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, 2004
------------------
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________________to__________________
Commission file Number 0-21885
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Advance Financial Bancorp
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(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 10, 2004: 1,383,392
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, 2004 and June 30, 2004 3
Consolidated Statement of Income (Unaudited)
For the Three Months ended September 30, 2004 and 2003 4
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months ended September 30, 2004 and 2003 5
Notes to the Unaudited Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis 8-14
Item 3 - Controls and Procedures 15
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 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 16
SIGNATURES 17
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, JUNE 30,
2004 2004
------------- -------------
Assets
Cash and cash equivalents:
Cash and amounts due from banks $ 2,561,766 $ 2,742,338
Interest bearing deposits with other institutions 16,293,621 16,816,375
------------- -------------
Total cash and cash equivalents 18,855,387 19,558,713
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Investment securities:
Securities held to maturity (fair value of $10,203,542 and $7,061,289) 10,082,626 7,089,742
Securities available for sale 12,386 13,265
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Total investment securities 10,095,012 7,103,007
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Mortgaged-backed securities:
Securities held to maturity (fair value of $11,207,774 and $11,927,394) 11,329,708 12,307,317
Securities available for sale 4,893,755 5,290,846
------------- -------------
Total mortgage-backed securities 16,223,463 17,598,163
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Loans held for sale 136,850 269,800
Loans receivable, (net of allowance for loan losses
of $1,860,733 and $1,798,636 ) 251,908,282 259,833,742
Office properties and equipment, net 4,666,929 4,762,619
Federal Home Loan Bank Stock, at cost 2,029,100 2,158,100
Accrued interest receivable 1,212,532 1,227,693
Goodwill 4,700,472 4,700,472
Other intangibles, net 1,486,446 1,531,040
Other assets 2,238,433 2,395,820
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TOTAL ASSETS $ 313,552,906 $ 321,139,169
============= =============
Liabilities:
Deposits $ 262,812,042 $ 267,724,634
Advances from Federal Home Loan Bank 20,000,000 23,000,000
Other Borrowings 7,261,000 7,253,286
Advance payments by borrowers for taxes and insurance 377,792 466,634
Accrued interest payable and other liabilities 865,040 964,923
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TOTAL LIABILITIES 291,315,874 299,409,477
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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 10,655,224 10,609,610
Retained earnings - substantially restricted 14,053,388 13,658,888
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (142,115) (163,825)
Unallocated shares held by Restricted Stock Plan (RSP) (205,719) (205,719)
Treasury Stock (228,248 shares at cost) (2,233,265) (2,233,265)
Accumulated other comprehensive income (loss) 1,074 (44,442)
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TOTAL STOCKHOLDERS' EQUITY 22,237,032 21,729,692
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 313,552,906 $ 321,139,169
============= =============
See accompanying notes to the unaudited consolidated financial statements.
-3-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
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INTEREST AND DIVIDEND INCOME
Loans $ 3,829,472 $ 3,908,300
Investment securities - taxable 37,893 140,348
Investment securities - nontaxable 34,997 111,984
Interest-bearing deposits with other institutions 47,323 8,971
Mortgage-backed securities 155,468 203,306
Dividends on Federal Home Loan Bank Stock 6,765 10,845
----------- -----------
Total interest and dividend income 4,111,918 4,383,754
----------- -----------
INTEREST EXPENSE
Deposits 1,306,378 1,505,250
Advances from Federal Home Loan Bank 293,518 310,170
Other Borrowings 97,063 86,206
----------- -----------
Total interest expense 1,696,959 1,901,626
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NET INTEREST INCOME 2,414,959 2,482,128
Provision for loan losses 211,365 321,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,203,594 2,161,128
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 216,781 205,924
Income from loan servicing activity 24,096 81,102
Gain on sale of loans 16,846 132,817
Loss on sale of repossessed assets (800) (13,370)
Other income 106,751 99,370
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Total noninterest income 363,674 505,843
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NONINTEREST EXPENSE
Compensation and employee benefits 866,109 745,887
Occupancy and equipment 271,419 272,439
Professional fees 52,541 41,443
Advertising 47,754 50,706
Data processing charges 140,196 130,238
Amortization of intangible asset 44,593 44,593
Other expenses 370,521 400,849
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Total noninterest expenses 1,793,133 1,686,155
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Income before income taxes 774,135 980,816
Income taxes 244,409 326,445
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Net Income $ 529,726 $ 654,371
=========== ===========
EARNINGS PER SHARE - NET INCOME
Basic $ .39 $ .49
Diluted $ .38 $ .48
DECLARED DIVIDEND PER SHARE $ .10 $ .10
See accompanying notes to the unaudited consolidated financial statements.
-4-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net Income $ 529,726 $ 654,371
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 209,565 204,050
Provision for loan losses 211,365 321,000
Gain on sale of loans (16,846) (132,817)
Loss on sale of repossessed assets 800 13,370
Origination of loans held for sale (2,274,761) (12,089,588)
Proceeds from the sale of loans 2,424,557 15,391,999
Increase in other assets and liabilities 104,845 (243,047)
------------ ------------
Net cash provided by operating activities 1,189,251 4,119,338
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (2,985,715) -
Maturities and repayments - 1,000,000
Investment securities available for sale:
Maturities and repayments 285 480
Mortgage-backed securities held to maturity:
Maturities and repayments 950,639 2,504,769
Mortgage-backed securities available for sale:
Maturities and repayments 458,793 1,268,977
Purchase of Federal Home Loan Bank Stock - (898,600)
Redemption of Federal Home Loan Bank Stock 129,000 -
Net decrease (increase) in loans 7,714,095 (24,589,203)
Purchases of premises and equipment (23,014) (29,483)
------------ ------------
Net cash provided by (used in) investing activities 6,244,083 (20,743,060)
------------ ------------
FINANCING ACTIVITIES
Net decrease in deposits (4,912,592) (7,634,234)
Net (decrease) increase in short term borrowings (3,000,000) 12,500,000
Net change in advances for taxes and insurance (88,842) (84,514)
Cash dividends paid (135,226) (134,130)
------------ ------------
Net cash (used in) provided by financing activities (8,136,660) 4,647,122
------------ ------------
Decrease in cash and cash equivalents (703,326) (11,976,600)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,558,713 16,070,321
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,855,387 $ 4,093,721
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 1,679,051 $ 1,899,841
Income taxes $ 322,500 $ 485,000
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, 2005 or any other
period.
These statements should be read in conjunction with the consolidated statements
of and for the year ended June 30, 2004 and related notes which are included on
the Form 10-KSB (file no. 0-21885).
NOTE 2 - BUSINESS COMBINATIONS
Effective September 1, 2004, Advance Financial Bancorp ("Advance") and Parkvale
Financial Corporation ("Parkvale") have signed a definitive merger agreement for
Parkvale to acquire Advance. Advance shareholders will receive $26.00 in cash
per share. The merger is conditioned upon the receipt of the necessary
regulatory approval of Advance and Parkvale and shareholder approval of Advance.
NOTE 3 - 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.
Three Months Ended
September 30
(Unaudited)
2004 2003
---------- ----------
Weighted-average common shares outstanding 1,626,621 1,626,621
Average treasury stock shares (228,248) (228,248)
Average unearned ESOP and RSP shares (37,781) (50,795)
---------- ----------
Weighted -average common shares and
common stock equivalents used to
calculate basic earnings per share 1,360,592 1,347,578
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 39,874 24,690
---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,400,466 1,372,268
========== ==========
-6-
NOTE 4 - STOCK OPTIONS
In December 1997, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees, which was approved by stockholders at a
special meeting held on January 20, 1998. An aggregate of 162,667 shares of
authorized but unissued common stock of the Company were reserved for future
issuance under the plan. The stock options typically have expiration terms of
ten years subject to certain extensions and early terminations. The per share
exercise price of a stock option shall be, at a minimum, equal to the fair value
of a share of common stock on the date the option is granted. Proceeds from the
exercise of the stock options are credited to common stock for the aggregate par
value and the excess is credited to additional paid-in capital.
On January 20, 1998, qualified stock options were granted for the purchase of
97,591 shares exercisable at the market price of $12.50 per share at a rate of
one fourth per year beginning January 20, 1998. All options expire ten years
from the date of grant. At September 30, 2004, the initial stock options granted
remain outstanding with none being exercised.
On January 1, 2004, qualified stock options were granted for the purchase of
58,268 shares exercisable at the market price of $18.23 per share at a rate of
one fourth per year beginning January 2004. All options expire ten years from
the date of grant. At September 30, 2004, the stock options remain outstanding
with none being exercised.
The Company accounts for its stock option plan under provisions of APB Opinion
No. 25, " Accounting for Stock Issued to Employees," and related
interpretations. Under this opinion, no compensation expense has been recognized
with respect to the plan because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the grant date.
Had compensation expense for the stock option plan been recognized in accordance
with the fair value accounting provisions of Statement of Financial Accounting
Standards No. 123, " Accounting for Stock-based Compensation," net income
applicable to common stock, basic and dilutive net income per common share, for
the period ended September 30 would have been as follows:
2004 2003
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Net Income:
As reported $ 529,726 $ 654,371
========== ===========
Pro forma $ 511,732 $ 654,371
========== ============
Basic Earnings Per Share:
As reported $ .39 $ .49
=========== ============
Pro forma $ .38 $ .49
=========== ============
Diluted Earnings Per Share:
As reported $ .38 $ .48
=========== ============
Pro forma $ .37 $ .48
=========== ============
NOTE 5 - 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, 2004 and 2003, comprehensive income totaled $575,242 and $531,620,
respectively.
-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 September 1, 2004, the Company and Parkvale Financial Corporation
("Parkvale") signed a definitive merger agreement for Parkvale to acquire the
Company. The merger is conditioned upon the receipt of the necessary regulatory
approval and a majority vote of the Company's shareholders. Upon favorable
acceptance by all regulatory agencies and by the Company's shareholders, the
merger is expected to be completed in late December 2004 or January 2005. If
approved, the Company's shareholders will receive cash of $26.00 per common
share.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND JUNE 30, 2004
- -------------------------------------------------------------------------
The Company's total assets decreased by approximately $7,600,000 to $313,552,906
at September 30, 2004, from $321,139,169 at June 30, 2004. Net loans decreased
by approximately $7,900,000. The decrease in total assets and net loans is the
result of management's intent to continue restructuring their Balance Sheet for
future interest rate cycles and growth opportunities while minimizing current
interest rate risk scenarios. In response to the decrease in lending activity
over the past three months, the Company has permitted high cost certificate and
money market deposit products to be withdrawn from the institution and has
repaid $3,000,000 in short term funding from the Federal Home Loan Bank
("FHLB").
Investment securities held to maturity have increased approximately $3,000,000
to $10,082,626 at September 30, 2004 from $7,089,742 at June 30, 2004. The
increase is the result of the Company purchasing five short-term agencies
callable securities. Each of the purchased securities has maturity of two years
or less with callable options ranging from three months to one year. The average
yield on the investments purchased is approximately 2.45%. The proceeds used to
purchase the investments were derived from loan repayments during the period.
Loans receivable, net decreased by approximately $7,900,000 to $251,908,282 at
September 30, 2004 from $259,833,742 at June 30, 2004. The decrease in net loans
consists primarily of 1-4 family and non-residential mortgage loans, including
construction, which have decreased a combined $6,300,000 during the period. The
decrease in mortgage lending is attributed to the customers' lack of desire for
adjustable rate loan products when fixed-rate products continue to be offered at
historically low levels and aggressive competition from other institutions as
overall loan demand in the market area decreases. In addition to the decrease in
mortgage lending, indirect automobile loans have decreased $2,800,000 and
automobile dealer floor plan loans decreased $500,000 during the period. The
decrease in indirect lending and floor plan lending is the result of the
Company's desire to minimize credit risk and position the bank for future growth
opportunities. Offsetting the decreases is an increase in Home Equity Lines of
Credit. These loan products have increased $1,400,000 during the period as
customers access equity in their residential property without jeopardizing their
long term fixed rate mortgages. The Company believes that future loan growth
will be from this product type.
Deposits decreased $4,900,000 to $262,812,042 at September 30, 2004 from
$267,724,634 at June 30, 2004. The decrease is spread throughout the core
checking, saving and money market accounts. Core checking and savings have
decreased $2,000,000 each for the period, while money market accounts have
decreased $4,500,000. Offsetting these decreases were increases in certificates
of deposits of $3,600,000. The decrease in core accounts, including money
markets, is principally due to customers moving "parked" funds to higher
yielding investment alternatives. To some extent, customers have opted for the
Company's current certificate of deposit products that yield greater returns
than core accounts. To an equal extent, customers have gone outside the Company
into the equity markets and to local competitors to find higher yields than the
Company currently offers or feels the need to offer in the current interest rate
environment. If the Company begins to realize an increase in lending growth in
future periods, management feels that deposit outflows can be modified by
increasing funding costs to create deposit growth needed to fund the increased
lending activity.
-8-
Advances from the FHLB decreased $3,000,000 to $20,000,000 at September 30, 2004
from $23,000,000 at June 30, 2004. This decrease is in the short-term Open-Repo
line of credit product offered by the FHLB of Pittsburgh. As stated above, the
primary reason for the decrease is due to the decrease in loan demand in the
market area, as well as management's intent to restructure the Balance Sheet. At
September 30, 2004, the Company has no outstanding balance on the line of
credit.
Stockholders' equity increased approximately $507,000 to $22,237,032 at
September 30, 2004 from $21,729,692 at June 30, 2004. This increase was the
result of net income of $530,000 for the period, the recognition of shares in
the Employee Stock Ownership Plan of $67,000 and an increase in the net
unrealized gain on securities of $45,000. These increases were offset by the
payment of cash dividends of $135,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2003 AND 2002
- -------------
Net interest income decreased $67,000 or 2.71%, to $2,415,000 for the three
months ended September 30, 2004 from $2,482,000 for the comparable period ended
2003. The decrease in net interest income resulted primarily from a decrease 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, 2004, decreased to 3.08% from 3.10% for the comparable period
ended 2003. The 2 basis point decrease in the net interest rate spread for the
current three-month period was primarily due to a 24 basis point decline in
average yields on assets which was offset by a 22 basis point decline in average
cost of funds. See "Average Balance Sheet" for the three-month periods ended
September 30, 2004 and 2003.
The provision for loan losses decreased $109,000 to $211,365 for the three
months ended September 30, 2004 from $321,000 for the comparable period ended
2003. The decrease in the provision for loan losses was precipitated by a
decrease 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. 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 affect 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.
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 decreased $142,000 or 28.11%, to $363,674 for the three
months ended September 30, 2004 from $505,843 for the comparable period ended
2003. For the three-month period of 2004, miscellaneous fees and fees on deposit
accounts increased by $11,000 or 5.27% as a result of an increase in core
customers and related activity and individual fee item increases. For the three
month period of 2004, gains on sales of fixed rate loans and income from loan
servicing activity decreased a combined $173,000 as a result of the decrease in
customer demand for fixed 1-4 family mortgage loans during the period in
comparison to the period ended in 2003.
Noninterest expense increased $107,000 or 6.34%, to $1,793,133 for the three
months ended September 30, 2004, from $1,686,155 for the comparable 2003 period.
For the three-month period ended September 30, 2004, compensation and employee
benefits increased $120,000. The increase in compensation and employee benefits
is due primarily to a decrease of $94,000 in Loan Compensation Contra due to the
decrease in loan production for the three months ended September 30, 2004 in
comparison to the same period ended 2003. Also, fringe benefit expenses have
increased $21,000 or 9.84% for the three-month period of 2004 in comparison to
the same period ended in 2003. Consequently, actual salaries paid to employees
for the three-month period increased by only $4,600 or .70%. The small increase
in actual salaries is due to management's intention to control costs by
attrition in a period of limited growth.
-9-
Data processing costs increased $10,000 for the three month period ended
September 30, 2004 in comparison to the same period ended 2003 primarily as a
result of customers' increased usage of the Company's internet banking module
which increased $18,000 for the period. Other expenses decreased $30,000 for the
same three-month period as a result of a decrease in office supplies and postage
of $19,000 and of expenses related to repossessed assets of $13,000. The
decrease in supplies and postage is primarily the result of a reduction in
purchasing inventory in anticipation of the pending merger. The decrease in
expenses related to repossessed assets is the result of the decrease in real
estate foreclosure activity in comparison to the same period ended 2003.
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, provides 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, 2004, liquid assets
totalled $23.8 million or 7.58% 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 are expected to enable the Company to
meet cash obligations and off-balance sheet commitments as they come due.
Operating activities provided net cash of $1.2 million and $4.1 million for the
three-month periods ended September 30, 2004 and 2003, respectively. The
operating cash flows from 2003 were generated principally from the net sales of
fixed rate 1-4 family mortgages.
Investing activities provided $6.2 million and used $20.7 million in funds
during the three-month periods ended September 30, 2004 and 2003, respectively.
The cash flows primarily are determined by net loan payments of $7.7 million and
$(24.6) million for 2004 and 2003, respectively. Offsetting these cash flows for
the period ended September 30, 2004 and 2003, respectively were investment cash
flows of $(1.5) million and $3.8 million.
Financing activities consist of the solicitation and repayment of customer
deposits and borrowings. Financing activities used $8.1 million and provided
$4.6 million during the three months ended September 30, 2004 and 2003,
respectively. For the period ended September 30, 2004, deposits decreased by
$4.9 million and borrowed funds deceased by $3.0 million. For the period ended
September 30, 2003, deposits decreased by $7.6 million and borrowed funds
increased by $13.0 million.
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, 2004, 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
5.22% and 12.06%, 11.15% and 7.37%, respectively, at September 30, 2004.
-10-
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,
--------------------------------------
2004 Vs 2003
--------------------------------------
Increase (Decrease)
Due to
--------------------------------------
Volume Rate Net
--------------------------------------
Interest Income:
Loans $ 177,425 $(256,253) $ (78,828)
Investments (134,995) (58,013) (193,008)
--------------------------------------
Total interest-earning assets 42,430 (314,266) (271,836)
--------------------------------------
Interest Expense
Core Deposits (9,638) (75,831) (85,469)
Certificates of Deposit 9,069 (122,472) (113,403)
FHLB Borrowings (59,785) 43,133 (16,652)
Other Borrowings 386 10,471 10,857
Total interest-bearing liabilities (59,968) (144,699) (204,667)
--------------------------------------
Change in net interest income $ 102,398 $(169,567) $ (67,169)
======================================
-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,
----------------------------------------------------------------------------------------
2004 2003
----------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ ------------ ----------- ------------- ------------ -----------
Interest-earning assets:
Loans receivable (1) $256,804 $3,829 5.96% $246,043 $3,908 6.35%
Investment securities (2) 25,926 127 1.96% 33,947 272 3.21%
Mortgage-backed securities 16,854 156 3.69% 25,796 204 3.15%
-------- ------- ------ -------- ------ ------
Total interest-earning assets 299,584 4,112 5.49% 305,786 4,384 5.73%
------- ------ ------ ------
Non-interest-earning assets 16,930 17,641
-------- --------
Total assets $316,514 $323,427
======== ========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 49,438 114 0.92% $ 53,445 143 1.07%
Certificates of deposit 155,552 1,116 2.87% 154,300 1,229 3.19%
Savings deposits 49,057 77 0.63% 49,369 134 1.08%
FHLB Borrowings 20,500 293 5.73% 25,391 310 4.89%
Other Borrowings 7,257 97 5.35% 7,226 86 4.77%
-------- ------- ------ -------- ------ ------
Total interest-bearing liabilities 281,804 1,697 2.41% 289,731 1,902 2.63%
------- ------ ------ ------
Non-interest bearing liabilities 12,700 13,248
-------- --------
Total liabilities 294,504 302,979
Stockholders' equity 22,010 20,448
-------- --------
Total liabilities and stockholders'
equity $316,514 $323,427
======== ========
Net interest income $ 2,415 $ 2,482
======= =======
Interest rate spread (3) 3.08% 3.10%
====== ======
Net Yield on interest-earning assets (4) 3.22% 3.25%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 106.31% 105.54%
====== ======
- --------------------------------------------------------------------------------
(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.
-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,
2004 2004
------------- ----------
Loans on a nonaccrual basis $ 877 $ 697
Loans past due 90 days or more and still accruing 1,598 1,707
------ ------
Total nonperforming loans 2,475 2,404
------ ------
Other real estate 258 253
Repossessed assets 34 -
------ ------
Total nonperforming assets $2,767 $2,657
------ ------
Nonperforming loans as a percentage of total net loans .98% .93%
===== =====
Nonperforming assets as a percentage of total assets .88% .83%
===== =====
Allowance for loan losses to nonperforming loans 75.17% 74.81%
===== =====
Nonaccrual loans at September 30, 2004, consisted of $620,596 in one-to-four
family residential mortgages and $256,028 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 does not consider an insignificant delay, which is defined as less
than 90 days by the Company, to be a reason to classify a loan 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, 2004, the total investment in impaired loans was $267,189,
and such amount was subject to a specific allowance for loan losses of $105,852.
The average investment in the impaired loans for the three-month period ended
September 30, 2004 was $282,375. The interest income potential based upon the
original terms of the contracts of these impaired loans was $4,780 for the
three-month period ended September 30, 2004, all of which has been recognized as
income.
-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 actual 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,
2004 and June 30, 2004:
September 30, June 30,
2004 2004
----------------------------------
Mortgage loans:
1-4 Family $119,596,515 $119,783,861
1-4 Family construction 5,532,946 7,944,357
Multi-family 8,901,225 8,997,796
Non-residential 40,936,484 40,247,378
Non-residential construction 5,489,866 9,063,738
------------ ------------
180,457,036 186,037,130
------------ ------------
Consumer Loans:
Home Improvement 572,594 680,206
Home Equity LOC 18,307,802 16,916,392
Automobile-Direct 8,724,540 9,042,103
Automobile-Indirect 29,088,092 31,902,157
Share loans 2,192,688 2,346,149
Other 1,956,348 2,146,205
------------ ------------
60,842,064 63,033,212
------------ ------------
------------ ------------
Commercial Loans 15,961,363 17,009,222
------------ ------------
------------ ------------
Gross Loans 257,260,463 266,079,564
Less:
Loans in process 3,376,303 4,338,892
Net deferred loan fees 115,145 108,294
Allowance for loan losses 1,860,733 1,798,636
------------ ------------
5,352,181 6,245,822
------------ ------------
Total $251,908,282 $259,833,742
============ ============
-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 - Unregistered Sales of Equity 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
(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-Oxley Act of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
* 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 March 31, 2003 10-Q. (File No. 0-021885)
filed May 13, 2003.
*** Incorporated by reference to the Form 8-K ( File No. 0-21885) filed July
17, 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.
-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 12, 2004 By: /s/Stephen M. Gagliardi
-------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: November 12, 2004 By: /s/Stephen M. Magnone
-------------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)
-17-