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
------------------------------
Advance Financial Bancorp
-------------------------
(Exact name of registrant as specified in its charter)
------------------------------------------------------
Delaware 55-0753533
- -------- ----------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1015 Commerce Street, Wellsburg, WV 26070
-----------------------------------------
(Address of principal executive offices)
(304) 737-3531
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subjected to such filing requirements for the past 90 days. Yes x No
--- ---
State the number of shares outstanding for each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at February 1, 2003: 932,285
Advance Financial Bancorp
Index
Page
Number
------
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet ( Unaudited) as of
December 31, 2002 and June 30, 2002 3
Consolidated Statement of Income (Unaudited)
For the Three Months ended December 31, 2002 and 2001 4
Consolidated Statement of Income (Unaudited)
For the Six Months ended December 31, 2002 and 2001 5
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months ended December 31, 2002 and 2001 6
Notes to the Unaudited Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis 10-18
Item 3 - Controls and Procedures 19
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities and Use of Proceeds 20
Item 3 - Default Upon Senior Securities 20
Item 4 - Submissions of Matters to a Vote of Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
SECTION 302 CERTIFICATIONS 23-24
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, JUNE 30,
2002 2002
------------- -------------
Assets
Cash and cash equivalents:
Cash and amounts due from banks $ 2,023,295 $ 1,775,051
Interest bearing deposits with other institutions 5,510,165 9,995,389
------------- -------------
Total cash and cash equivalents 7,533,460 11,770,440
------------- -------------
Investment securities:
Securities held to maturity (fair value of $4,598,104 and $ -0-) 4,588,093 -
Securities available for sale 12,304,664 12,999,362
------------- -------------
Total investment securities 16,892,757 12,999,362
------------- -------------
Mortgaged-backed securities:
Securities held to maturity (fair value of $1,145,853 and $1,449,641) 1,100,755 1,396,306
Securities available for sale 9,305,268 7,791,566
------------- -------------
Total mortgage-backed securities 10,406,023 9,187,872
------------- -------------
Loans held for sale 848,325 578,647
Loans receivable, (net of allowance for loan losses
of $977,624 and $969,088 ) 188,938,966 172,145,867
Office properties and equipment, net 4,722,956 3,901,592
Federal Home Loan Bank Stock, at cost 1,430,300 1,058,100
Accrued interest receivable 1,094,200 1,160,312
Other assets 1,880,020 1,502,749
------------- -------------
TOTAL ASSETS $ 233,747,007 $ 214,304,941
============= =============
Liabilities:
Deposits $ 186,442,544 $ 175,058,743
Advances from Federal Home Loan Bank 20,000,000 20,000,000
Other borrowings 7,200,000 -
Advance payments by borrowers for taxes and insurance 439,173 404,220
Accrued interest payable and other liabilities 600,426 618,232
------------- -------------
TOTAL LIABILITIES 214,682,143 196,081,195
------------- -------------
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 10,416,139 10,380,430
Retained earnings - substantially restricted 10,948,877 10,274,004
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (294,014) (337,394)
Unallocated shares held by Restricted Stock Plan (RSP) (208,771) (215,775)
Treasury Stock (152,165 shares at cost) (2,233,265) (2,233,265)
Accumulated other comprehensive income 327,453 247,301
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,064,864 18,223,746
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 233,747,007 $ 214,304,941
============= =============
See accompanying notes to the unaudited consolidated financial statements.
-3-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
2002 2001
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 3,160,482 $ 3,182,927
Investment securities 161,738 152,379
Interest-bearing deposits with other institutions 39,002 28,291
Mortgage-backed securities 117,386 149,386
Dividends on Federal Home Loan Bank Stock 9,198 17,247
----------- -----------
Total interest and dividend income 3,487,806 3,530,230
----------- -----------
INTEREST EXPENSE
Deposits 1,379,767 1,581,671
Advances from Federal Home Loan Bank 292,738 292,738
----------- -----------
Total interest expense 1,672,505 1,874,409
----------- -----------
NET INTEREST INCOME 1,815,301 1,655,821
Provision for loan losses 105,000 82,800
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,710,301 1,573,021
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 151,989 134,649
Income from loan servicing activity 8,553 76,579
Gain on sale of loans 68,976 111,510
Gain on sale of fixed assets - 3,120
Loss on sale of repossessed assets (950) -
Other income 72,020 63,771
----------- -----------
Total noninterest income 300,588 389,629
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 627,639 596,722
Occupancy and equipment 271,001 214,138
Professional fees 38,404 37,939
Advertising 57,492 39,705
Data processing charges 87,093 83,471
Other expenses 332,962 322,823
----------- -----------
Total noninterest expenses 1,414,591 1,294,798
----------- -----------
Income before income taxes 596,298 667,852
Income taxes 234,719 243,903
----------- -----------
Net Income $ 361,579 $ 423,949
=========== ===========
EARNINGS PER SHARE - NET INCOME
Basic $ .42 $ .48
Diluted $ .42 $ .48
See accompanying notes to the unaudited consolidated financial statements.
-4-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
2002 2001
----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 6,339,277 $ 6,030,917
Investment securities 318,639 320,718
Interest-bearing deposits with other institutions 81,260 78,398
Mortgage-backed securities 240,950 303,650
Dividends on Federal Home Loan Bank Stock 17,866 38,401
----------- -----------
Total interest and dividend income 6,997,992 6,772,084
----------- -----------
INTEREST EXPENSE
Deposits 2,763,636 3,114,200
Advances from Federal Home Loan Bank 585,476 587,925
----------- -----------
Total interest expense 3,349,112 3,702,125
----------- -----------
NET INTEREST INCOME 3,648,880 3,069,959
Provision for loan losses 154,200 149,100
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,494,680 2,920,859
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 304,579 270,343
Income from loan servicing activity 74,788 102,231
Gain on sale of loans 163,902 143,889
Gain on sale of fixed assets - 3,120
Loss on sale of repossessed assets (13,489) -
Other income 174,549 139,913
----------- -----------
Total noninterest income 704,329 659,496
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,242,365 1,121,452
Occupancy and equipment 522,812 410,813
Professional fees 74,420 69,641
Advertising 84,287 60,810
Data processing charges 166,110 147,776
Other expenses 680,438 601,323
----------- -----------
Total noninterest expenses 2,770,432 2,411,815
----------- -----------
Income before income taxes 1,428,577 1,168,540
Income taxes 541,618 441,755
----------- -----------
Income before extaordinary item 886,959 726,785
Extraordinary item- Excess over cost on net assets acquired in merger - 201,206
----------- -----------
Net Income $ 886,959 $ 927,991
=========== ===========
EARNINGS PER SHARE - INCOME BEFORE EXTRAORDINARY ITEM
Basic $ 1.00 $ .82
Diluted $ 1.00 $ .82
EARNINGS PER SHARE - NET INCOME
Basic $ 1.00 $ 1.05
Diluted $ 1.00 $ 1.05
See accompanying notes to the unaudited consolidated financial statements.
-5-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net Income $ 886,959 $ 927,991
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 248,523 287,366
Provision for loan losses 154,200 149,100
Gain on sale of loans (163,902) (143,889)
Gain on sale of fixed assets - (3,120)
Loss on sale of repossessed assets 13,489 -
Extraordinary gain on net assets acquired in merger - (201,206)
Origination of loans held for sale (12,432,512) (12,327,844)
Proceeds from the sale of loans 12,326,736 12,107,282
(Increase) decrease in net other assets and liabilities (523,210) 357,037
------------ ------------
Net cash provided by operating activities 510,283 1,152,717
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (4,588,093) -
Maturities and repayments - 750,000
Investment securities available for sale:
Purchases (3,507,886) (260,722)
Maturities and repayments 4,304,400 3,856,504
Mortgage-backed securities held to maturity:
Maturities and repayments 294,720 238,679
Mortgage-backed securities available for sale:
Purchases (3,723,622) (1,508,800)
Maturities and repayments 2,226,008 1,634,579
Purchase of Federal Home Loan Bank Stock (372,200) (115,000)
Sale of Federal Home Loan Bank Stock - 445,900
Net increase in loans (16,697,299) (6,684,447)
Purchases of premises and equipment (1,089,957) (177,492)
------------ ------------
Net cash used in investing activities (23,153,929) (1,820,799)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 11,383,801 6,191,773
Increase in long term borrowings 7,200,000 -
Net change in advances for taxes and insurance 34,953 150,422
Net cash purchase of stock in merger - (6,041,007)
Cash dividends paid (212,088) (191,044)
------------ ------------
Net cash provided by financing activities 18,406,666 110,144
------------ ------------
Decrease in cash and cash equivalents (4,236,980) (557,938)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,770,440 8,553,178
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,533,460 $ 7,995,240
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 3,366,719 $ 3,719,295
Income taxes $ 640,000 $ 492,000
See accompanying notes to the unaudited consolidated financial statements.
-6-
ADVANCE FINANCIAL BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Advance Financial Bancorp (the
"Company"), includes its wholly-owned subsidiaries, Advance Financial Savings
Bank (the "Bank") and Advance Statutory Trust I (the "Trust") and the Bank's
wholly-owned service corporation subsidiary, Advance Financial Service
Corporation of West Virginia. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments, which are, in
the opinion of management, necessary for a fair statement of results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the fiscal year ended June 30, 2003 or any other
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.
Six Months Ended
December 31,
(Unaudited)
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 (41,659) (48,989)
--------- ---------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 890,626 883,296
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 890,626 883,296
========= =========
-7-
NOTE 2 - EARNINGS PER SHARE (CONTINUED)
Three Months Ended
December 31
(Unaudited)
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 (40,213) (47,543)
--------- ---------
Weighted -average common shares and
common stock equivalents used to
calculate basic earnings per share 892,072 884,742
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 892,072 884,742
========= =========
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 six months ended
December 31, 2002, comprehensive income totaled $302,156 and $967,111,
respectively. For the three and six months ended December 31, 2001,
comprehensive income totaled $232,687 and $965,858, respectively.
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 acquisition includes approximately $89 million
in deposits, $85,000 in loans and real and personal property with a value of
approximately $450,000. The Company is paying a premium of approximately $6
million for the deposits. The transaction was completed as of the close of
business February 7, 2003.
-8-
NOTE 6 - OTHER BORROWINGS
Other borrowings at December 31, 2002 consisted of $7.2 million of floating rate
trust capital securities. In December 2002, the Company formed a wholly-owned
subsidiary, Advance Statutory Trust I (the "Trust"). On December 19, 2002, the
Trust issued and sold $7.2 million of floating rate capital securities in a
pooled trust offering. The interest rate resets every quarter to 3-month LIBOR
plus 3.25% with an initial rate of 4.66%. The capital securities mature in 2032,
and the Company has the right to redeem the securities prior to the maturity
date but no sooner than five years after the issuance. The proceeds were used
for the acquisition of two branches from Second National Bank of Warren, which
was completed as of the close of business February 7, 2003.
NOTE 7 - 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
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. The
adoption of this statement is not expected to have a material effect on the
Company's financial statements.
-9-
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting
for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of
FAS No. 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. Under the provisions
of FAS No. 123, companies that adopted the preferable, fair value based method
were required to apply that method prospectively for new stock option awards.
This contributed to a "ramp-up" effect on stock-based compensation expense in
the first few years following adoption, which caused concern for companies and
investors because of the lack of consistency in reported results. To address
that concern, FAS No. 148 provides two additional methods of transition that
reflect an entity's full complement of stock-based compensation expense
immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148
also improves the clarity and prominence of disclosures about the pro forma
effects of using the fair value based method of accounting for stock-based
compensation for all companies--regardless of the accounting method used--by
requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
the statement improves the timeliness of those disclosures by requiring that
this information be included in interim as well as annual financial statements.
The transition guidance and annual disclosure provisions of FAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
In November, 2002, the FASB issued Interpretation No.45, Guarantor's Accounting
and Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, and general economic conditions.
The Company conducts no significant business or operations of its own other
than holding all of the outstanding stock of the Advance Financial Savings Bank
(the "Bank"). As a result, references to the Company generally refer to the Bank
unless the context indicates otherwise.
OVERVIEW
- --------
On September 18, 2002, the Bank 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 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 $89 million
in deposits, $85,000 in loans and real and personal property with a value of
approximately $450,000. The Company is paying a premium on the deposits of
approximately $6 million. The deposit and branch acquisition received regulatory
approval in January 2003. The transaction was completed as of the close of
business February 7, 2003.
The Company expects that its noninterest expense in fiscal 2003 will increase
due to the costs associated with operating the three additional branches.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND JUNE 30, 2002
- ------------------------------------------------------------------------
The Company's total assets increased by approximately $19,400,000 to
$233,747,007 at December 31, 2002, from $214,304,941 at June 30, 2002. Net
loans, investment securities and mortgage-backed securities increased
$16,800,000, $3,900,000 and $1,200,000, respectively. The net increase in loans
and securities has been funded primarily by an increase of $9,200,000 in
certificates of deposit, by the issuance of $7,200,000 of Capital Trust
Securities by Advance Statutory Trust I, a wholly owned subsidiary of the
Company, and by the use of $4,500,000 in interest-bearing deposits with other
financial institutions.
Investment securities increased $3,900,000 to $16,892,757 at December 31, 2002
from $12,999,362 at June 30, 2002. The increase is due in part to the purchase
of five municipal securities totalling $3,100,000 with a weighted average tax
equivalent yield of 6.43% and an average maturity of 15 years with callable
provisions ranging from 7 to 10 years. The increase is also due in part to a net
increase in callable agency securities of $1,000,000. During the six months
ended December 31, 2002, the Company has had seven investments totalling
$4,000,000 called. These investments were replaced by similar agency securities
in terms of amounts and maturities. The weighted average yield on the securities
called was 4.37% while the average yield on the investments replacing these
securities was 2.90%. The decrease in yield is due to current interest rate
environment of decreasing yields.
Mortgage-backed securities increased $1,200,000 to $10,406,023 at December 31,
2002 from $9,187,872 at June 30, 2002. The increase is due to the purchase of
two GNMA investments totalling $3,100,000. These securities have an average
yield of 4.20% and average lives ranging from 3.5 to 5 years. The purchase of
these securities was offset by accelerated prepayments of higher yielding
securities of $1,900,000 for the six months ended December 31, 2002 due to the
current rate environment for 1-4 family mortgages.
Loans receivable, net increased $16,793,000 to $188,938,966 at December 31, 2002
from $172,145,867 at June 30, 2002. The increase in net loans consists primarily
of 1-4 family mortgages, automobile dealer floor plan loans, land development
loans and dealer originated automobile loans which increased $11,100,000,
$1,091,000 $1,135,000 and $2,701,000, respectively. The increase in 1-4 family
mortgages includes approximately $9,900,000 for the three-month period October
to December 2002. The increase over this period is due to a change in management
strategy to increase the Company's interest-earning assets in anticipation of
the acquisition of the branch offices from the Second National Bank of Warren
Ohio. The branch acquisition was completed as of the close of business February
7, 2003. The majority of these 1-4 family mortgage loans would have been sold in
periods prior to this change in strategy. The increase in dealer originated
automobile loans is the result of new relationships the company has developed
with floor plan customers over the six month period ended December 31, 2002.
-11-
Office properties and equipment, net increased $821,000 to $4,722,956 at
December 31, 2002 from $3,901,592 at June 30, 2002. The increase is primarily
the result of the construction and furnishing of the Bank's de novo branch
facility in the Hollywood Plaza in Steubenville, Ohio which opened for business
on September 18, 2002.
Deposits increased $11,259,000 to $186,442,544 at December 31, 2002 from
$175,058,743 at June 30, 2002. The increase is primarily due to an increase in
certificates of deposit of $9,200,000. This increase is comprised of deposits in
longer-term products such as two year and 34 month specials and 5 and 7 year
term regular products. These increases are the result of customer preference to
obtain higher yields in the current interest rate environment. Deposit growth
over the three-month period ended December 31, 2002 was $3,200,000 compared to
$8,100,000 for the three month period ended September 30, 2002. This reduction
in deposit growth is a result of a change in management strategy in anticipation
of the acquisition of the two branches from the Second National Bank of Warren,
Ohio. The acquisition was completed as of the close of business February 7, 2003
and brought approximately of $89 million in deposits, therefore, the Company has
restrained from aggressive deposit growth over the past three month period.
During the three months ended December 31, 2003, the Company participated in a
pooled trust preferred offering. The effective date of the issuance was December
19, 2002. The rate on the securities is at 3-month LIBOR plus 3.25% adjusted
quarterly, the beginning rate is 4.66% and it is effective until March 26, 2003.
The securities are written with a 30 year maturity and a five year call
provision.
Stockholders' equity increased approximately $841,000 to $19,064,864 at December
31, 2002 from $18,223,746 at June 30, 2002. This increase was the result of net
income of $887,000 for the period, the recognition of shares in the Employee
Stock Ownership Plan and Restricted Stock Plan of $86,000 and an increase in the
net unrealized gain on securities of $80,000. These increases were offset by the
payment of cash dividends of $212,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 AND 2001
- --------------------------
Net interest income increased $159,000 or 9.63%, to $1,815,000 for the three
months ended December 31, 2002 from $1,656,000 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
December 31, 2002 decreased to 3.07% from 3.12% for the comparable period ended
2001. The 5 basis point decrease in the net interest rate spread for the current
three month period was primarily due to a 105 basis point decline in average
yields on assets which was offset by a 100 basis point decline in average cost
of funds. See "Average Balance Sheet" for the three-month periods ended December
31, 2002 and 2001.
Net interest income increased $579,000 or 18.86%, to $3,649,000 for the
six-months December 31, 2002 from $3,070,000 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 six months ended
December 31, 2002 increased to 3.14% from 3.03% for the comparable period ended
2001. The 11 basis point increase in the net interest rate spread for the
current six month period was primarily the result of a 118 basis point decline
in average cost of funds which was offset by a 107 basis point decline in
average yields on assets. See "Average Balance Sheet" for the six-month periods
ended December 31, 2002 and 2001.
The provision for loan losses increased $22,000 to $105,000 for the three months
ended December 31, 2002 from $83,000 for the comparable period ended 2001. The
provision increased $5,000 to $154,000 for the six months ended December 31,
2002 from $149,000 for the comparable period ended 2001. The increase in the
provision for loan losses was precipitated by an increase in loan volume. In
determining the adequacy of the allowance for loan losses, management reviews
and evaluates on a quarterly basis the potential risk in the loan portfolio.
This evaluation process is documented by management and approved by the
Company's Board of Directors. The evaluation is performed by senior members of
management with years of lending and review experience. Management evaluates
homogenous consumer-oriented loans, such as 1-4 family mortgage loans and retail
consumer loans, based upon all or a combination of delinquencies, loan
concentrations and charge-off experience. Management supplements this analysis
by reviewing the local economy, 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.
-12-
During this evaluation, the individual loans are evaluated quarterly by senior
members of management for impairment as prescribed under SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". Impairment losses are
assumed when, based upon current information, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impairment is measured by a loan's observable market value,
fair value of the collateral or the present value of future cash flows
discounted at the loan's effective interest rate. This data on impairment is
combined with the other data used for homogenous loans and is used by the
classified asset committee in determining the adequacy of the allowance for loan
losses.
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for loan losses will
be adequate to cover losses which, may be realized in the future and that
additional provision for loan losses will not be required. See "Risk Elements".
Noninterest income decreased $89,000 or 22.85%, to $301,000 for the three months
ended December 31, 2002 from $390,000 for the comparable period ended 2001.
Noninterest income increased $45,000 or 6.80% to $704,000 for the six-months
ended December 31, 2002 from $659,000 for the comparable period ended 2001. For
the three and six month periods of 2002, miscellaneous fees and fees on deposit
accounts increased by $26,000 and $69,000, respectively, as a result of an
increase in core customers and related activity. For the three and six month
periods of 2002, gains on sales of fixed rate loans and income from loan
servicing activity decreased $111,000 and $7,000, respectively, as a result of
the change in management strategy toward retaining fixed rate 1-4 family
mortgage loans that would have been sold, as noted above in the loan discussion.
Until such time as the funds acquired in the assumption have been invested into
interest earning assets, management expects to maintain its strategy of
retaining 1-4 family mortgages. Therefore, future gains and servicing income
will decline accordingly.
Noninterest expense increased $120,000 or 9.25%, to $1,415,000 for the three
months ended December 31, 2002, from $1,295,000 for the comparable 2001 period.
Noninterest expense increased $358,000 or 14.87%, to $2,770,000 for the six
months ended December 31, 2002 from $2,412,000 for the comparable period ended
2001. For the three and six month periods ended December 31, 2002, compensation
and employee benefits increased $31,000 and $121,000, respectively. The increase
in compensation and employee benefits for the three and six month periods ended
December 31, 2002 totalled $39,000 and $97,000, respectively, due to the hiring
of additional employees to operate the two branches acquired in the Company's
acquisition of Ohio State Financial Services ("OSFS") in September 2001 and the
September 2002 opening of the de novo branch in Steubenville, Ohio. The effects
of the OSFS merger totals $58,000 and includes two additional months for 2002 in
comparison to the same period of 2001. The effects of the de novo branch in
Steubenville totals $39,000 and is primarily reflected in the three month period
October to December 2002. Occupancy and equipment, professional fees, marketing
and data processing expenses have increased by $79,000 and $159,000 for the
three and six month periods ended December 31, 2002, respectively. Such
increases are primarily due to the operation of the two OSFS branches and the
opening of the de novo branch in Steubenville, Ohio in September 2002. For the
three and six month period ended December 31, 2002, other expenses have
increased $10,000 and $79,000, respectively. The increase in other expense is
due to increases in supplies, communications and postage of $1,000 and $16,000,
in fees paid for ATM and consumer card usage of $14,000 and $26,000, and in fees
paid to the Federal Reserve for item processing of $2,000 and $4,000, for the
three and six month periods, respectively. Each of these increases are primarily
related to customer activity due to the increase in the Company's core customers
created primarily by the merger with OSFS in September 2001 and the opening of
the de novo branch in Steubenville, Ohio in September 2002. Regulatory fees,
capital market assessments and state tax franchise fees have increased $8,000
and $16,000 for the three and six month periods ended December 31, 2002 due to
factors related to asset and capital growth. Expenses related to Other Real
Estate and Repossessed assets decreased $5,000 for the three month period but
increased $11,000 for the six month period ended December 31, 2002 due to the
activity in these areas.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of December 31, 2002, the Company had commitments to fund loans of
approximately $5,801,764. These loan commitments are expected to be funded by
January 31, 2003.
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 December 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 12.54%, 11.91% and 7.91% and 16.20%, 15.57% and 10.33%, respectively,
at December 31, 2002.
-13-
RATE/VOLUME ANALYSIS
- --------------------
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume and
(ii) changes in rate. Changes not solely attributable to rate or volume, are
allocated to changes in rate due to rate sensitivity of interest-earning assets
and interest-bearing liabilities.
Three Months Ended December 31,
-----------------------------------------------
2002 Vs 2001
-----------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------
Volume Rate Net
-----------------------------------------------
Interest Income:
Loans $ 389,116 $(411,561) $(22,445)
Investments 97,920 (117,899) (19,979)
-----------------------------------------------
Total interest-earning assets 487,036 (529,460) (42,424)
-----------------------------------------------
Interest Expense
Core Deposits 75,081 (117,188) (42,107)
Certificates of Deposit 164,112 (323,909) (159,797)
FHLB Borrowings - - -
-----------------------------------------------
Total interest-bearing liabilities 239,193 (441,097) (201,904)
-----------------------------------------------
Net change in interest income $247,843 $ (88,363) $159,480
===============================================
Six Months Ended December 31,
-----------------------------------------------
2002 Vs 2001
-----------------------------------------------
Increase (Decrease)
Due to
-----------------------------------------------
Volume Rate Net
-----------------------------------------------
Interest Income:
Loans $1,194,795 $(886,435) $308,360
Investments 158,868 (241,320) (82,452)
-----------------------------------------------
Total interest-earning assets 1,353,663 (1,127,755) 225,908
-----------------------------------------------
Interest Expense
Core Deposits 228,041 (225,092) 2,949
Certificates of Deposit 434,261 (787,774) (353,513)
FHLB Borrowings (2,449) - (2,449)
-----------------------------------------------
Total interest-bearing liabilities 659,853 (1,012,866) (353,013)
-----------------------------------------------
Net change in interest income $693,810 $(114,889) $578,921
===============================================
-14-
Average Balance Sheet for the Three-Month Period ended December 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) $181,527 $3,161 6.96% $161,077 $3,183 7.90%
Investment securities (2) 26,721 210 3.14% 18,168 198 4.36%
Mortgage-backed securities 8,699 117 5.40% 9,564 149 6.25%
-------- ------------ ----------- ---------- ------------ -----------
Total interest-earning assets 216,947 3,488 6.43% 188,809 3,530 7.48%
------------ ----------- ------------ -----------
Non-interest-earning assets 9,522 7,944
--------- -----------
Total assets $226,469 $196,753
========= ===========
Interest-bearing liabilities:
Interest-bearing demand deposits $29,889 135 1.80% $24,262 150 2.47%
Certificates of deposit 110,704 1,068 3.86% 97,082 1,223 5.04%
Savings deposits 37,153 177 1.91% 30,529 208 2.74%
Borrowings 21,200 293 5.52% 20,000 293 5.85%
-------- ------------ ----------- ---------- ------------ -----------
Total interest-bearing liabilities 198,946 1,673 3.36% 171,873 1,874 4.36%
------------ ----------- ------------ -----------
Non-interest bearing liabilities 8,525 7,709
--------- -----------
Total liabilities 207,471 179,582
Stockholders' equity 18,998 17,171
--------- -----------
Total liabilities and stockholders'
equity $226,469 $196,753
========= ===========
Net interest income $ 1,815 $ 1,656
============ ============
Interest rate spread (3) 3.07% 3.12%
=========== ===========
Net Yield on interest-earning assets (4) 3.35% 3.51%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.05% 109.85%
=========== ===========
- --------------------------------------------------------------------------------
(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-
Average Balance Sheet for the Six-Month Period ended December 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) $178,141 $6,339 7.12% $148,644 $6,031 8.11%
Investment securities (2) 25,756 418 3.24% 18,631 437 4.70%
Mortgage-backed securities 8,847 241 5.45% 9,614 304 6.32%
-------- ------------ ----------- ------------ ------------ -----------
Total interest-earning assets 212,744 6,998 6.58% 176,889 6,772 7.66%
------------ ----------- ------------ -----------
Non-interest-earning assets 9,231 7,547
---------- -------------
Total assets $221,975 $184,436
========== =============
Interest-bearing liabilities:
Interest-bearing demand deposits $29,615 280 1.89% $22,652 291 2.57%
Certificates of deposit 108,028 2,121 3.93% 91,843 2,470 5.38%
Savings deposits 36,440 363 1.99% 25,607 353 2.76%
Borrowings 20,600 585 5.68% 20,000 588 5.88%
-------- ------------ ----------- ------------ ------------ -----------
Total interest-bearing liabilities 194,683 3,349 3.44% 160,102 3,702 4.63%
------------ ----------- ------------ -----------
Non-interest bearing liabilities 8,540 7,476
---------- -------------
Total liabilities 203,223 167,578
Stockholders' equity 18,752 16,858
---------- -------------
Total liabilities and stockholders'
equity $221,975 $184,436
========== =============
Net interest income $ 3,649 $ 3,070
============ ============
Interest rate spread (3) 3.14% 3.03%
=========== ===========
Net Yield on interest-earning assets (4) 3.43% 3.47%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.28% 110.49%
=========== ===========
- --------------------------------------------------------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(3) Interest-rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-16-
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.
December 31, June 30,
2002 2002
------ ------
Loans on a nonaccrual basis $ 831 $ 864
Loans past due 90 days or more and still accruing 586 1,148
------ ------
Total nonperforming loans 1,417 2,012
------ ------
Other real estate 688 645
Repossessed assets 10 18
------ ------
Total nonperforming assets $2,115 $2,675
------ ------
Nonperforming loans as a percentage of total net loans 0.75% 1.17%
====== ======
Nonperforming assets as a percentage of total assets 0.91% 1.25%
====== ======
Allowance for loan losses to nonperforming loans 68.99% 48.16%
====== ======
Nonaccrual loans at December 31, 2002, consisted of $272,803 in one to four
family residential mortgages, $41,575 in multi-family mortgages, $177,671 in
non-residential real estate mortgages and $339,430 in commercial loans at
December 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 December 31, 2002, the total investment in impaired loans was $928,388,
and such amount was subject to a specific allowance for loan losses of $125,884.
The average investment in the impaired loans for the six-month period ended
December 31, 2002 was $958,444. The interest income potential based upon the
original terms of the contracts of these impaired loans was $42,228 for the
six-month period ended December 31, 2002. A total of $24,176 of interest income
has been recognized for the six-month period ended December 31, 2002.
-17-
During the six-month period ended December 31, 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
December 31, 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 December 31,
2002 and June 30, 2002:
December 31, June 30,
2002 2002
------------ ------------
Mortgage loans:
1-4 family $102,730,054 $ 91,663,131
Multi-family 6,542,282 6,864,328
Non-residential 36,193,991 36,146,830
Construction 4,611,482 4,338,936
------------ ------------
150,077,809 139,013,225
------------ ------------
Consumer Loans:
Home Improvement 913,553 943,384
Automobile 20,250,116 17,176,464
Share loans 1,838,728 1,589,842
Other 2,705,231 2,613,244
------------ ------------
25,707,628 22,322,934
------------ ------------
Commercial Loans 17,050,216 14,824,483
------------ ------------
Less:
Loans in process 2,813,058 2,961,044
Net deferred loan fees 106,005 84,643
Allowance for loan losses 977,624 969,088
------------ ------------
3,896,687 4,014,775
------------ ------------
Total $188,938,966 $172,145,867
============ ============
-18-
ITEM 3 - 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.
-19-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
NONE
Item 2 - Changes in Securities and Use of Proceeds
NONE
Item 3 - Defaults upon Senior Securities
NOT APPLICABLE
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on October 21,
2002 and the following matters were voted upon:
PROPOSAL I - Election of Directors with term to expire in 2003.
FOR WITHHELD
--- --------
Walker Peterson Holloway, Jr. 802,291 4,045
John R. Sperlazza 802,291 4,045
Dominic J. Teramana, Jr. 802,291 4,045
Directors continuing in office are Stephen M. Gagliardi, William B. Chesson,
Kelly M. Bethel, William E. Watson, and Frank Gary Young.
PROPOSAL II - Ratification of the appointment of S.R. Snodgrass, AC., as
independent auditors for the Company, for the fiscal year ending
June 30, 2003.
FOR AGAINST ABSTAIN
--- ------- -------
794,082 11,054 1,200
Item 5 - Other Information
NONE
-20-
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.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advance Financial Bancorp
Date: February 13, 2003 By: /s/Stephen M. Gagliardi
-----------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: February 13, 2003 By: /s/Stephen M. Magnone
-----------------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)
-22-
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: February 13, 2003 /s/Stephen M. Magnone
---------------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)
-23-
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: February 13, 2003 /s/Stephen M. Gagliardi
----------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
-24-