-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GyBWuylDfUS2FRDlqD0LMoeQzx8uDYvITzeDyirFBvCb03c1MGeQsjicFV3+wyMj t5PCBNKdYK6IRtMTa1zang== 0000946275-03-000805.txt : 20031113 0000946275-03-000805.hdr.sgml : 20031113 20031113145551 ACCESSION NUMBER: 0000946275-03-000805 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCE FINANCIAL BANCORP CENTRAL INDEX KEY: 0001023398 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 550753533 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21885 FILM NUMBER: 03997577 BUSINESS ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 BUSINESS PHONE: 3047373531 MAIL ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 10QSB 1 f10q93003-0192.txt FORM 10-QSB 9-30-03 ADVANCE FINANCIAL BANCORP 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 ------ 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 ----------- ----------- 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% ====== ====== _____________ (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, 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 EX-31 3 ex31.txt EXHIBIT 31 TO FORM 10-QSB Exhibit 31 SECTION 302 CERTIFICATION I, Stephen M. Gagliardi, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Advance Financial Bancorp; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. Date: November 13, 2003 /s/ Stephen M. Gagliardi ----------------------------------------- Stephen M. Gagliardi President and Chief Executive Officer Exhibit 31 SECTION 302 CERTIFICATION I, Stephen M. Magnone, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Advance Financial Bancorp ; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting. Date: November 13, 2003 /s/ Stephen M. Magnone -------------------------------------- Stephen M. Magnone Chief Financial Officer EX-32 4 ex32.txt EXHIBIT 32 TO FORM 10-QSB CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Advance Financial Bancorp (the "Company") on Form 10QSB for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Stephen M. Gagliardi, President and Chief Executive Officer, and Stephen M. Magnone, Treasurer (Chief Financial Officer), certify, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen M. Gagliardi /s/ Stephen M. Magnone - ------------------------------------- ----------------------------------- Stephen M. Gagliardi Stephen M. Magnone President and Chief Executive Officer Treasurer (Chief Financial Officer) November 13, 2003 -----END PRIVACY-ENHANCED MESSAGE-----