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
-------------------------
(Exact name of registrant as specified in its charter)
Deleware 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 November 10, 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
September 30, 2002 and June 30, 2002 3
Consolidated Statement of Income (Unaudited)
For the Three Months ended September 30, 2002 and 2001 4
Consolidated Statement of Cash Flows (Unaudited)
For the Three Months ended September 30, 2002 and 2001 5
Notes to the Unaudited Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis 9-15
Item 3 - Control and Procedures 16
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Default Upon Senior Securities 17
Item 4 - Submissions of Matters to a vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, JUNE 30,
2002 2002
------------- -------------
Assets
Cash and cash equivalents:
Cash and amounts due from banks $ 2,074,023 $ 1,775,051
Interest bearing deposits with other institutions 14,211,239 9,995,389
------------- -------------
Total cash and cash equivalents 16,285,262 11,770,440
------------- -------------
Investment securities:
Securities available for sale 12,882,880 12,999,362
Mortgaged-backed securities:
Securities held to maturity (fair value of $1,310,417 and $1,449,641) 1,260,519 1,396,306
Securities available for sale 7,509,511 7,791,566
------------- -------------
Total mortgage-backed securities 8,770,030 9,187,872
------------- -------------
Loans held for sale - 578,647
Loans receivable, (net of allowance for loan losses
of $885,013 and $969,088 ) 176,557,416 172,145,867
Office properties and equipment, net 4,682,105 3,901,592
Federal Home Loan Bank Stock, at cost 1,058,100 1,058,100
Accrued interest receivable 1,157,267 1,160,312
Other assets 1,449,938 1,502,749
------------- -------------
TOTAL ASSETS $222,842,998 $214,304,941
============= =============
Liabilities:
Deposits $182,594,646 $175,058,743
Advances from Federal Home Loan Bank 20,000,000 20,000,000
Advance payments by borrowers for taxes and insurance 247,931 404,220
Accrued interest payable and other liabilities 1,164,092 618,232
------------- -------------
TOTAL LIABILITIES 204,006,669 196,081,195
------------- -------------
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 10,397,493 10,380,430
Retained earnings - substantially restricted 10,704,757 10,274,004
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (315,704) (337,394)
Unallocated shares held by Restricted Stock Plan (RSP) (212,273) (215,775)
Treasury Stock (152,165 shares at cost) (2,233,265) (2,233,265)
Accumulated other comprehensive income 386,876 247,301
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TOTAL STOCKHOLDERS' EQUITY 18,836,329 18,223,746
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $222,842,998 $214,304,941
============= =============
See accompanying notes to the unaudited consolidated financial statements.
-3-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----------- ------------
INTEREST AND DIVIDEND INCOME
Loans $3,178,795 $2,847,990
Investment securities 156,901 168,339
Interest-bearing deposits with other institutions 42,258 50,107
Mortgage-backed securities 123,564 154,264
Dividends on Federal Home Loan Bank Stock 8,668 21,154
----------- ------------
Total interest and dividend income 3,510,186 3,241,854
----------- ------------
INTEREST EXPENSE
Deposits 1,383,869 1,532,529
Advances from Federal Home Loan Bank 292,738 295,187
----------- ------------
Total interest expense 1,676,607 1,827,716
----------- ------------
NET INTEREST INCOME 1,833,579 1,414,138
Provision for loan losses 49,200 66,300
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,784,379 1,347,838
----------- ------------
NONINTEREST INCOME
Service charges on deposit accounts 152,590 135,694
Income from loan servicing activity 66,235 25,652
Gain on sale of loans 94,926 32,379
Loss on sale of repossessed assets (12,539) -
Other income 102,529 76,142
----------- ------------
Total noninterest income 403,741 269,867
----------- ------------
NONINTEREST EXPENSE
Compensation and employee benefits 614,726 524,730
Occupancy and equipment 251,811 196,675
Professional fees 36,016 31,702
Advertising 26,795 21,105
Data processing charges 79,017 64,305
Other expenses 347,476 278,500
----------- ------------
Total noninterest expenses 1,355,841 1,117,017
----------- ------------
Income before income taxes 832,279 500,688
Income taxes 306,899 197,852
----------- ------------
Income before extaordinary item 525,380 302,836
Extraordinary item- Excess over cost on net assets acquired in merger - 201,206
----------- ------------
Net Income 525,380 504,042
=========== ============
EARNINGS PER SHARE - INCOME BEFORE EXTRAORDINARY ITEM
Basic $ .58 $ .34
Diluted $ .58 $ .34
EARNINGS PER SHARE - NET INCOME
Basic $ .58 $ .57
Diluted $ .58 $ .57
See accompanying notes to the unaudited consolidated financial statements.
-4-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net Income $ 525,380 $ 504,042
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 87,212 149,969
Provision for loan losses 49,200 66,300
Gain on sale of loans (94,926) (32,379)
Loss on sale of repossessed assets 12,539 -
Extraordinary gain on net assets acquired in merger - (201,206)
Origination of loans held for sale (7,654,419) (4,693,270)
Proceeds from the sale of loans 8,327,992 2,954,042
Increase in other assets and liabilities 363,707 134,093
------------ ------------
Net cash provided by (used in) operating activities 1,616,685 (1,118,409)
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Maturities and repayments - 250,000
Investment securities available for sale:
Purchases (2,004,133) (256,808)
Maturities and repayments 2,300,550 3,343,200
Mortgage-backed securities held to maturity:
Maturities and repayments 135,440 113,740
Mortgage-backed securities available for sale:
Purchases (1,000,050) -
Maturities and repayments 1,310,210 683,653
Purchase of Federal Home Loan Bank Stock - (115,000)
Sale of Federal Home Loan Bank Stock - 445,900
Net increase in loans (4,210,749) (1,092,113)
Purchases of premises and equipment (906,701) (73,952)
------------ ------------
Net cash (used in) provided by investing activities (4,375,433) 3,298,620
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 7,535,903 768,242
Net change in advances for taxes and insurance (156,289) 3,845
Net cash purchase of OSFS stock - (6,041,007)
Cash dividends paid (106,044) (86,838)
------------ ------------
Net cash provided by (used in) financing activities 7,273,570 (5,355,758)
------------ ------------
Increase (decrease) in cash and cash equivalents 4,514,822 (3,175,547)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,770,440 8,553,178
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 16,285,262 5,377,631
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 1,688,127 $ 1,837,498
Income taxes $ 285,000 $ 160,230
See accompanying notes to the unaudited consolidated financial statements.
-5-
ADVANCE FINANCIAL BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Advance Financial Bancorp (the
"Company"), includes its wholly-owned 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, 2003 or any other
interim period.
These statements should be read in conjunction with the consolidated statements
of and for the year ended June 30, 2002 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 denominator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
Three Months Ended
September 30
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 (42,382) (49,712)
----------- -----------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 889,903 882,573
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 889,903 882,573
=========== ============
-6-
NOTE 3 - COMPREHENSIVE INCOME
Other accumulated comprehensive income consists solely of net unrealized gains
and losses on available for sale securities. For the three months ended
September 30, 2002, comprehensive income totaled $664,955. For the three months
ended September 30, 2001, comprehensive income totaled $733,171.
NOTE 4 - 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 5 - BRANCH DEVELOPMENT
On October 28, 2002, the Company entered into a purchase and assumption
agreement to acquire the deposits of Second National Bank of Warren's two
Steubenville Ohio branches. The assumption includes approximately $92 million in
deposits, loans of $135,000 and real and personal property with a value of
approximately $450,000. The Company is paying a premium of approximately
$6,000,000 for the deposits. The deposit and branch acquisition is subject to
the approval of regulatory authorities.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued FAS No. 145, "Recission of FASB Statement No.4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS
No. 145 rescinds FAS No.4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FASB FAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement also makes technical corrections to existing pronouncements, which are
not substantive but in some cases may change accounting practice. FAS No. 145 is
effective for transactions occurring after May 15, 2002. The adoption of FAS No.
145 did not have a material effect on the Company's financial position or
results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial statements.
-7-
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On October 1, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 147, Acquisitions of Certain Financial Institutions, which
provides guidance on the accounting for the acquisition of a financial
institution, except those between two or more mutual enterprises. The excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired in a business combination represents
goodwill that should be accounted for under FASB Statement No. 142, Goodwill and
Other Intangible Assets. Thus, the specialized accounting guidance in paragraph
5 of FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or
Thrift Institutions, will not apply after September 30, 2002. In accordance with
Statement 147, if previously acquired branches that meet the definition of a
business combination as defined in Emerging Issues Task Force Issue No. 98-3,
the amount of the unidentifiable intangible asset will be reclassified to
goodwill upon adoption of that Statement. Financial institutions meeting
conditions outlined in Statement 147 will be required to restate previously
issued financial statements. The objective of that restatement requirement is to
present the balance sheet and income statement as if the amount accounted for
under Statement 72 as an unidentifiable intangible asset had been reclassified
to goodwill as of the date Statement 142 was initially applied. (For example, a
financial institution that adopted Statement 142 on January 1, 2002, would
retroactively reclassify the unidentifiable intangible asset to goodwill as of
that date and restate previously issued income statements to remove the
amortization expense recognized in 2002). Those transition provisions are
effective on October 1, 2002; however, early application is permitted.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, and general economic conditions.
The Company conducts no significant business or operations of its own other
than holding all of the outstanding stock of the Advance Financial Savings Bank
(the "Bank"). As a result, references to the Company generally refer to the Bank
unless the context indicates otherwise.
OVERVIEW
- --------
On September 18, 2002, the Company began operations in its newly constructed de
novo branch located in the Hollywood Plaza in Steubenville, Ohio. This full
service branch is staffed by seven full time employees. The total cost of the
facility totaled approximately $800,000 and was paid for with cash from current
operations.
On October 28, 2002, the Company entered into a purchase and assumption
agreement to acquire the deposits of Second National Bank of Warren's two
Steubenville, Ohio branches. The assumption includes approximately $92 million
in deposits, loans of $135,000 and real and personal property with a value of
approximately $450,000. The Company is paying a premium on the deposits of
approximately $6,000,000. The deposit and branch acquisition is subject to the
approval of the regulatory authorities. It is anticipated that the transaction
will close by the end of the Company's second fiscal quarter of 2003.
The company expects that its noninterest expense in fiscal 2003 will increase
due to the costs associated with opening the three branches.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND JUNE 30, 2002
- -------------------------------------------------------------------------
The Company's total assets increased by approximately $8,538,000 to $222,842,998
at September 30, 2002, from $214,304,941 at June 30, 2002. Interest Bearing
deposits with other institutions increased $4,200,000 and net loans increased
$4,412,000 for the three-month period. These increases have been funded
primarily by an increase in longer-term certificate of deposit products.
Loans receivable, net increased $4,412,000 to $176,557,416 at September 30, 2002
from $172,145,867 at June 30, 2002. The increase in net loans consist primarily
of one-to-four family mortgages, automobile dealer floor plan loans and dealer
originated automobile loans which increased $1,208,000, $1,736,000 and
$1,639,000, respectively.
Office properties and equipment, net increased $781,000 to $4,682,105 at
September 30, 2002 from $3,901,592 at June 30, 2002. The increase is primarily
the result of the construction and furnishing of the de novo branch facility in
the Hollywood Plaza in Steubenville, Ohio that open for business on September
18, 2002.
Deposits increased $7,536,000 to $182,594,646 at September 30, 2002 from
$175,058,743 at June 30, 2002. The increase is primarily the result of an
increase in longer-term certificate of deposit products. The certificate
increases are spread primarily between the two year special and 5 and 7 year
term products. The increases in these longer term products is reflective of
customer's desire to obtain a higher rate of return than shorter duration
products can provide in this current interest rate environment.
-9-
Stockholders' Equity increased approximately $613,000 to $18,836,329 at
September 30, 2002 from $18,223,746 at June 30, 2002. This increase was the
result of net income of $525,000 for the period, the recognition of shares in
the Employee Stock Ownership Plan and Restricted Stock Plan of $54,000 and an
increase in the net unrealized gain on securities of $140,000. These increases
were offset by the payment of cash dividends of $106,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2002 AND 2001
- -------------
Net interest income increased $419,000 or 29.66%, to $1,834,000 for the three
months ended September 30, 2002 from $1,414,000 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
September 30, 2002 increased to 3.21% from 2.93% for the comparable period ended
2001. The 28 basis point increase in the net interest rate spread for the three
month period was primarily due to a 141 basis point decline in average cost of
funds which was offset by a 113 basis point decline in average yields on assets.
See "Average Balance Sheet" for the three-month periods ended September 30, 2002
and 2001.
The provision for loan losses decreased $17,000 to $49,000 for the three months
ended September 30, 2002 from $66,000 for the comparable period ended 2001. The
decrease in the provision for loan losses was precipitated by a decrease in
nonperforming loans of $412,000 from June 30, 2002. In determining the adequacy
of the allowance for loan losses, management reviews and evaluates on a
quarterly basis the potential risk in the loan portfolio. This evaluation
process is documented by management and approved by the Company's Board of
Directors. The evaluation is performed by senior members of management with
years of lending and review experience. Management evaluates homogenous
consumer-oriented loans, such as 1-4 family mortgage loans and retail consumer
loans, based upon all or a combination of delinquencies, loan concentrations and
charge-off experience. Management supplements this analysis by reviewing the
local economy, political trends effecting local industry and business
development and other known factors which may impact future credit losses.
Nonhomogenous loans, generally defined as commercial business and real estate
loans, are selected by management to be reviewed on a quarterly basis upon the
combination of delinquencies, concentrations and other known factors that may
effect the local economy and more specifically the individual businesses. During
this evaluation, the individual loans are evaluated quarterly by senior members
of management for impairment as prescribed under SFAS No. 114, "Accounting by
Creditors for Impairment of a loan". Impairment losses are assumed when, based
upon current information, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Impairment is measured by a loan's observable market value, fair
value of the collateral or the present value of future cash flows discounted at
the loan's effective interest rate. This data on impairment is combined with the
other data used for homogenous loans and is used by the classified asset
committee in determining the adequacy of the allowance for loan losses.
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".
-10-
Noninterest income increased $134,000 or 49.61%, to $404,000 for the three
months ended September 30, 2002 from $270,000 for the comparable period ended
2001 For the three month period ended September 30, 2002, miscellaneous fees and
fees on deposit accounts increased by $26,000 and $17,000, respectively, as a
result of an increase in core customers and related activity. For the three
month period ended September 30, 2002, gains on sales of fixed rate loans and
related loan servicing activity income increased $63,000 and $40,000,
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 loan servicing activity income for the three month period
ended September 30, 2002, are not necessarily indicative of anticipated trends
for the remainder of the fiscal year ended June 30, 2003.
Noninterest expense increased $239,000 or 21.38%, to $1,356,000 for the three
months ended September 30, 2002, from $1,117,000 for the comparable 2001 period.
For the three month period ended September 30, 2002, compensation and employee
benefits increased $90,000. This increase includes increases in wages and
benefits paid of $58,000 due to the hiring of thirteen (13) new employees to
operate the two branches created by the merger with OSFS on September 7, 2001.
Also, the increase is the due to an additional cost of living increase for other
full time employees. Occupancy and equipment, professional fees, marketing and
data processing expenses have increased by $81,000 for the three month period
ended September 30, 2002. Such increase is primarily due to the operation of the
two branches created by the merger with OSFS in September 2001. For the three
month period ended September 30, 2002, other expenses have increased $69,000.
The increase in other expense is due to an increase in supplies, communications
and postage of $17,000, in fees paid for ATM and consumer card usage of $12,000,
and in fees paid to the Federal Reserve for item processing of $2,000 for the
three month period. Each of these increases are primarily related to customer
activity due to the increase in the Company's core customers created primarily
by the merger with OSFS in September 2001. Board of directors fees have
increased $19,000 for the three month period due primarily to the retirement of
one director on July 1, 2002 and the accrual of the estimated compensation
package as an honorarium of that director's many years of service to the
Company. Expenses related to Other Real Estate and Repossessed assets increased
$16,000 for the three month period due to the increased activity in these areas.
Also, state franchise taxes have increased $4,000 for the three month period due
to the increase in the company's capital subject to Ohio Bank Franchise Tax.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 2002, the Company had commitments to fund loans of
approximately $1,259,340. These loan commitments are expected to be funded by
October 31, 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 September 30, 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 12.86%, 12.26%, 8.09% and 11.84%, 11.24%, and 7.44%, respectively, at
September 30, 2002.
- 11 -
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.
Period Ended September 30,
-----------------------------------------------
2002 vs 2001
-----------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------
Volume Rate Net
-----------------------------------------------
Interest Income:
Loans $805,679 $(474,874) $330,805
Investments 60,948 (123,421) (62,473)
-----------------------------------------------
Total interest-earning assets 866,627 (598,295) 268,332
-----------------------------------------------
Interest Expense
Core Deposits 152,960 (107,904) 45,056
Certificates of Deposit 270,149 (463,865) (193,716)
FHLB Borrowings (2,449) - (2,449)
-----------------------------------------------
Total interest-bearing liabilities 420,660 (571,769) (151,109)
-----------------------------------------------
Net change in interest income $445,967 $(26,526) $419,441
===============================================
-12-
Average Balance Sheet for the Three-Month Period ended September 30
- -------------------------------------------------------------------
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
Period Ended September 30,
----------------------------------------------------------------------
2002 2001
-------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------- -------- -------- ----------
Interest-earning assets:
Loans receivable (1) $174,754 $3,179 7.28% $136,211 $2,848 8.36%
Investment securities (2) 24,791 208 3.35% 19,094 240 5.02%
Mortgage-backed securities 8,994 123 5.50% 9,663 154 6.39%
--------- -------- -------- --------- -------- -------
Total interest-earning assets 208,539 3,510 6.73% 164,968 3,242 7.86%
-------- -------- -------- -------
Non-interest-earning assets 8,942 7,152
--------- ---------
Total assets $217,481 $172,120
========= =========
Interest-bearing liabilities:
Interest-bearing demand deposits $29,340 145 1.98% $21,043 142 2.69%
Certificates of deposit 105,353 1,053 4.00% 86,604 1,247 5.76%
Savings deposits 35,727 186 2.08% 20,683 144 2.79%
FHLB borrowings 20,000 293 5.85% 20,000 295 5.90%
--------- -------- -------- --------- -------- -------
Total interest-bearing liabilities 190,420 1,677 3.52% 148,330 1,828 4.93%
-------- -------- -------- -------
Non-interest bearing liabilities 8,555 7,244
--------- ---------
Total liabilities 198,975 155,574
Stockholders' equity 18,506 16,546
--------- ---------
Total liabilities and stockholders'
equity $217,481 $172,120
========= =========
Net interest income $ 1,833 $ 1,414
======== ========
Interest rate spread (3) 3.21% 2.93%
======== ========
Net Yield on interest-earning assets (4) 3.52% 3.43%
======== ========
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.52% 111.22%
======== ========
- --------------------------------------------------------------------------------
(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.
- 13 -
RISK ELEMENTS
- -------------
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days past due, other real estate
loans and repossessed assets. A loan is classified as nonaccrual when, in the
opinion of management, there are serious doubts about collectibility of interest
and principal. At the time the accrual of interest is discontinued, future
income is recognized only when cash is received. Renegotiated loans are those
loans which terms have been renegotiated to provide a reduction or deferral of
principal or interest as a result of the deterioration of the borrower.
September 30, June 30,
2002 2002
----------- ------------
Loans on a nonaccrual basis $ 689 $ 864
Loans past due 90 days or more and still accruing 911 1,148
----------- ------------
Total nonperforming loans 1,600 2,012
----------- ------------
Other real estate 647 645
Repossessed assets 19 18
----------- ------------
Total nonperforming assets $2,266 $2,675
----------- ------------
Nonperforming loans as a percentage of total net loans 0.91% 1.17%
========== ===========
Nonperforming assets as a percentage of total assets 1.02% 1.25%
========== ===========
Allowance for loan losses to nonperforming loans 55.31% 48.16%
========== ===========
Nonaccrual loans consist of $518,746 in one to four family residential
mortgages, $41,352 in multi-family mortgages and $128,877 in non-residential
real estate mortgages at September 30, 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 September 30, 2002, the total investment in impaired loans was $784,892,
and such amount was subject to a specific allowance for loan losses of $35,000.
The average investment in the impaired loans for the three-month period ended
September 30, 2002 was $837,535. The interest income potential based upon the
original terms of the contracts of these impaired loans was $18,061 for the
three-month period ended September 30, 2002. A total of $16,773 of interest
income has been recognized for the three month period ended September 30, 2002.
-14-
During the quarter ended September 30, 2002, the company foreclosed upon a loan
with a balance of $102,228 that was classified as impaired at June 30, 2002. As
a result of the foreclosure action, the asset collaterallizing this loan was
added to "Other Real Estate" in the amount of $75,000, which resulted in a write
down to the allowance for loan losses during the period ended September 30, 2002
of $27,517.
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed in respect to the
losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. The historical loss experience model that is used
to established the loan loss factors for problem graded loans is designed to be
self-correcting by taking into account our recent loss experience. Similarly, by
basing the past graded loss factors on historical loss experience, the
methodology is further designed to take our recent loss experience into account.
In addition to historical and recent loss trends, our methodology incorporates
the current volume and trend in delinquencies, as well as, a self-assessment of
the status of the local economy. Our methodology requires the monitoring of the
changing loan portfolio mix and the effect that the changing mix has on the
trend in delinquencies, as well as, actually loss factors.
The combination of the historical loss factors, recent loss experience, current
trend in delinquencies, the local economic environment, and the assessment of
the changing loan portfolio mix are used in conjunction with the internal loan
grading system to adjust our allowance on a quarterly basis. Furthermore, our
methodology includes our impaired loan assessment and permits adjustments to any
loss factor used in determining the allowance in the event that, in management's
judgement, significant conditions which effect the collectibility of the
portfolio as of the evaluation date are not reflected in the loss factors. By
assessing the probable estimated losses inherent in the loan portfolio on a
quarterly basis, we are able to adjust specific and inherent loss estimates
based upon recent information, as it becomes available.
The following is a breakdown of the loan portfolio composition at September 30,
2002 and June 30, 2002:
September 30, June 30,
2002 2002
----------------- -----------------
Mortgage loans:
1-4 family $92,871,404 $91,663,131
Multi-family 7,226,421 6,864,328
Non-residential 34,060,252 36,146,830
Construction 3,878,478 4,338,936
----------------- -----------------
138,036,555 139,013,225
----------------- -----------------
Consumer Loans:
Home Improvement 965,020 943,384
Automobile 19,277,572 17,176,464
Share loans 1,592,580 1,589,842
Other 2,709,473 2,613,244
----------------- -----------------
24,544,645 22,322,934
----------------- -----------------
----------------- -----------------
Commercial Loans 17,554,328 14,824,483
----------------- -----------------
Less:
Loans in process 2,599,897 2,961,044
Net deferred loan fees 93,202 84,643
Allowance for loan losses 885,013 969,088
----------------- -----------------
3,578,112 4,014,775
----------------- -----------------
Total $176,557,416 $172,145,867
================= =================
-15-
CONTROLS AND PROCEDURES
- -----------------------
(1) Evaluation of disclosure controls and procedures - Based on their evaluation
------------------------------------------------
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-QSB, the Registrant's principal executive officer and principal financial
officer have concluded that the Registrant's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the "Exchange Act")) 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 controls - There were no significant changes in the
------------------------------
Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
-16-
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 ****
99 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
(b) None
- --------------------------------------------------------------------------------
* Incorporated by reference to the Registration Statement on Form S-1 (File
No. 333-13021) declared effective by the SEC on November 12, 1996.
** Incorporated by reference to the Form 8-K ( File No. 0-21885) filed July
17, 1997.
*** Incorporated by reference to the June 30, 1997 Form 10K-SB (File No.
0-21885) filed September 23, 1997.
**** Incorporated by reference to the proxy statement for the Special Meeting of
the Stockholders on January 20, 1998 and filed with the SEC on December 12,
1997.
*****Incorporated by reference to the June 30, 1999 Form 10KSB (File No.
0-21885) filed on . September 28, 1999.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advance Financial Bancorp
Date: November 12, 2002 By: /s/ Stephen M. Gagliardi
-------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ Stephen M. Magnone
-------------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)
SECTION 302 CERTIFICATION
I, Stephen M. Gagliardi, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Advance Financial
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Stephen M. Gagliardi
----------------------------- -------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
SECTION 302 CERTIFICATION
I, Stephen M. Magnone, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Advance Financial
Bancorp ;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Stephen M. Magnone
----------------------------- -----------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)