United States Securities and Exchange Commission
Washington, D.C. 20552
FORM 10QSB
{x} QUARTERLY REPORT UNDER SECTION 13 OF 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCAHANGE
ACT
For the transition period from _________,_______to__________________
Commission file Number 0-21885
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Advance Financial Bancorp
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(Exact name of registrant as specified in its charter)
Delaware 55-0753533
- ------------------------------ --------------------------------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1015 Commerce Street, Wellsburg, WV 26070
-----------------------------------------
(Address of principal executive offices)
(304) 737-3531
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subjected to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding for each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at May 1, 2002: 932,285
Advance Financial Bancorp
Index
Page
Number
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Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited) as of
March 31, 2002 and June 30, 2001 3
Consolidated Statement of Income (Unaudited)
For the Three Months ended March 31, 2002 and 2001 4
Consolidated Statement of Income (Unaudited)
For the Nine Months ended March 31, 2002 and 2001 5
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months ended March 31, 2002 and 2001 6
Notes to the Unaudited Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis 11-17
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities 18
Item 3 - Default Upon Senior Securities 18
Item 4 - Submissions of Matters to a vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, JUNE 30,
2002 2001
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Assets
Cash and cash equivalents:
Cash and amounts due from banks $ 1,513,338 $ 1,177,728
Interest bearing deposits with other institutions 11,943,791 7,375,450
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Total cash and cash equivalents 13,457,129 8,553,178
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Investment securities:
Securities held to maturity (fair value of $ - and $742,057) - 749,934
Securities available for sale 11,504,251 11,147,919
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Total investment securities 11,504,251 11,897,853
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Mortgaged-backed securities:
Securities held to maturity (fair value of $1,553,415 and $1,601,960) 1,523,396 1,595,349
Securities available for sale 7,365,494 8,383,075
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Total mortgage-backed securities 8,888,890 9,978,424
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Loans held for sale - 439,949
Loans receivable, (net of allowance for loan losses
of $979,069 and $779,170 ) 164,781,814 129,595,542
Office properties and equipment, net 3,724,870 3,828,367
Federal Home Loan Bank Stock, at cost 1,000,000 1,075,000
Accrued interest receivable 1,184,529 1,017,024
Other assets 1,436,704 1,101,725
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TOTAL ASSETS $ 205,978,187 $ 167,487,062
============= =============
Liabilities:
Deposits $ 167,408,254 $ 130,499,131
Advances from Federal Home Loan Bank 20,000,000 20,000,000
Advance payments by borrowers for taxes and insurance 274,819 146,095
Accrued interest payable and other liabilities 726,442 499,119
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TOTAL LIABILITIES 188,409,515 151,144,345
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Stockholders' Equity:
Preferred stock, $.10 par value; 500,000 shares
authorized, none issued - -
Common stock, $.10 par value; 2,000,000 shares
authorized 1,084,450 shares issued 108,445 108,445
Additional paid in capital 10,365,320 10,339,790
Retained earnings - substantially restricted 9,864,196 8,806,639
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (359,084) (424,154)
Unallocated shares held by Restricted Stock Plan (RSP) (220,679) (316,480)
Treasury Stock (152,165 shares at cost) (2,233,265) (2,233,265)
Accumulated other comprehensive income 43,739 61,742
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TOTAL STOCKHOLDERS' EQUITY 17,568,672 16,342,717
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 205,978,187 $ 167,487,062
============= =============
See accompanying notes to the unaudited consolidated financial statements.
-3-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2002 2001
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 3,062,999 $ 2,675,618
Investment securities 141,955 211,270
Interest-bearing deposits with other institutions 28,763 70,433
Mortgage-backed securities 141,908 145,273
Dividends on Federal Home Loan Bank Stock 11,494 17,892
----------- -----------
Total interest and dividend income 3,387,119 3,120,486
----------- -----------
INTEREST EXPENSE
Deposits 1,444,517 1,539,014
Advances from Federal Home Loan Bank 286,374 306,432
----------- -----------
Total interest expense 1,730,891 1,845,446
----------- -----------
NET INTEREST INCOME 1,656,228 1,275,040
Provision for loan losses 55,500 48,300
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,600,728 1,226,740
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 126,207 121,967
Gain on sale of loans 69,976 36,163
Loss on other real estate owned (27,500) --
Other income 123,164 87,299
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Total noninterest income 291,847 245,429
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NONINTEREST EXPENSE
Compensation and employee benefits 600,390 527,848
Occupancy and equipment 222,668 192,027
Professional fees 25,188 24,583
Advertising 31,624 29,860
Data processing charges 84,728 68,432
Other expenses 334,360 250,460
----------- -----------
Total noninterest expenses 1,298,958 1,093,210
----------- -----------
Income before income taxes 593,617 378,959
Income taxes 163,940 131,379
----------- -----------
Net Income 429,677 247,580
=========== ===========
EARNINGS PER SHARE - NET INCOME
Basic $ .49 $ .29
Diluted $ .49 $ .29
See accompanying notes to the unaudited consolidated financial statements.
-4-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
2002 2001
------------ ------------
INTEREST AND DIVIDEND INCOME
Loans $ 9,093,916 $ 7,879,632
Investment securities 462,673 557,171
Interest-bearing deposits with other institutions 107,161 212,613
Mortgage-backed securities 445,558 302,764
Dividends on Federal Home Loan Bank Stock 49,895 47,982
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Total interest and dividend income 10,159,203 9,000,162
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INTEREST EXPENSE
Deposits 4,558,717 4,482,580
Advances from Federal Home Loan Bank 874,299 713,432
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Total interest expense 5,433,016 5,196,012
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NET INTEREST INCOME 4,726,187 3,804,150
Provision for loan losses 204,600 119,100
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,521,587 3,685,050
------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 396,550 357,295
Gain on sale of loans 213,865 45,574
Loss on other real estate owned (27,500) (20,000)
Loss on sale of investments - (1,705)
Gain on sale of fixed assets 3,120 -
Other income 365,308 226,956
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Total noninterest income 951,343 608,120
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NONINTEREST EXPENSE
Compensation and employee benefits 1,721,842 1,538,020
Occupancy and equipment 633,481 563,678
Professional fees 94,829 81,210
Advertising 92,434 83,089
Data processing charges 232,504 181,766
Other expenses 935,683 730,346
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Total noninterest expenses 3,710,773 3,178,109
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Income before income taxes 1,762,157 1,115,061
Income taxes 605,695 426,255
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Income before extaordinary item 1,156,462 688,806
Extraordinary item- Excess over cost on net assets acquired in merger 201,206 -
------------ ------------
Net Income 1,357,668 688,806
============ ============
EARNINGS PER SHARE - INCOME BEFORE EXTRAORDINARY ITEM
Basic $ 1.31 $ .79
Diluted $ 1.31 $ .79
EARNINGS PER SHARE - NET INCOME
Basic $ 1.54 $ .79
Diluted $ 1.54 $ .79
See accompanying notes to the unaudited consolidated financial statements.
-5-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net Income 1,357,668 688,806
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 424,122 454,991
Provision for loan losses 204,600 119,100
Loss on other real estate owned 27,500 20,000
Loss on sale of investments - 1,705
Gain on sale of fixed assets (3,120) -
Extraordinary gain on net assets acquired in merger (201,206) -
Gain on sale of loans (213,865) (45,574)
Origination of loans held for sale (17,889,988) (4,437,165)
Proceeds from the sale of loans 18,543,802 3,717,968
Decrease (increase) in other assets and liabilities 391,996 (345,023)
------------ ------------
Net cash provided by operating activities 2,641,509 174,808
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INVESTING ACTIVITIES
Investment securities held to maturity:
Maturities and repayments 750,000 -
Investment securities available for sale:
Purchases (1,764,917) (7,736,171)
Maturities and repayments 4,257,059 4,510,025
Mortgage-backed securities held to maturity:
Maturities and repayments 398,682 343,965
Mortgage-backed securities available for sale:
Purchases (1,508,800) (5,002,344)
Maturities and repayments 2,570,751 349,358
Purchase of Federal Home Loan Bank Stock (115,000) (275,000)
Sale of Federal Home Loan Bank Stock 635,900 -
Net increase in loans (9,081,069) (6,100,336)
Purchases of premises and equipment (214,769) (142,840)
------------ ------------
Net cash used in investing activities (4,072,163) (14,053,343)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 12,649,571 9,785,030
Net decrease in short term advances from FHLB - (2,500,000)
Net Proceeds from advances from the FHLB - 12,000,000
Net change in advances for taxes and insurance 23,130 (62,543)
Net cash purchase of OSFS stock (6,041,007) -
Cash dividends paid (297,089) (257,464)
------------ ------------
Net cash provided by financing activities 6,334,605 18,965,023
------------ ------------
Increase in cash and cash equivalents 4,903,951 5,086,488
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,553,178 5,751,624
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,457,129 $ 10,838,112
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 5,450,308 $ 5,321,267
Income taxes $ 495,537 $ 448,332
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 subsidiary, Advance Financial Savings Bank
(the "Bank"), and its wholly-owned 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, 2002 or any other
interim period.
These statements should be read in conjunction with the consolidated statements
of and for the year ended June 30, 2001 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, which 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.
Nine Months Ended
March 31
2002 2001
---------- ----------
Weighted-average common shares outstanding 1,084,450 1,084,450
Average treasury stock shares (152,165) (152,165)
Average unearned ESOP and RSP shares (48,420) (55,683)
---------- ----------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 883,865 876,602
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share - -
---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 883,865 876,602
========== ==========
-7-
NOTE 2 - EARNINGS PER SHARE (CONTINUED)
Three Months Ended
March 31
2002 2001
---------- ----------
Weighted-average common shares outstanding 1,084,450 1,084,450
Average treasury stock shares (152,165) (152,165)
Average unearned ESOP and RSP shares (46,527) (53,655)
---------- ----------
Weighted -average common shares and
common stock equivalents used to
calculate basic earnings per share 885,758 878,630
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share - -
---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 885,758 878,630
========== ==========
NOTE 3 - 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, 2002, comprehensive income totaled $373,807 and $1,339,665,
respectively. For the three and nine months ended March 31, 2001, comprehensive
income totaled $369,318 and $1,115,494, respectively.
NOTE 4 - MERGER
As of the close of business September 7, 2001, the Company acquired all of the
outstanding stock of Ohio State Financial Services "OSFS". The total cost of the
acquisition by the Company was $7,861,147. The acquisition was a cash purchase
of all outstanding stock of OSFS and was accounted for under the purchase method
of accounting. The Consolidated Statements of Income for the three-and
nine-month periods ended March 31, 2002, include the results of operation of the
acquired institution from September 8, 2001.
OSFS was a bank holding company for Bridgeport Savings and Loan, which had
branch offices in Bridgeport and Shadyside, Ohio. The merger was entered into to
enhance the Company's return on equity by geographical diversification, more
profitable deployment of excess capital and market area expansion.
The following are proforma Statements of Income for the three-and nine-month
periods ended March 31, 2002 and 2001. The proforma statements are intended to
present the business combination's effect on earnings per share for the
comparable periods had both entities been combined at the start of each period.
-8-
NOTE 4 - MERGER (CONTINUED)
PROFORMA
NINE-MONTHS ENDED
MARCH 31
2002 2001
----------- -----------
Total Interest Income $10,578,685 $10,765,386
Total Interest Expense 5,612,500 5,947,954
----------- -----------
Net Interest Income 4,966,185 4,817,432
Provision for loan losses 235,515 119,100
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Net Interest Income after Provision for Loan Losses 4,730,670 4,698,332
----------- -----------
Noninterest Income 957,103 629,828
Noninterest Expense 3,911,380 3,950,953
----------- -----------
Income before income taxes 1,776,393 1,377,207
Income taxes 606,084 519,446
----------- -----------
Net Income $ 1,170,309 $ 857,761
=========== ===========
Earnings per share:
Basic $ 1.32 $ 0.98
Diluted $ 1.32 $ 0.98
PROFORMA
THREE-MONTHS ENDED
MARCH 31
2002 2001
---------- ----------
Total Interest Income $3,387,119 $3,699,420
Total Interest Expense 1,730,891 2,089,540
---------- ----------
Net Interest Income 1,656,228 1,609,880
Provision for loan losses 55,500 48,300
---------- ----------
Net Interest Income after Provision for Loan Losses 1,600,728 1,561,580
---------- ----------
Noninterest Income 291,847 254,266
Noninterest Expense 1,298,958 1,364,966
---------- ----------
Income before income taxes 593,617 450,880
Income taxes 163,940 157,004
---------- ----------
Net Income $ 429,677 $ 293,876
========== ==========
Earnings per share:
Basic $ 0.49 $ 0.33
Diluted $ 0.49 $ 0.33
-9-
NOTE 5 - EXTRAORDINARY ITEM
As a result of the merger with OSFS, the fair market value of the net assets
acquired by the Company from OSFS exceeded the amount paid by approximately
$2,697,000. In accordance with FASB 141, all non-current and non-financial asset
balances were reduced until the excess fair value was eliminated. The total
non-current and non-financial assets created as a result of the merger was
$2,496,000, therefore, since this total was less than the total excess fair
value, these asset balances were reduced to zero in accordance with FASB 141.
After eliminating these asset balances, approximately $201,000
($2,697,000-$2,496,000) in excess fair value remained that could not be reduced.
In accordance with APB Opinion 30, any excess that remains after reducing to
zero the amounts that otherwise would have been assigned to those assets, the
remaining excess shall be recognized as an extraordinary gain. The extraordinary
gain shall be recognized in the period in which the business combination is
completed. The remaining portion of the excess, $201,206, was recognized as an
extraordinary gain for the period ended September 30, 2001.
NOTE 6 - BRANCH DEVELOPMENT
Effective March 8, 2002, the Company was granted permission to establish a de
novo branch at the Hollywood Plaza in Steubenville, Ohio. The regulatory
authorities have given the Company until March 8, 2003 to establish the branch
facility. The company anticipates the completion of the de novo branch in the
first quarter of the 2002-03 fiscal year.
-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
- --------
Effective March 8, 2002, the Company was granted permission to establish a de
novo branch at the Hollywood Plaza in Steubenville, Ohio. The regulatory
authorities have given the Company until March 8, 2003 to establish the branch
facility. The company anticipates the completion of the de novo branch in the
first quarter of the 2002-2003 fiscal year. The anticipated cost of the facility
is expected to be approximately $500,000, which will primarily be capitalized.
On September 7, 2001, the Company's growth was bolstered by the completion of
the acquisition of Ohio State Financial Services, Inc ("OSFS") and its wholly
owned subsidiary Bridgeport Savings and Loan Association. The acquisition was
accounted for under the purchase method of accounting in a cash transaction. As
a result of the completion of the acquisition, the Company paid $7.8 million to
the shareholders of OSFS. The transaction was funded with a $3.8 million
short-term FHLB advance and $4 million dollars from the Company's overnight
funds. The FHLB advance was repaid with proceeds from matured and called
investment securities and redeemed FHLB stock after the date of the merger and
prior to September 30, 2001. With the completion of the acquisition, the Company
added two additional branches located in Bridgeport and Shadyside, Ohio bringing
the total branch locations of the Company to five. The results of operations
from September 8, 2001 include the operations of OSFS.
For the three and nine months ended March 31, 2002, net income totaled $430,000
and $1,358,000, respectively, compared to $248,000 and $689,000 for the same
2001 periods. The increase in net income for the current three and nine month
periods is primarily the result of the low interest rate environment in which
the Company had been active in the origination and sale of fixed rate
residential mortgage loans. However, the increase in net income for the current
nine-month period also reflects a $201,000 extraordinary gain from the
acquisition of OSFS. This non-recurring gain was due to the fact that the
Company purchased the net assets of OSFS at a discount of their fair market
value. See "Note 5 - Extraordinary item" on page 10 to the Consolidated
Financial Statements.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND JUNE 30, 2001
- ---------------------------------------------------------------------
The Company's total assets increased by approximately $38,491,000 to
$205,978,187 at March 31, 2002, from $167,487,062 at June 30, 2001 primarily as
a result of the acquisition of OSFS which increased assets $24,935,000. In
addition, net loans from operations and cash in the Company's overnight deposit
account have increased $8,423,000 and $10,473,000, respectively for the
nine-month period. These increases have been funded by an increase in core
deposits and funds from matured investments securities that have not yet been
reinvested.
Investment securities, including mortgage-backed securities decreased by
approximately $1,483,000 to $20,393,141 at March 31, 2002 from $21,876,277 at
June 30, 2001. The acquisition of OSFS contributed $3,265,000 to the investment
portfolio. Net of the OSFS contribution, investment securities decreased
approximately $4,748,000. This decrease is the result of the current interest
rate environment in which the Company has not yet reinvested proceeds from
called, matured and repaid investment securities over the nine month period
ending March 31, 2002. The funds are currently in the Company's overnight
deposit account invested at the current federal funds rate.
-11-
Loans receivable, net increased $35,186,000 to $164,781,814 at March 31, 2002
from $129,595,542 at June 30, 2001. The acquisition of OSFS contributed
$26,763,000 to loans receivable, net, consisting primarily of $25,300,000 in 1-4
family and construction loans and $700,000 in automobile loans. The increase in
net loans as a result of operations of $8,423,000 consist primarily of
one-to-four family mortgages, non-residential mortgages and automobile loans
which increased $5,623,000, $993,000, and $1,714,000, respectively, over the
nine month period ended March 31, 2002.
Deposits increased $36,909,000 to $167,408,254 at March 31, 2002 from
$130,499,131 at June 30, 2001. The acquisition of OSFS contributed approximately
$24,349,000 to deposits, consisting primarily of $12,630,000 in core savings and
NOW accounts and $11,719,000 in certificates of deposit. Deposits increased
$12,650,000 as a result of operations. The increase is primarily the result of
an increase in core savings and demand products of $6,518,000 and $5,050,000,
respectively. These increases in core products is reflective of customer
preferences toward short term liquid insured deposits due to the current low
interest rate environment and other significant events over the nine month
period ended March 31, 2002.
Stockholders' Equity increased approximately $1,226,000 to $17,568,672 at March
31, 2002 from $16,342,717 at June 30, 2001. This increase was the result of net
income of $1,358,000 for the period, of which $201,000 relates to an
extraordinary gain as a result of the merger, and the recognition of shares in
the Employee Stock Ownership Plan and Restricted Stock Plan of $183,000. These
increases were offset by a decrease in the net unrealized gain on securities of
$18,000 and the payment of cash dividends of $297,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
- --------------------------------------------------------------------------------
MARCH 31, 2002 AND 2001
- -----------------------
Net interest income increased $381,000 or 29.90%, to $1,656,000 for the three
months ended March 31, 2002 from $1,275,000 for the comparable period ended
2001. 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 March
31, 2002 increased to 3.08% from 2.80% for the comparable period ended 2001. The
28 basis point increase in the net interest rate spread for the current three
month period was primarily due to a 134 basis point decline in average cost of
funds which was offset by a 106 basis point decline in average yields on assets.
See "Average Balance Sheet" for the three-month periods ended March 31, 2002 and
2001.
Net interest income increased $922,000 or 24.24%, to $4,726,000 for the
nine-months ended March 31, 2002 from $3,804,000 for the comparable period ended
2001. 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 nine months ended March
31, 2002 increased to 3.06% from 2.96% for the comparable period ended 2001. The
10 basis point increase in the net interest rate spread for the current nine
month period was primarily the result of a 88 basis point decline in average
cost of funds which was offset by a 78 basis point decline in average yields on
assets. See "Average Balance Sheet" for the nine-month periods ended March 31,
2002 and 2001.
The provision for loan losses increased $7,200 to $55,500 for the three months
ended March 31, 2002 from $48,300 for the comparable period ended 2001. The
provision increased $85,500 to $204,600 for the nine months ended March 31, 2002
from $119,100 for the comparable period ended 2001. The increase in the
provision for loan losses for the nine-month period ended March 31, 2002 was
precipitated by a $82,000 write-down of impaired loans prior to foreclosure. See
"Risk Elements".
-12-
Noninterest income increased $46,000 or 18.91%, to $292,000 for the three months
ended March 31, 2002 from $245,000 for the comparable period ended 2001.
Noninterest income increased $343,000 or 56.49% to $951,000 for the nine-months
ended March 31, 2002 from $608,000 for the comparable period ended 2001. For the
three and nine month periods ended March 31, 2002, miscellaneous fees and fees
on deposit accounts increased by $6,000 and $51,000, respectively, as a result
of an increase in core customers and related activity. For the three and nine
month periods ended March 31, 2002, gains on sales of fixed rate loans and
related servicing rights increased $64,000 and $276,000, respectively due to the
current fixed rate mortgage loan environment in comparison to the comparable
period ended 2001. The gains of the sales of fixed rate loans and related
servicing rights for the three month period ended March 31, 2002, are not
necessarily indicative of anticipated trends for the remainder of the fiscal
year ended June 30, 2002.
Noninterest expense increased $206,000 or 18.82%, to $1,299,000 for the three
months ended March 31, 2002, from $1,093,000 for the comparable 2001 period.
Noninterest expense increased $533,000 or 16.76%, to $3,711,000 for the nine
months ended March 31, 2002 from $3,178,000 for the comparable period ended
2001. For the three and nine month periods ended March 31, 2002, compensation
and employee benefits increased $72,000 and $184,000, respectively. The increase
in compensation and employee benefits for the three and nine month periods ended
March 31, 2002 includes increases in wages and benefits paid of $96,000 and
$269,000, respectively, due to the hiring of thirteen (13) new employees to
operate the two branches created by the merger with OSFS and an additional cost
of living increase for other full time employees. This increase was offset by an
increase of $24,000 and $85,000, respectively in deferred labor costs as a
result of increased loan production. Occupancy and equipment, professional fees,
marketing and data processing expenses have increased by $49,000 and $143,000
for the three and nine-month periods ended March 31, 2002, respectively. Such
increases are primarily due to the operation of the two branches created by the
merger with OSFS. For the three and nine month periods ended March 31, 2002,
other expenses have increased $84,000 and $206,000, respectively. The increase
in other expense is due to an increase in supplies, communications and postage
of $20,000 and $64,000, in fees paid for ATM and consumer card usage of $4,000
and $25,000, and in fees paid to the Federal Reserve for item processing of
$5,000 and $19,000, for the three and nine month periods, respectively. Each of
these increases are primarily related to customer activity due to the increase
in the Company's core customers. Board of directors fees and insurance expense
have increased a combined $3,000 and $26,000 for the three and nine month
periods, respectively due primarily to the creation of the advisory board made
up of nonemployee directors of the former OSFS and the purchase of liability
insurance for potential claims against the former OSFS. Expenses related to
Other Real Estate and Repossessed assets have increase $11,000 and $13,000 for
the three and nine month periods, respectively due to the increased activity in
these areas. Also, state franchise taxes have increased $34,000 and $44,000 for
the three and nine month periods, respectively due to the increase in the
company's capital subject to Ohio Bank Franchise Tax.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of March 31, 2002, the Company had commitments to fund loans of approximately
$2,635,871. These loan commitments are expected to be funded by April 30, 2002.
Management monitors both the Company's 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, 2002, both the Company and the Bank
exceeded the minimum risk-based and leveraged capital ratio requirements. The
Company's and the Bank's total risk-based, Tier I risk-based and Tier I leverage
ratios are 13.43%, 12.70%, 8.30% and 12.20%, 11.47%, and 7.51%, respectively, at
March 31, 2002.
-13-
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.
Period Ended March 31,
-----------------------------------------------------------------------------------------
2002 2001
------------------------------------------ ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------- ------------ ----------- ------------- ------------ -----------
Interest-earning assets:
Loans receivable (1) $164,617 $3,063 7.44% $126,640 $2,676 8.45%
Investment securities (2) 19,498 182 3.74% 19,898 299 6.02%
Mortgage-backed securities 9,386 142 6.05% 8,305 145 7.00%
------------- ------------ ----------- ------------- ------------ -----------
Total interest-earning assets 193,501 3,387 7.00% 154,843 3,120 8.06%
------------ ----------- ------------ -----------
Non-interest-earning assets 7,988 7,182
------------- -------------
Total assets $201,489 $162,025
============= =============
Interest-bearing liabilities:
Interest-bearing demand deposits $26,140 157 2.41% $19,093 156 3.28%
Certificates of deposit 97,405 1,068 4.38% 83,298 1,262 6.06%
Savings deposits 33,189 220 2.65% 17,236 121 2.81%
FHLB borrowings 20,000 286 5.73% 20,750 306 5.91%
------------- ------------ ----------- ------------- ------------ -----------
Total interest-bearing liabilities 176,734 1,731 3.92% 140,377 1,845 5.26%
------------ ----------- ------------ -----------
Non-interest bearing liabilities 7,298 5,691
------------- -------------
Total liabilities 184,032 146,068
Stockholders' equity 17,457 15,957
------------- -------------
Total liabilities and stockholders'
equity $201,489 $162,025
============= =============
Net interest income $ 1,656 $ 1,275
============ ============
Interest rate spread (3) 3.08% 2.80%
=========== ===========
Net Yield on interest-earning assets (4) 3.42% 3.29%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.49% 110.31%
=========== ===========
- ------------------------------------------------
(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.
-14-
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.
Period Ended December 31,
---------------------------------------------------------------------------------------
2002 2001
---------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- ------------ ----------- ------------- ------------ -----------
Interest-earning assets:
Loans receivable (1) $153,968 $9,094 7.88% $123,688 $7,879 8.49%
Investment securities (2) 18,920 620 4.37% 16,552 818 6.59%
Mortgage-backed securities 9,538 445 6.23% 5,932 303 6.80%
----------- ------------ ----------- ------------- ------------ -----------
Total interest-earning assets 182,426 10,159 7.43% 146,172 9,000 8.21%
------------ ----------- ------------ -----------
Non-interest-earning assets 7,695 7,123
----------- -------------
Total assets $190,121 $153,295
=========== =============
Interest-bearing liabilities:
Interest-bearing demand deposits $23,815 449 2.51% $19,334 497 3.43%
Certificates of deposit 93,697 3,537 5.03% 79,929 3,619 6.04%
Savings deposits 28,134 573 2.72% 17,287 367 2.83%
FHLB borrowings 20,000 874 5.83% 15,417 713 6.17%
----------- ------------ ----------- ------------- ------------ -----------
Total interest-bearing liabilities 165,646 5,433 4.37% 131,967 5,196 5.25%
------------ ----------- ------------ -----------
Non-interest bearing liabilities 7,417 5,760
----------- -------------
Total liabilities 173,063 137,727
Stockholders' equity 17,058 15,568
----------- -------------
Total liabilities and stockholders'
equity $190,121 $153,295
=========== =============
Net interest income $ 4,726 $ 3,804
============ ============
Interest rate spread (3) 3.06% 2.96%
=========== ===========
Net Yield on interest-earning assets (4) 3.45% 3.47%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.13% 110.76%
=========== ===========
- -------------------------------------------------
(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.
-15-
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.
March 31, June 30,
2002 2001
------ ------
Loans on a nonaccrual basis $ 744 $ 535
Loans past due 90 days or more and still accruing 1,477 668
------ ------
Total nonperforming loans 2,221 1,203
------ ------
Other real estate 659 355
Repossessed assets 42 13
------ ------
Total nonperforming assets $2,922 $1,571
------ ------
Nonperforming loans as a percentage of total net loans 1.35% 0.92%
====== ======
Nonperforming assets as a percentage of total assets 1.42% 0.94%
====== ======
Allowance for loan losses to nonperforming loans 44.08% 64.77%
====== ======
Nonaccrual loans consist of $660,467 in one to four family residential
mortgages, $42,000 in multi-family mortgages and $42,000 in non-residential real
estate mortgages at March 31, 2002.
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, 2002, the total investment in impaired loans was $892,274, and
such amount was subject to a specific allowance for loan losses of $45,685. The
average investment in the impaired loans for the nine-month period ended March
31, 2002 was $910,790. The interest income potential based upon the original
terms of the contracts of these impaired loans was $65,256 for the nine-month
period ended March 31, 2002. A total of $65,256 of interest income has been
recognized for the nine month period ended March 31, 2002.
-16-
During the quarter ended December 2001, the company foreclosed upon loan
balances of $438,509 that were classified as impaired at September 30, 2001. As
a result of the foreclosure action, the assets collateralizing these loans were
added to "Other Real Estate" in the amount of $356,057, which resulted in a
write down to the allowance for loan losses during December 2001 of $82,452.
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 March 31, 2002
and June 30, 2001:
March 31, June 30,
2002 2001
------------ ------------
Mortgage loans:
1-4 family $ 90,073,448 $ 64,696,315
Multi-family 6,431,317 6,002,553
Non-residential 33,770,274 27,956,885
Construction 4,024,565 2,455,751
------------ ------------
134,299,604 101,111,504
------------ ------------
Consumer Loans:
Home Improvement 936,546 1,208,279
Automobile 15,401,479 13,000,468
Share loans 1,400,097 1,594,755
Other 2,566,758 2,778,630
------------ ------------
20,304,880 18,582,132
------------ ------------
------------ ------------
Commercial Loans 12,620,752 12,651,451
------------ ------------
Less:
Loans in process 1,390,132 1,861,360
Net deferred loan fees 74,221 109,015
Allowance for loan losses 979,069 779,170
------------ ------------
2,443,422 2,749,545
------------ ------------
Total $164,781,814 $129,595,542
============ ============
-17-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
NONE
Item 2 - Changes in 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 ****
(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 10KSB (File No.
0-21885) filed on . September 28, 1999.
-18-
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 14, 2002 By: /s/Stephen M. Gagliardi
----------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: May 14, 2002 By: /s/Stephen M. Magnone
----------------------------------------
Stephen M. Magnone
Vice President and CFO
-19-