 to $321,000 for the three
months ended September 30, 2003 from $49,000 for the comparable period ended
2002. The increase in the provision for loan losses was precipitated by an
increase in loan volume. In determining the adequacy of the allowance for loan
losses, management reviews and evaluates on a quarterly basis the potential risk
in the loan portfolio. This evaluation process is documented by management and
approved by the Company's Board of Directors. The evaluation is performed by
senior members of management with years of lending and review experience.
Management evaluates homogenous consumer-oriented loans, such as 1-4 family
mortgage loans and retail consumer loans, based upon all or a combination of
delinquencies, loan concentrations and charge-off experience. Management
supplements this analysis by reviewing the local economy, trends affecting local
industry and business development and other known factors which may impact
future credit losses. Nonhomogenous loans, generally defined as commercial
business and real estate loans, are selected by management to be reviewed on a
quarterly basis upon the combination of delinquencies, concentrations and other
known factors that may effect the local economy and more specifically the
individual businesses.
During this evaluation, the individual loans are evaluated quarterly by senior
members of management for impairment as prescribed under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". Impairment losses are
assumed when, based upon current information, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impairment is measured by a loan's observable market value,
fair value of the collateral or the present value of future cash flows
discounted at the loan's effective interest rate. This data on impairment is
combined with the other data used for homogenous loans and is used by the
classified asset committee in determining the adequacy of the allowance for loan
losses.
9
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for loan losses will
be adequate to cover losses which, may be realized in the future and that
additional provision for loan losses will not be required. See "Risk Elements".
Noninterest income increased $102,000 or 25.29%, to $506,000 for the three
months ended September 30, 2003 from $404,000 for the comparable period ended
2002. For the three month period of 2003, miscellaneous fees and fees on deposit
accounts increased by $50,000 or 19.67% as a result of an increase in core
customers and related activity and individual fee item increases. For the three
month period of 2003, gains on sales of fixed rate loans and income from loan
servicing activity increased $53,000 as a result of the customer demand for
fixed 1-4 family mortgage loans during the period in comparison to the period
ended in 2002.
Noninterest expense increased $338,000 or 24.93%, to $1,694,000 for the three
months ended September 30, 2003, from $1,356,000 for the comparable 2002 period.
For the three-month period ended September 30, 2003, compensation and employee
benefits increased $131,000. The increase in compensation and employee benefits
for the three month period ended September 30, 2003 is due in part to the
February 2003 branch acquisitions and de novo branch opening in September 2002,
$92,000 of the $131,000 increase is attributable to the new branches. Occupancy
and equipment, professional fees, marketing and data processing expenses have
increased by $101,000 for the three-month period ended September 30, 2003. Such
increases are primarily due to the operation of the new branches acquired and
opened since September 2002. For the three-month period ended September 30,
2003, other expenses have increased $106,000. The increase in other expense is
due to increases in supplies and communications of $13,000, in fees paid for ATM
and consumer card usage of $10,000 and in fees paid to the Federal Reserve for
item processing of $7,000. Each of these increases are primarily related to
customer activity due to the increase in the Company's core customers created
primarily by the branch purchases and the de novo branch opening. Also, other
expense increased for the three-month period ended September 2003 due to an
increase in amortization expense as a result of the branch acquisition in
February 2003 and costs relating to Other Real Estate and Repossessed Assets of
$52,000 and $21,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
LIQUIDITY
- ---------
Liquidity management for the Company is measured and monitored on both a short
and long-term basis, thereby allowing management to better understand and react
to emerging balance sheet trends. After assessing actual and projected cash flow
needs, management seeks to obtain funding at the most economical cost to the
Company. Both short and long-term liquidity needs are addressed by maturities
and sales of investment securities, loan payments and maturities, and
liquidating overnight deposit accounts. The use of these resources, in
conjunction with access to credit, provide the core ingredients to meet
depositor, borrower, and creditor needs.
The Company's liquid assets consist of cash and cash equivalents and investment
and mortgage-backed securities classified as available for sale. The level of
these assets is dependent on the Company's operating, investing, and financing
activities during any given period. At September 30, 2003, liquid assets
totalled $22.3 million or 7.03% of total assets. Management believes that the
liquidity needs of the Company are satisfied by the current balance of cash and
cash equivalents, readily available access to traditional funding sources, FHLB
advances, and the portion of the investment and loan portfolios that mature
within one year. These sources of funds will enable the Company to meet cash
obligations and off-balance sheet commitments as they come due.
Operating activities provided net cash of $4.1 million and $1.6 million for the
three-month periods ended September 30, 2003 and 2002, respectively, and were
generated principally from net income and net sales of fixed rate 1-4 family
mortgages.
Investing activities used $20.7 million and $4.4 million in funds during the
three-month periods ended September 30, 2003 and 2002, respectively. These cash
usages primarily consisted of loan originations of $24.6 million and $4.2
million for 2003 and 2002, respectively. Offsetting these usages for the period
ended September 30, 2003 were proceeds from repayments and maturities of
investment and mortgage-backed securities of $4.8 million.
Financing activities consist of the solicitation and repayment of customer
deposits and borrowings. During the three months ended September 30, 2003, net
cash provided by financing activities was $4.6 million, and consisted of an
increase in borrowings of $12.5 million. Offsetting this amount was reduction in
deposits of $7.6 million. During the same period ended 2002, net cash provided
by financing activities totaled $7.3 million, principally derived from an
increase in deposits.
10
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable based in part on
the bank's commitment to make loans, as well as management's assessment of the
Company's ability to generate funds. The Company anticipates it will have
sufficient liquidity available to meet estimated short-term and long-term
funding needs.
CAPITAL
- -------
Management monitors both the Company's equity capital ratio and the Bank's total
risk-based, Tier I risk-based and Tier I leveraged capital ratios in order to
assess compliance with regulatory guidelines. At September 30, 2003, both the
Company and the Bank exceeded the minimum capital requirements, including
risk-based and leveraged capital ratios. The Company's equity capital ratio and
the Bank's total risk-based, Tier I risk-based and Tier I leverage ratios are
4.22% and 10.27%, 9.65% and 6.22%, respectively, at September 30, 2003.
RATE/VOLUME ANALYSIS
- --------------------
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume and
(ii) changes in rate. Changes not solely attributable to rate or volume are
allocated to changes in rate due to rate sensitivity of interest-earning assets
and interest-bearing liabilities.
Three Months Ended September 30,
-----------------------------------------------
2003 Vs 2002
-----------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------
Volume Rate Net
-----------------------------------------------
Interest Income:
Loans $1,318,008 $(588,503) $ 729,505
Investments 254,617 (110,554) 144,063
-----------------------------------------------
Total interest-earning assets 1,572,625 (699,057) 873,568
-----------------------------------------------
Interest Expense
Core Deposits 182,345 (237,307) (54,962)
Certificates of Deposit 489,672 (313,330) 176,342
FHLB Borrowings 106,177 (88,744) 17,433
Other Borrowings 78,493 - 78,493
-----------------------------------------------
Total interest-bearing liabilities 856,687 (639,381) 217,306
-----------------------------------------------
Change in net interest income $715,938 $ ( 59,676) $656,262
===============================================
11
AVERAGE BALANCE SHEET FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented.
Three-Month Period Ended September 30,
----------------------------------------------------------------------
2003 2002
----------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ----------- ------- -------- ----------
Interest-earning assets:
Loans receivable (1) $246,043 $3,908 6.35% $174,754 $3,179 7.28%
Investment securities (2) 33,947 272 3.21% 24,791 208 3.35%
Mortgage-backed securities 25,796 204 3.15% 8,994 123 5.50%
-------- ------ ------ -------- ------ ------
Total interest-earning assets 305,786 4,384 5.73% 208,539 3,510 6.73%
------ ------ ------ ------
Non-interest-earning assets 17,641 8,942
-------- --------
Total assets $323,427 $217,481
======== ========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 53,445 143 1.07% $ 29,340 145 1.98%
Certificates of deposit 154,300 1,229 3.19% 105,353 1,053 4.00%
Savings deposits 49,369 133 1.08% 35,727 186 2.08%
FHLB Borrowings 25,417 310 4.88% 20,000 293 5.85%
Other Borrowings 7,200 79 4.36% - - -
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 289,731 1,894 2.61% 190,420 1,677 3.52%
------ ------ ------ ------
Non-interest bearing liabilities 13,248 8,555
-------- --------
Total liabilities 302,979 198,975
Stockholders' equity 20,448 18,506
-------- --------
Total liabilities and stockholders'
equity $323,427 $217,481
======== ========
Net interest income $ 2,490 $1,833
======= ======
Interest rate spread (3) 3.12% 3.21%
====== ======
Net Yield on interest-earning assets (4) 3.26% 3.52%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 105.54% 109.52%
====== ======
<FN>
_____________
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(3) Interest-rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
</FN>
12
RISK ELEMENTS
- -------------
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days past due, other real estate
loans and repossessed assets. A loan is classified as nonaccrual when, in the
opinion of management, there are serious doubts about collectibility of interest
and principal. At the time the accrual of interest is discontinued, future
income is recognized only when cash is received. Renegotiated loans are those
loans which terms have been renegotiated to provide a reduction or deferral of
principal or interest as a result of the deterioration of the borrower.
September 30, June 30,
2003 2003
------------ --------
Loans on a nonaccrual basis $1,061 $1,398
Loans past due 90 days or more and still accruing 1,537 1,681
------ ------
Total nonperforming loans 2,598 3,079
------ ------
Other real estate 662 802
Repossessed assets 35 28
------ ------
Total nonperforming assets $3,295 $3,909
------ ------
Nonperforming loans as a percentage of total net loans 1.02% 1.34%
====== ======
Nonperforming assets as a percentage of total assets 1.01% 1.21%
====== ======
Allowance for loan losses to nonperforming loans 49.08% 35.60%
====== ======
Nonaccrual loans at September 30, 2003, consisted of $450,032 in one-to-four
family residential mortgages and $611,138 in non-residential real estate
mortgages.
The Company considers a loan impaired when it is probable that the borrower will
not repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on one-to-four
family properties and all consumer loans represent large groups of
smaller-balance, homogenous loans that are to be collectively evaluated.
Management considers an insignificant delay, which is defined as less than 90
days by the Company, will not cause a loan to be classified as impaired. A loan
is not impaired during the period of delay in payment if the Company expects to
collect all amounts due including interest accrued at the contractual interest
rate during the period of delay. All loans identified as impaired are evaluated
independently by management. The Company estimates credit losses on impaired
loans through the allowance for loan losses by evaluating the recorded
investment in the impaired loan to the estimated present value of the underlying
collateral or the present value of expected cash flows.
As of September 30, 2003, the total investment in impaired loans was $646,164,
and such amount was subject to a specific allowance for loan losses of $66,357.
The average investment in the impaired loans for the three-month period ended
September 30, 2003 was $649,383. The interest income potential based upon the
original terms of the contracts of these impaired loans was $14,159 for the
three-month period ended September 30, 2003. A total of $7,258 of interest
income has been recognized for the three-month period ended September 30, 2003.
13
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed in respect to the
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. The historical loss experience model that is used
to established the loan loss factors for problem graded loans is designed to be
self-correcting by taking into account our recent loss experience. Similarly, by
basing the past graded loss factors on historical loss experience, the
methodology is further designed to take our recent loss experience into account.
In addition to historical and recent loss trends, our methodology incorporates
the current volume and trend in delinquencies, as well as, a self-assessment of
the status of the local economy. Our methodology requires the monitoring of the
changing loan portfolio mix and the effect that the changing mix has on the
trend in delinquencies, as well as, actually loss factors.
The combination of the historical loss factors, recent loss experience, current
trend in delinquencies, the local economic environment, and the assessment of
the changing loan portfolio mix are used in conjunction with the internal loan
grading system to adjust our allowance on a quarterly basis. Furthermore, our
methodology includes our impaired loan assessment and permits adjustments to any
loss factor used in determining the allowance in the event that, in management's
judgement, significant conditions which effect the collectibility of the
portfolio as of the evaluation date are not reflected in the loss factors. By
assessing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, we are able to adjust specific and inherent loss estimates
based upon recent information, as it becomes available.
The following is a breakdown of the loan portfolio composition at September 30,
2003 and June 30, 2003:
September 30, June 30,
2003 2003
------------ -------------
Mortgage loans:
1-4 family $137,486,466 $126,106,815
Multi-family 8,702,301 8,227,328
Non-residential 39,307,581 39,099,195
Construction 13,092,582 10,074,633
------------ ------------
198,588,930 183,507,971
------------ ------------
Consumer Loans:
Home Improvement 880,609 900,060
Automobile-Direct 8,836,870 8,761,516
Automobile-Indirect 31,694,788 22,140,818
Share loans 2,253,947 1,914,628
Other 2,490,745 2,687,302
------------ ------------
46,156,959 36,404,324
------------ ------------
Commercial Loans 18,190,171 17,383,993
Less:
Loans in process 8,023,120 6,844,741
Net deferred loan fees 130,159 116,178
Allowance for loan losses 1,275,031 1,095,822
------------ ------------
9,428,310 8,056,741
------------ ------------
Total $253,507,750 $229,239,547
============ ============
14
ITEM 3 - CONTROLS AND PROCEDURES
(1) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Based on their evaluation
-------------------------------------------------
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the
Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-QSB such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(2) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the quarter
--------------------------------------------------------
under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
NONE
Item 2 - Changes in Securities and Use of Proceeds
NONE
Item 3 - Defaults upon Senior Securities
NOT APPLICABLE
Item 4 - Submission of Matters to a Vote of Security Holders
NONE
Item 5 - Other Information
NONE
Item 6 - Exhibits and reports on Form 8-K
(a) List of Exhibits:
3 (i) Certificate of Incorporation of Advance Financial Bancorp *
3 (ii) Amended Bylaws of Advance Financial Bancorp
4 (i) Specimen Stock Certificate *
4 (ii) Shareholders Rights Plan **
10 Employment Agreement between the Bank and Stephen M.
Gagliardi ***
10.1 1998 Stock Option Plan ****
10.2 Restricted Stock Plan and Trust Agreement ****
31 Certification pursuant to Section 302 of the Sarbanes-Okley
Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) None
__________________
* Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-13021) declared effective by the SEC on November 12, 1996.
** Incorporated by reference to the Form 8-K ( File No. 0-21885) filed July
17, 1997.
*** Incorporated by reference to the June 30, 1997 Form 10K-SB (File No.
0-21885) filed September 23, 1997.
**** Incorporated by reference to the proxy statement for the Special Meeting of
the Stockholders on January 20, 1998 and filed with the SEC on December 12,
1997.
*****Incorporated by reference to the June 30, 1999 Form 10-KSB filed with the
SEC on September 28, 1999.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advance Financial Bancorp
Date: November 13, 2003 By:/s/ Stephen M. Gagliardi
-------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: November 13, 2003 By:/s/ Stephen M. Magnone
-------------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)
17