10QSB 1 f10qsb_033104-0192.txt FORM 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 March 31, 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 ------------------------------ 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 May 10, 2004: 1,398,373 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 March 31, 2004 and June 30, 2003 3 Consolidated Statement of Income (Unaudited) For the Three Months ended March 31, 2004 and 2003 4 Consolidated Statement of Income (Unaudited) For the Nine Months ended March 31, 2004 and 2003 5 Consolidated Statement of Cash Flows (Unaudited) For the Nine Months ended March 31, 2004 and 2003 6 Notes to the Unaudited Consolidated Financial Statements 7-10 Item 2 - Management's Discussion and Analysis 11-19 Item 3 - Controls and Procedures 20 Part II - OTHER INFORMATION Item 1 - Legal Proceedings 21 Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 21 Item 3 - Default Upon Senior Securities 21 Item 4 - Submissions of Matters to a Vote of Security Holders 21 Item 5 - Other Information 21 Item 6 - Exhibits and Reports on Form 8-K 21 SIGNATURES 22
ADVANCE FINANCIAL BANCORP CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, JUNE 30, 2004 2003 ------------- ------------- Assets Cash and cash equivalents: Cash and amounts due from banks $ 2,513,608 $ 2,906,568 Interest bearing deposits with other institutions 6,905,261 13,163,753 ------------- ------------- Total cash and cash equivalents 9,418,869 16,070,321 ------------- ------------- Investment securities: Securities held to maturity (fair value of $7,221,555 and $15,298,606) 7,090,146 15,086,475 Securities available for sale 12,938 11,394,701 ------------- ------------- Total investment securities 7,103,084 26,481,176 ------------- ------------- Mortgaged-backed securities: Securities held to maturity (fair value of $13,744,749 and $18,751,018) 13,787,473 18,642,532 Securities available for sale 6,077,279 8,979,898 ------------- ------------- Total mortgage-backed securities 19,864,752 27,622,430 ------------- ------------- Loans held for sale 646,750 5,687,708 Loans receivable, (net of allowance for loan losses of $1,604,768 and $1,095,822 ) 265,256,747 229,239,547 Office properties and equipment, net 4,841,703 5,069,073 Federal Home Loan Bank Stock, at cost 2,192,500 1,679,400 Accrued interest receivable 1,308,802 1,447,525 Goodwill 4,700,472 4,700,472 Other intangibles, net 1,575,633 1,709,413 Other assets 2,375,647 2,193,526 ------------- ------------- TOTAL ASSETS $ 319,284,959 $ 321,900,591 ============= ============= Liabilities: Deposits $ 266,992,674 $ 272,828,932 Advances from Federal Home Loan Bank 22,300,000 20,000,000 Other Borrowings 7,200,000 7,200,000 Advance payments by borrowers for taxes and insurance 469,498 507,049 Accrued interest payable and other liabilities 919,115 1,276,657 ------------- ------------- TOTAL LIABILITIES 297,881,287 301,812,638 ------------- ------------- Stockholders' Equity: Preferred stock, $.10 par value; 500,000 shares authorized, none issued - - Common stock, $.0667 par value; 3,000,000 shares authorized 1,626,621 shares issued 108,445 108,445 Additional paid in capital 10,573,447 10,467,559 Retained earnings - substantially restricted 13,308,106 11,705,306 Unallocated shares held by Employee Stock Ownership Plan (ESOP) (185,536) (250,634) Unallocated shares held by Restricted Stock Plan (RSP) (205,719) (206,756) Treasury Stock (228,248 shares at cost) (2,233,265) (2,233,265) Accumulated other comprehensive income 38,194 497,298 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 21,403,672 20,087,953 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 319,284,959 $ 321,900,591 ============= =============
See accompanying notes to the unaudited consolidated financial statements. -3- ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2004 2003 ---------- ---------- INTEREST AND DIVIDEND INCOME Loans $3,973,736 $3,372,413 Investment securities - taxable 61,222 94,708 Investment securities - nontaxable 34,998 111,984 Interest-bearing deposits with other institutions 2,762 104,729 Mortgage-backed securities 200,869 175,231 Dividends on Federal Home Loan Bank Stock 8,335 13,463 ---------- ---------- Total interest and dividend income 4,281,922 3,872,528 ---------- ---------- INTEREST EXPENSE Deposits 1,448,446 1,577,652 Advances from Federal Home Loan Bank 305,868 287,629 Other Borrowings 80,374 94,034 ---------- ---------- Total interest expense 1,834,688 1,959,315 ---------- ---------- NET INTEREST INCOME 2,447,234 1,913,213 Provision for loan losses 233,100 121,800 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,214,134 1,791,413 ---------- ---------- NONINTEREST INCOME Service charges on deposit accounts 201,299 162,942 Income from loan servicing activity 29,288 43,255 Gain on sale of loans 31,164 85,342 Gain on sale of Investments 120 - Other income 106,006 86,444 ---------- ---------- Total noninterest income 367,877 377,983 ---------- ---------- NONINTEREST EXPENSE Compensation and employee benefits 859,134 740,487 Occupancy and equipment 275,531 280,623 Professional fees 40,652 44,395 Advertising 46,119 35,408 Data processing charges 137,741 147,835 Amortization of intangible asset 44,593 24,000 Other expenses 381,647 365,543 ---------- ---------- Total noninterest expenses 1,785,417 1,638,291 ---------- ---------- Income before income taxes 796,594 531,105 Income taxes 278,157 160,002 ---------- ---------- Net Income $ 518,437 $ 371,103 ========== ========== EARNINGS PER SHARE - NET INCOME Basic $ .39 $ .28 Diluted $ .38 $ .28 DECLARED DIVIDEND PER SHARE $ .10 $ .10 See accompanying notes to the unaudited consolidated financial statements. -4- ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2004 2003 ----------- ----------- INTEREST AND DIVIDEND INCOME Loans $11,925,171 $ 9,711,690 Investment securities - taxable 303,689 259,214 Investment securities - nontaxable 227,074 266,117 Interest-bearing deposits with other institutions 14,827 185,989 Mortgage-backed securities 616,092 416,181 Dividends on Federal Home Loan Bank Stock 25,592 31,329 ----------- ----------- Total interest and dividend income 13,112,445 10,870,520 ----------- ----------- INTEREST EXPENSE Deposits 4,443,889 4,341,288 Advances from Federal Home Loan Bank 944,028 873,105 Other Borrowings 239,678 94,034 ----------- ----------- Total interest expense 5,627,595 5,308,427 ----------- ----------- NET INTEREST INCOME 7,484,850 5,562,093 Provision for loan losses 904,950 276,000 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,579,900 5,286,093 ----------- ----------- NONINTEREST INCOME Service charges on deposit accounts 633,877 467,521 Income from loan servicing activity 176,428 118,043 Gain on sale of loans 221,906 249,244 Gain on sale of Investments 446,497 -- Other income 284,145 247,504 ----------- ----------- Total noninterest income 1,762,853 1,082,312 ----------- ----------- NONINTEREST EXPENSE Compensation and employee benefits 2,424,541 1,982,852 Occupancy and equipment 816,365 803,435 Professional fees 127,431 118,815 Advertising 145,080 119,695 Data processing charges 403,793 313,945 Amortization of intangible asset 133,780 24,000 Other expenses 1,231,140 1,045,981 ----------- ----------- Total noninterest expenses 5,282,130 4,408,723 ----------- ----------- Income before income taxes 3,060,623 1,959,682 Income taxes 1,054,543 701,620 ----------- ----------- Net Income $ 2,006,080 $ 1,258,062 =========== =========== EARNINGS PER SHARE - NET INCOME Basic $ 1.49 $ .94 Diluted $ 1.46 $ .94 DECLARED DIVIDEND PER SHARE $ .30 $ .26
See accompanying notes to the unaudited consolidated financial statements. -5- ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2004 2003 ------------ ------------ OPERATING ACTIVITIES Net Income $ 2,006,080 $ 1,258,062 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 582,320 377,925 Provision for loan losses 904,950 276,000 Gain on sale of loans (221,906) (249,244) Gain on sale of investments (446,497) - Origination of loans held for sale (15,579,243) (18,472,904) Proceeds from the sale of loans 20,842,107 19,300,795 (Increase) decrease in other assets and liabilities,net (345,355) 345,496 ------------ ------------ Net cash provided by operating activities 7,742,456 2,836,130 ------------ ------------ INVESTING ACTIVITIES Investment securities held to maturity: Purchases - (12,588,093) Maturities and repayments 8,000,000 - Investment securities available for sale: Purchases - (4,007,886) Maturities and repayments 1,000 6,036,342 Sales 11,211,377 - Mortgage-backed securities held to maturity: Purchases - (14,995,240) Maturities and repayments 4,728,004 555,308 Mortgage-backed securities available for sale: Purchases - (3,723,622) Maturities and repayments 2,436,953 3,274,505 Sales 352,881 - Purchase of Federal Home Loan Bank Stock, net (513,100) (694,800) Net increase in loans (36,498,289) (33,944,678) Purchases of premises and equipment (135,438) (1,255,119) Branch Acquisition: Loans purchased - (85,347) Purchase of premises and equipment - (440,592) Premium paid on deposits - (5,853,373) Deposits assumed - 88,260,100 Other, net - (184,924) ------------ ------------ Net cash (used in) provided by investing activities (10,416,612) 20,352,581 ------------ ------------ FINANCING ACTIVITIES Net (decrease) increase in deposits (5,836,258) 12,162,219 Net increase in short term borrowings 2,300,000 - Proceeds from long term borrowings - 7,200,000 Net change in advances for taxes and insurance (37,551) (35,330) Cash dividends paid (403,487) (319,230) ------------ ------------ Net cash (used in) provided by financing activities (3,977,296) 19,007,659 ------------ ------------ (Decrease) increase in cash and cash equivalents (6,651,452) 42,196,370 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,070,321 11,770,440 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,418,869 $ 53,966,810 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest on deposits and borrowings $ 5,648,679 $ 5,308,211 Income taxes $ 1,110,000 $ 640,000
See accompanying notes to the unaudited consolidated financial statements. -6- 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 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. 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 March 31 (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 (44,288) (57,105) ---------- ---------- Weighted -average common shares and common stock equivalents used to calculate basic earnings per share 1,354,085 1,341,268 Additional common stock equivalents (stock options) used to calculate diluted earnings per share 30,565 8,872 ---------- ---------- Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share 1,384,650 1,350,140 ========== ========== -7- NOTE 2 - EARNINGS PER SHARE (Continued) Nine-Months Ended March 31 (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 (48,626) (61,409) ---------- ---------- Weighted -average common shares and common stock equivalents used to calculate basic earnings per share 1,349,747 1,336,964 Additional common stock equivalents (stock options) used to calculate diluted earnings per share 27,844 621 ---------- ---------- Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share 1,377,591 1,337,585 ========== ========== NOTE 3 - 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 March 31, 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 March 31, 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. The options issued would have had no dilutive effect on net income for the three and nine month periods ended March 31, 2004. Had the options been dilutive, compensation expense for the stock option plan would have been recognized in accordance with the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, " Accounting for Stock-based Compensation". -8- NOTE 4 - COMPREHENSIVE INCOME Other accumulated comprehensive income consists solely of net unrealized gains and losses on available for sale securities. For the three and nine months ended March 31, 2004, comprehensive income totaled $526,149 and $1,546,976, respectively. For the three and nine months ended March 31, 2003, comprehensive income totaled $373,924 and $1,341,035, respectively. For the nine months ended March 31, 2004, net income included a reclassification of net unrealized gains of $446,497, primarily as a result of the sale of available for sale securities in November 2003. NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board ("FASB") revised Statement of Financial Accounting Standards ("FAS") No. 132, Employers' Disclosures about Pension and Other Postretirement Benefits. This statement retains the disclosures required by FAS No. 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable and requires additional information on changes in the benefit obligations and fair value of plan assets. Additional disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. This statement retains reduced disclosure requirements for nonpublic entities from FAS No. 132, and it includes reduced disclosure for certain of the new requirements. This statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company's disclosure requirements. In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. The amendments set forth in FAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in FAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS No.149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This statement is effective for contracts entered into or modified after September 30, 2003, except as stated below and for hedging relationships designated after September 30, 2003. The guidance should be applied prospectively. The provisions of this statement that relate to FAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to September 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after September 30, 2003. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. The adoption of this statement did not have a material effect on the Company's reported equity. -9- NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) 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. -10- 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 was effective for holders of record as of November 10, 2003. After the stock split, the outstanding shares of the Company increased 466,088 shares to 1,398,373. The earnings per share calculations for March 31, 2003 have been restated to reflect the stock split. During the period ended December 31, 2003, the Company sold approximately $11,765,000 in available for sale investment securities. The amounts consisted of $2 million in commercial bonds, $5.8 million in long-term municipal bonds and $3 million in FHLB callable bonds. The Company realized a gain on the sales of approximately $446,000 that is included in the Statement of Income for the nine-month period ended March 31, 2004. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND JUNE 30, 2003 --------------------------------------------------------------------- The Company's total assets decreased by approximately $2,616,000 to $319,284,959 at March 31, 2004, from $321,900,591 at June 30, 2003. Net loans increased by approximately $36,017,000. The increase in net loans was funded by a decrease in interest bearing deposits with other financial institutions of $6,258,000, sales and repayments of investment securities and mortgage-backed securities of $27,136,000 and a decrease in loans available for sale of $5,041,000. Short-term advances from the Federal Home Loan Bank "FHLB" increased $2,300,000 during the period to partially replace the loss of approximately $5,836,000 in deposits. Interest-bearing deposits with other financial institutions decreased $6,258,000 to $6,905,261 at March 31, 2004 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 $19,378,000 to $7,103,084 at March 31, 2004 from $26,481,176 at June 30, 2003. This decrease was due primarily to sales of available for sale securities of $11,765,000 and the call of approximately $9,000,000, of which $7,000,000 was during the months of February and March 2004. The proceeds from the sales and calls were used to fund the Company's loan demand. Mortgage-backed securities decreased $7,758,000 to $19,864,752 at March 31, 2004 from $27,622,430 at June 30, 2003. The decrease was due primarily to accelerated principal repayments on higher yielding securities due to the low interest rate environment during the period ended March 31, 2004. Loans held for sale decreased $5,041,000 to $646,750 at March 31, 2004 from $5,687,708 at June 30, 2003. The decrease is indicative of 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 $36,017,000 to $265,256,747 at March 31, 2004 from $229,239,547 at June 30, 2003. The increase in net loans is spread over the Company's entire portfolio. One-four family mortgages increased $11,645,000 which includes approximately $4,982,000 in fixed rate loans that were added to the Bank's portfolio during the period and $6,663,000 in adjustable rate loans as these products became attractive as a result of the Bank's competitive pricing. Nonresidential mortgages increased approximately $2,540,000 as a result of continued demand from existing customers and municipalities within the local trade area. The increase in construction loans for the period was $6,832,000. This increase was split $3,399,000 and $3,434,000 for 1-4 family and nonresidential mortgages, respectively. The increase in construction loans is due to the demand created by the anticipation of near future interest rate increases in mortgage products. Dealer Floor Plan loans have increased $2,751,000 and indirect automobile loans have increased $11,249,000 during the period primarily as a result of new relationships the Company has developed over the past year 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. -11- FHLB stock increased $513,100 to $2,192,500 at March 31, 2004 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 nine month period ended March 31, 2004, the Company increased its advance total by $2,300,000. Deposits decreased $5,836,000 to $266,992,674 at March 31, 2004 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 $3,591,000 during the period as customers continue to search for higher yields on their investments in equities or other investment vehicles. The money market accounts had 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 $1,195,000 during the period due to similar customer sentiments. These types of certificates are generally the highest costing deposits offered by the 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 instead to borrow on a short-term basis from the FHLB. This funding approach could change in future periods depending upon the local demand for loans, the local deposit market or other factors such as management's consideration of interest rate risk. Advances from the FHLB increased $2,300,000 to $22,300,000 at March 31, 2004 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 March 31, 2004, the average rate paid on the line was approximately 1.2%. 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 $1,316,000 to $21,403,672 at March 31, 2004 from $20,087,953 at June 30, 2003. This increase was the result of net income of $2,006,000 for the period and the recognition of shares in the Employee Stock Ownership Plan and Restricted Stock Plan of $172,000. These increases were offset by a decrease in the net unrealized gain on securities of $459,000 and by the payment of cash dividends of $403,000. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED -------------------------------------------------------------------------------- MARCH 31, 2004 AND 2003 ----------------------- Net interest income increased $534,000 or 27.91%, to $2,447,000 for the three months ended March 31, 2004 from $1,913,000 for the comparable period ended 2003. The increase in net interest income resulted primarily from an increase in the average volume of the underlying principal balances in interest-earning assets and interest-bearing liabilities. The net interest spread for the three months ended March 31, 2004 increased to 3.08% from 2.67% for the comparable period ended 2003. The 41 basis point increase in the net interest rate spread for the current three month period was primarily due to a 58 basis point decline in average cost of funds which was offset by a 17 basis point decline in average yields on assets. See "Average Balance Sheet" for the three-month periods ended March 31, 2004 and 2003. Net interest income increased $1,923,000 or 34.57%, to $7,485,000 for the nine months ended March 31, 2004 from $5,562,000 for the comparable period ended 2003. The increase in net interest income resulted primarily from an increase in the average volume of the underlying principal balances in interest-earning assets and interest-bearing liabilities. The net interest spread for the nine months ended March 31, 2004 increased to 3.12% from 2.96% for the comparable period ended 2003. The 16 basis point increase in the net interest rate spread for the current nine month period was primarily the result of a 73 basis point decline in cost of funds which was offset by a 57 basis point decline in average yields on assets. See "Average Balance Sheet" for the nine-month periods ended March 31, 2004 and 2003. The provision for loan losses increased $111,000 to $233,100 for the three months ended March 31, 2004 from $121,800 for the comparable period ended 2003. The provision increased $629,000 to $904,950 for the nine-months ended March 31, 2004 from $276,000 for the comparable period ended 2003. 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. 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. -12- 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, the present value of future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral. 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 $10,000 or 2.67%, to $368,000 for the three months ended March 31, 2004 from $378,000 for the comparable period ended 2003. Noninterest income increased $681,000 or 62.88% to $1,763,000 for the nine months ended March 31, 2004 from $1,082,000 for the comparable period ended 2003. The nine month period of 2004 includes gains on the sales of investment securities of approximately $446,000, as previously discussed. Also, for the three and nine month period ended March 31, 2004, miscellaneous fees and fees on deposit accounts increased by $38,000 and $166,000, respectively, as a result of an increase in core customers and related activity. For the three month period ended March 31, 2004, gains on sales of fixed rate loans and income from loan servicing activity decreased by $68,000 while increasing over the nine-month period ended March 31, 2004, by $31,000. The decrease over the three month period is due to decreasing customer demand for fixed rate 1-4 family mortgage loans in comparison to the same period ended in 2003. Noninterest expense increased $147,000 or 8.98%, to $1,785,000 for the three months ended March 31, 2004, from $1,638,000 for the comparable 2003 period. Noninterest expense increased $873,000 or 19.81%, to $5,282,000 for the nine months ended March 31, 2004 from $4,409,000 for the comparable period ended 2003. For the three and nine month periods ended March 31, 2004, compensation and employee benefits increased $119,000 and $442,000, respectively. The increase in compensation and employee benefits for the three and nine month periods ended March 31, 2004 is due in part to the acquisition of the branch in Ohio in February 2003 and the de novo branch opening in September 2002. The new branches account for $20,000 and $154,000 of the increase for the three and nine month periods, respectively. Occupancy and equipment, professional fees, marketing and data processing expenses have remained stable for the three month period while they have increased by $137,000 for the nine month period ended March 31, 2004. Such increases are primarily due to the operation of the new branches acquired and opened since September 2002. For the three and nine month periods ended March 31, 2004, other expenses, including the amortization of the core deposit intangible "CDI" have increased $37,000 and $295,000, respectively. The increase in other expense for the three month period is due to increases in expenses related to other real estate and repossessed assets of $19,000 and the amortization of the CDI of $21,000. The increase in other expense for the nine month period is due to increases in supplies and communications of $9,000, in fees paid for ATM and consumer card usage of $50,000 and in fees paid to the Federal Reserve for item processing of $13,000, respectively. 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 purchase and the de novo branch opening. Also, other expense increased for the nine month period ended March 31, 2004 due to an increase in state franchise tax expense of $32,000 and CDI amortization of $134,000 as a result of the branch acquisition during February 2003. Costs relating to other real estate and repossessed assets increased for the nine month period ended March 31, 2004 by $47,000. 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 March 31, 2004, liquid assets totalled $15.5 million or 4.9% 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. -13- Operating activities provided net cash of $7.7 million and $2.8 million for the nine-month periods ended March 31, 2004 and 2003, respectively, and were generated principally from net income and net sales of fixed rate 1-4 family mortgages. Investing activities used $10.4 million and provided $20.3 million in funds during the nine-month periods ended March 31, 2004 and 2003, respectively. During the period ended March 31, 2004, the Company used cash to originate a net $36.5 million in loans. This usage was offset by net proceeds from the sale, repayment and maturity of investment and mortgage-backed securities of $26.7 million. During the period ended March 31, 2003, the Company used cash to originate a net $33.9 million in loans and to purchase $25.5 million in investment and mortgage-backed securities. Offsetting the uses of funds for the period ended March 31, 2003 was $81.3 million received from the branch purchase in February 2003. Financing activities consist of the solicitation and repayment of customer deposits and borrowings. Financing activities used $4.0 million and provided $19.0 million during the nine months ended March 31, 2004 and 2003, respectively. For the period ending 2004, deposits had decreased $5.8 million. This decrease had been partially offset by an increase in short-term borrowings of $2.3 million. For 2003, deposits increased $12.2 million and the Company received $7.2 million as part of a Pooled Trust Preferred Offering. 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 currently has approximately $144 million in unused borrowing capacity at the FHLB of Pittsburgh. As a result of this unused borrowing capacity, 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 March 31, 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 4.84% and 10.87%, 10.12% and 6.87%, respectively, at March 31, 2004. -14- 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 March 31, ---------------------------------------------- 2004 Vs 2003 ---------------------------------------------- Increase (Decrease) Due to ---------------------------------------------- Volume Rate Net ---------------------------------------------- Interest Income: Loans $1,140,220 $(538,897) $601,323 Investments (216,688) 24,759 (191,929) ---------------------------------------------- Total interest-earning assets 923,532 (514,138) 409,394 ---------------------------------------------- Interest Expense Core Deposits 62,127 (127,759) (65,632) Certificates of Deposit 159,506 (223,080) (63,574) FHLB Borrowings 53,680 (35,441) 18,239 Other Borrowings - (13,660) (13,660) ---------------------------------------------- Total interest-bearing liabilities 275,313 (399,940) (124,627) ============================================== Change in net interest income $ 648,219 $(114,198) $ 534,021 ==============================================
Nine Months Ended March 31, ---------------------------------------------- 2004 Vs 2003 ---------------------------------------------- Increase (Decrease) Due to ---------------------------------------------- Volume Rate Net ---------------------------------------------- Interest Income: Loans $3,899,444 $(1,685,963) $2,213,481 Investments 61,997 (33,553) 28,444 ---------------------------------------------- Total interest-earning assets 3,961,441 (1,719,516) 2,241,925 ---------------------------------------------- Interest Expense Core Deposits 384,521 (544,077) (159,556) Certificates of Deposit 1,032,679 (770,522) 262,157 FHLB Borrowings 234,600 (163,677) 70,923 Other Borrowings 230,433 (84,789) 145,644 ---------------------------------------------- Total interest-bearing liabilities 1,882,233 (1,563,065) 319,168 ============================================== Change in net interest income $2,079,208 $ (156, 451) $1,922,757 ==============================================
-15- Average Balance Sheet for the Three-Month Period ended March 31 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 March 31, -------------------------------------------------------------------------------------- 2004 2003 ------------------------------------------ ------------------------------------------ Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------------ ------------ ------------ ------------- ------------ ----------- Interest-earning assets: Loans receivable (1) $265,520 $3,974 5.99% $198,431 $3,372 6.80% Investment securities (2) 18,201 107 2.36% 53,000 325 2.45% Mortgage-backed securities 20,675 201 3.89% 15,597 175 4.49% ------------ ------------ ----------- ------------- ------------ ----------- Total interest-earning assets 304,396 4,282 5.63% 267,028 3,873 5.80% ------------ ----------- ------------ ----------- Non-interest-earning assets 17,630 13,449 ------------ ------------- Total assets $322,026 $280,477 ============ ============= Interest-bearing liabilities: Interest-bearing demand deposits $ 52,377 134 1.02% $ 43,285 168 1.55% Certificates of deposit 153,667 1,184 3.08% 136,232 1,246 3.66% Savings deposits 49,610 131 1.06% 42,607 163 1.53% FHLB Borrowings 25,117 306 4.87% 21,167 288 5.44% Other Borrowings 7,200 80 4.47% 7,200 94 5.22% ------------ ------------ ----------- ------------- ------------ ----------- Total interest-bearing liabilities 287,971 1,835 2.55% 250,491 1,959 3.13% ------------ ----------- ------------ ----------- Non-interest bearing liabilities 12,840 10,730 ------------ ------------- Total liabilities 300,811 261,221 Stockholders' equity 21,215 19,256 ------------ ------------- Total liabilities and stockholders' equity $322,026 $280,477 ============ ============= Net interest income $2,447 $1,913 ============ ============ Interest rate spread (3) 3.08% 2.67% =========== =========== Net yield on interest-earning assets (4) 3.22% 2.87% =========== =========== Ratio of average interest-earning assets to average interest-bearing liabilities 105.70% 106.60% =========== ===========
-------------------------------------------------------------------------------- (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. -16- Average Balance Sheet for the Nine-Month Period ended March 31 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.
Nine-Month Period Ended March 31, -------------------------------------------------------------------------------------- 2004 2003 ----------------------------------------- ------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------------ ------------ ----------- ------------- ------------ ------------ Interest-earning assets: Loans receivable (1) $257,790 $11,925 6.17% $184,904 $9,712 7.00% Investment securities (2) 25,381 571 3.00% 34,837 743 2.84% Mortgage-backed securities 23,011 616 3.57% 11,097 416 5.00% ------------ ------------ ----------- ------------- ------------ ----------- Total interest-earning assets 306,182 13,112 5.71% 230,838 10,871 6.28% ------------ ----------- ------------ ----------- Non-interest-earning assets 17,653 10,638 ------------ ------------- Total assets $323,835 $241,476 ============ ============= Interest-bearing liabilities: Interest-bearing demand deposits $ 52,948 418 1.06% $ 34,171 449 1.75% Certificates of deposit 153,400 3,629 3.15% 117,430 3,367 3.82% Savings deposits 49,553 396 1.07% 38,496 526 1.82% FHLB Borrowings 27,139 944 4.64% 20,789 873 5.60% Other Borrowings 7,200 240 4.44% 2,400 94 5.22% ------------ ------------ ----------- ------------- ------------ ----------- Total interest-bearing liabilities 290,040 5,627 2.59% 213,286 5,309 3.32% ------------ ----------- ------------ ----------- Non-interest bearing liabilities 12,962 9,270 ------------ ------------- Total liabilities 303,002 222,556 Stockholders' equity 20,833 18,920 ------------ ------------- Total liabilities and stockholders' equity $323,835 $241,476 ============ ============= Net interest income $7,485 $5,562 ============ ============ Interest rate spread (3) 3.12% 2.96% =========== =========== Net Yield on interest-earning assets (4) 3.26% 3.21% =========== =========== Ratio of average interest-earning assets to average interest-bearing liabilities 105.57% 108.23% =========== ===========
-------------------------------------------------------------------------------- (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. -17- RISK ELEMENTS ------------- The table below presents information concerning nonperforming assets including nonaccrual 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. March 31, June 30, 2004 2003 ------ ------ Loans on a nonaccrual basis $ 568 $1,398 Loans past due 90 days or more and still accruing 1,046 1,681 ------ ------ Total nonperforming loans 1,614 3,079 ------ ------ Other real estate 328 802 Repossessed assets 7 28 ------ ------ Total nonperforming assets $1,949 $3,909 ------ ------ Nonperforming loans as a percentage of total net loans 0.61% 1.34% ====== ====== Nonperforming assets as a percentage of total assets 0.61% 1.21% ====== ====== Allowance for loan losses to nonperforming loans 99.44% 35.60% ====== ====== Nonaccrual loans at March 31, 2004,consisted of $369,900 in one-to-four family residential mortgages and $198,480 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 March 31, 2004, the Company had no loans that were classified as impaired. -18- 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. The Company's 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 recent loss experience. Similarly, by basing the past graded loss factors on historical loss experience, the methodology is further designed to take the Company's recent loss experience into account. In addition to historical and recent loss trends, the Company's methodology incorporates the current volume and trend in delinquencies, as well as, a self-assessment of the status of the local economy. The Company's 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, the Company's methodology includes its 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, the Company is 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 March 31, 2004 and June 30, 2003: March 31, June 30, 2004 2003 ------------ ------------ Mortgage loans: 1-4 family $137,751,868 $126,106,815 Multi-family 9,214,970 8,227,328 Non-residential 41,639,174 39,099,195 Construction 16,906,946 10,074,633 ------------ ------------ 205,512,958 183,507,971 ------------ ------------ Consumer Loans: Home Improvement 762,219 900,060 Automobile-Direct 9,488,828 8,761,516 Automobile-Indirect 33,390,186 22,140,818 Share loans 2,163,369 1,914,628 Other 2,204,969 2,687,302 ------------ ------------ 48,009,571 36,404,324 ------------ ------------ Commercial Loans 18,323,338 17,383,993 Less: Loans in process 4,875,368 6,844,741 Net deferred loan fees 108,983 116,178 Allowance for loan losses 1,604,768 1,095,822 ------------ ------------ 6,589,119 8,056,741 ------------ ------------ Total $265,256,748 $229,239,547 ============ ============ -19- 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. -20- PART II - OTHER INFORMATION Item 1 - Legal Proceedings NONE Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 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-Oxley Act of 2002 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Form 8-Ks filed during the quarter: The Registrant filed a report on Form 8-K dated January 23, 2004 to report earnings for the quarter ended December 31, 2003. (Items 7 and 12) -------------------------------------------------------------------------------- * 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. -21- 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: May 12, 2004 By: /s/Stephen M. Gagliardi ------------------------------------- Stephen M. Gagliardi President and Chief Executive Officer Date: May 12, 2004 By: /s/Stephen M. Magnone ------------------------------------- Stephen M. Magnone Treasurer (Chief Financial Officer) -22-