United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10QSB
{x} QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from ________________to__________________
Commission File Number 0-21885
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Advance Financial Bancorp
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 55-0753533
- ------------------------------ --------------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1015 Commerce Street, Wellsburg, WV 26070
-----------------------------------------
(Address of principal executive offices)
(304) 737-3531
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subjected to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding for each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at May 1, 2003: 932,285
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
Advance Financial Bancorp
Index
Page
Number
------
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited) as of
March 31, 2003 and June 30, 2002 3
Consolidated Statement of Income (Unaudited)
For the Three Months ended March 31, 2003 and 2002 4
Consolidated Statement of Income (Unaudited)
For the Nine Months ended March 31, 2003 and 2002 5
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months ended March 31, 2003 and 2002 6
Notes to the Unaudited Consolidated Financial Statements 7-12
Item 2 - Management's Discussion and Analysis 13-21
Item 3 - Controls and Procedures 22
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 2 - Changes in Securities and Use of Proceeds 23
Item 3 - Default Upon Senior Securities 23
Item 4 - Submissions of Matters to a Vote of Security Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURES 24
SECTION 302 CERTIFICATIONS 25-26
-2-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, JUNE 30,
2003 2002
------------ ------------
Assets
Cash and cash equivalents:
Cash and amounts due from banks $ 2,557,781 $ 1,775,051
Interest bearing deposits with other institutions 51,409,029 9,995,389
------------ ------------
Total cash and cash equivalents 53,966,810 11,770,440
------------ ------------
Investment securities:
Securities held to maturity (fair value of $12,634,465 and $ -0-) 12,588,177 -
Securities available for sale 11,099,819 12,999,362
------------ ------------
Total investment securities 23,687,996 12,999,362
------------ ------------
Mortgage-backed securities:
Securities held to maturity (fair value of $15,861,350 and $1,449,641) 15,831,225 1,396,306
Securities available for sale 8,224,339 7,791,566
------------ ------------
Total mortgage-backed securities 24,055,564 9,187,872
------------ ------------
Loans held for sale - 578,647
Loans receivable, (net of allowance for loan losses
of $983,789 and $969,088 ) 205,741,897 172,145,867
Office properties and equipment, net 5,129,635 3,901,592
Federal Home Loan Bank Stock, at cost 1,752,900 1,058,100
Accrued interest receivable 1,317,029 1,160,312
Goodwill 4,700,472 -
Other intangibles, net 1,759,735 -
Other assets 1,987,732 1,502,749
------------ ------------
TOTAL ASSETS $324,099,770 $214,304,941
============ ============
Liabilities:
Deposits $275,481,062 $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 368,890 404,220
Accrued interest payable and other liabilities 1,670,141 618,232
------------ ------------
TOTAL LIABILITIES 304,720,093 196,081,195
------------ ------------
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 10,439,456 10,380,430
Retained earnings - substantially restricted 11,212,836 10,274,004
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (272,324) (337,394)
Unallocated shares held by Restricted Stock Plan (RSP) (205,745) (215,775)
Treasury Stock (152,165 shares at cost) (2,233,265) (2,233,265)
Accumulated other comprehensive income 330,274 247,301
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 19,379,677 18,223,746
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $324,099,770 $214,304,941
============ ============
See accompanying notes to the unaudited consolidated financial statements.
-3-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $3,372,413 $3,062,999
Investment securities 206,692 141,955
Interest-bearing deposits with other institutions 104,729 28,763
Mortgage-backed securities 175,231 141,908
Dividends on Federal Home Loan Bank Stock 13,463 11,494
---------- ----------
Total interest and dividend income 3,872,528 3,387,119
---------- ----------
INTEREST EXPENSE
Deposits 1,577,652 1,444,517
Advances from Federal Home Loan Bank 287,627 286,374
Other Borrowings 94,036 -
---------- ----------
Total interest expense 1,959,315 1,730,891
---------- ----------
NET INTEREST INCOME 1,913,213 1,656,228
Provision for loan losses 121,800 55,500
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,791,413 1,600,728
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 162,942 126,207
Income from loan servicing activity 43,255 56,649
Gain on sale of loans 85,342 69,976
Loss on sale of repossessed assets - (27,500)
Other income 86,444 66,515
---------- ----------
Total noninterest income 377,983 291,847
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 740,487 600,390
Occupancy and equipment 280,623 222,668
Professional fees 44,395 25,188
Advertising 35,408 31,624
Data processing charges 147,835 84,728
Other expenses 389,543 334,360
---------- ----------
Total noninterest expenses 1,638,291 1,298,958
---------- ----------
Income before income taxes 531,105 593,617
Income taxes 160,002 163,940
---------- ----------
Net Income $ 371,103 $ 429,677
========== ==========
EARNINGS PER SHARE - NET INCOME
Basic $ .41 $ .49
Diluted $ .41 $ .49
See accompanying notes to the unaudited consolidated financial statements.
-4-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
INTEREST AND DIVIDEND INCOME
Loans $ 9,711,690 $ 9,093,916
Investment securities 525,331 462,673
Interest-bearing deposits with other institutions 185,989 107,161
Mortgage-backed securities 416,181 445,558
Dividends on Federal Home Loan Bank Stock 31,329 49,895
----------- -----------
Total interest and dividend income 10,870,520 10,159,203
----------- -----------
INTEREST EXPENSE
Deposits 4,341,288 4,558,717
Advances from Federal Home Loan Bank 873,103 874,299
Other Borrowings 94,036 -
----------- -----------
Total interest expense 5,308,427 5,433,016
----------- -----------
NET INTEREST INCOME 5,562,093 4,726,187
Provision for loan losses 276,000 204,600
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,286,093 4,521,587
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 467,521 396,550
Income from loan servicing activity 118,043 158,880
Gain on sale of loans 249,244 213,865
Gain on sale of fixed assets - 3,120
Loss on sale of repossessed assets (13,489) (27,500)
Other income 260,993 206,428
----------- -----------
Total noninterest income 1,082,312 951,343
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,982,852 1,721,842
Occupancy and equipment 803,435 633,481
Professional fees 118,815 94,829
Advertising 119,695 92,434
Data processing charges 313,945 232,504
Other expenses 1,069,981 935,683
----------- -----------
Total noninterest expenses 4,408,723 3,710,773
----------- -----------
Income before income taxes 1,959,682 1,762,157
Income taxes 701,620 605,695
----------- -----------
Income before extraordinary item 1,258,062 1,156,462
Extraordinary item- Excess over cost
on net assets acquired in merger - 201,206
----------- -----------
Net Income $ 1,258,062 $ 1,357,668
=========== ===========
EARNINGS PER SHARE - INCOME BEFORE EXTRAORDINARY ITEM
Basic $ 1.41 $ 1.31
Diluted $ 1.41 $ 1.31
EARNINGS PER SHARE - NET INCOME
Basic $ 1.41 $ 1.54
Diluted $ 1.41 $ 1.54
See accompanying notes to the unaudited consolidated financial statements.
-5-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net Income $ 1,258,062 $ 1,357,668
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 377,925 424,122
Provision for loan losses 276,000 204,600
Gain on sale of loans (249,244) (213,865)
Gain on sale of fixed assets - (3,120)
Loss on sale of repossessed assets 13,489 27,500
Extraordinary gain on net assets acquired in merger - (201,206)
Origination of loans held for sale (18,472,904) (17,889,988)
Proceeds from the sale of loans 19,300,795 18,543,802
Decrease in net other assets and liabilities 332,007 391,996
------------ ------------
Net cash provided by operating activities 2,836,130 2,641,509
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (12,588,093) -
Maturities and repayments - 750,000
Investment securities available for sale:
Purchases (4,007,886) (1,764,917)
Maturities and repayments 6,036,342 4,257,059
Mortgage-backed securities held to maturity:
Purchases (14,995,240) -
Maturities and repayments 555,308 398,682
Mortgage-backed securities available for sale:
Purchases (3,723,622) (1,508,800)
Maturities and repayments 3,274,505 2,570,751
Purchase of Federal Home Loan Bank Stock (694,800) (115,000)
Sale of Federal Home Loan Bank Stock - 635,900
Net increase in loans (33,944,678) (9,081,069)
Purchases of premises and equipment (1,255,119) (214,769)
Branch Acquisition:
Loans purchased (85,347) -
Purchase of premises and equipment (440,592) -
Premium paid on deposits (5,853,373) -
Deposits assumed 88,260,100 -
Other, net (184,924) -
------------ ------------
Net cash provided by (used in) investing activities 20,352,581 (4,072,163)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 12,162,219 12,649,571
Increase in long term borrowings 7,200,000 -
Net change in advances for taxes and insurance (35,330) 23,130
Net cash purchase of stock in merger - (6,041,007)
Cash dividends paid (319,230) (297,089)
------------ ------------
Net cash provided by financing activities 19,007,659 6,334,605
------------ ------------
Increase in cash and cash equivalents 42,196,370 4,903,951
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,770,440 8,553,178
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53,966,810 $ 13,457,129
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 5,308,211 $ 5,450,308
Income taxes $ 640,000 $ 495,537
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.
Nine Months Ended March 31
(Unaudited)
2003 2002
----------- -----------
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 (40,940) (48,420)
---------- ----------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 891,345 883,865
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 1,092 -
---------- ---------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 892,437 883,865
========= =========
-7-
NOTE 2 - EARNINGS PER SHARE (CONTINUED)
Three Months Ended
March 31
(Unaudited)
2003 2002
------------- -----------
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 (38,070) (46,527)
---------- ----------
Weighted -average common shares and
common stock equivalents used to
calculate basic earnings per share 894,215 885,758
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 6,271 -
---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 900,486 885,758
========= ==========
NOTE 3 - COMPREHENSIVE INCOME
Other accumulated comprehensive income consists solely of net unrealized gains
and losses on available for sale securities. For the three and nine months ended
March 31, 2003, comprehensive income totaled $373,924 and $1,341,035,
respectively. For the three and nine months ended March 31, 2002, comprehensive
income totaled $373,807 and $1,339,665, respectively.
NOTE 4 - EXTRAORDINARY ITEM
The fair market value of the net assets acquired by the Company in its
acquisition of Ohio State Financial Services in September 2001 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.
-8-
NOTE 5 - BRANCH ACQUISITION
At the close of business, February 7, 2003, the Company completed a branch
purchase and deposit assumption of The Second National Bank of Warren, Ohio's
two Steubenville, Ohio branches. The assumption and purchase had the following
classifications on the Company's Balance Sheet as of the close of business
February 7, 2003:
Assets
- ------
Cash on hand $ 403,482
Interest-bearing deposits with other institutions 81,569,300
Loans, net 85,347
Office Properties and Equipment, net 368,650
Goodwill 4,700,472
Core Deposit Intangible 1,783,735
-----------
Total Assets $88,910,986
===========
Liabilities
- -----------
Deposits $88,665,696
Accrued interest payable 182,189
Accounts payable and other liabilities 63,101
-----------
Total Liabilities $88,910,986
===========
The "Core Deposit Intangible" noted above is included on the Balance Sheet in
the line item "Other Intangibles, net". The total amount of the intangible
amortized for the three and nine month periods is $24,000. The estimated life of
the Core Deposit Intangible is estimated at 120 months.
On March 31, 2003, the Bank's notified the Office of Thrift Supervision and the
customers of the Market Street branch of the Company's intent to close that
branch effective June 30, 2003. The Market Street location was one of the two
branches acquired from the Second National Bank of Warren as of February 7,
2003. The closure is due to this branch's close proximity (approximately 1.1
miles) to the de novo branch built on Dunbar Avenue in Steubenville, Ohio and
opened in September 2002. Also, the company feels that it can adequately service
these customers with improved convenience and efficiency from the Dunbar
location than what is presently done at the Market Street branch. The Bank
believes that there will be minimal, if any, inconvenience to the customers of
the Market Street branch as a result of the closing. The employees from the
Market Street location will be used to fill staffing needs at the Bank's other
branches and departments.
NOTE 6 - OTHER BORROWINGS
Other borrowings at March 31, 2003 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 current rate in effect until June
26, 2003 is 4.54%. 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.
-9-
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued FAS No.
143, Accounting for Asset Retirement Obligations, which requires that the fair
value of a liability be recognized when incurred for the retirement of a
long-lived asset and the value of the asset be increased by that amount. The
statement also requires that the liability be maintained at its present value in
subsequent periods and outlines certain disclosures for such obligations. The
adoption of this statement, which was effective January 1, 2003, did not have a
material effect on the Company's financial position or results of operations.
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 did not have
a material effect on the Company's financial position or results of operations.
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.
-10-
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The following table represents the effect on net income and earnings per share
had the stock-based employee compensation expense been recognized:
Nine Months Ended
March 31
(Unaudited)
2003 2002
---------- ----------
Net Income, as reported: $1,258,062 $1,357,668
Less pro forma expense related to stock options (141,833) (651)
---------- ----------
Pro forma net income $1,116,229 $1,357,017
========== ==========
Basic net income per common share:
As reported $ 1.41 $ 1.54
Pro forma $ 1.25 $ 1.54
Diluted net income per common share:
As reported $ 1.41 $ 1.54
Pro forma $ 1.25 $ 1.54
Three Months Ended
March 31
(Unaudited)
2003 2002
--------- ---------
Net Income, as reported: $ 371,103 $429,677
Less pro forma expense related to stock options (141,833) (651)
--------- --------
Pro forma net income $ 229,270 $429,026
========= ========
Basic net income per common share:
As reported $ .41 $ .49
Pro forma $ .27 $ .48
Diluted net income per common share:
As reported $ .41 $ .49
Pro forma $ .27 $ .48
-11-
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in FAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. FAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this statement that relate to FAS No. 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
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. The adoption of this standard did not
have a material effect on the Company's financial statements.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The objective of Interpretation 46 is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. Interpretation 46 changes that by requiring
a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of this statement has not
and is not expected to have a material effect on the Company's financial
position or results of operations.
-12-
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
totalled approximately $850,000 and was paid for with cash from current
operations.
At the close of business, February 7, 2003, the Company completed a branch
purchase and deposit assumption of The Second National Bank of Warren, Ohio's
two Steubenville, Ohio branches. The assumption includes approximately $88
million in deposits, $85,000 in loans and real and personal property with a
value of approximately $370,000. The Company paid a premium on the deposits of
approximately $5.9 million.
On March 31, 2003, the Bank notified the Office of Thrift Supervision and the
customers of the Market Street branch of the Bank's intent to close that branch
effective June 30, 2003. The Market Street location was one of the two branches
acquired from the Second National Bank of Warren as of February 7, 2003. The
closure is due to this branch's close proximity (approximately 1.1.miles) to the
de novo branch built on Dunbar Avenue in Steubenville, Ohio and opened in
September 2002. Also, the Bank feels that it can adequately service these
customers with improved convenience and efficiency from the Dunbar location than
what is presently done at the Market Street branch. The Bank believes that there
will be minimal, if any, inconvenience to the customers of the Market Street
branch as a result of the closing. The employees from the Market Street location
will be used to fill staffing needs at the Bank's other branches and
departments.
The Company expects that its noninterest expense in fiscal 2003 will increase
due to the costs associated with operating the additional branches.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2003 AND JUNE 30, 2002
The Company's total assets increased by approximately $109,795,000 to
$324,099,770 at March 31, 2003, from $214,304,941 at June 30, 2002. The increase
is primarily due to the February 7, 2003, deposit assumption and branch purchase
of Second National Bank of Warren's Steubenville, Ohio, locations. The deposit
assumption totalled $88,260,000, which was comprised of $37,312,000 in core
savings and checking products and $50,948,000 in certificates of deposit. Net
loans, interest-bearing deposits with other instituions, investment securities
and mortgage-backed securities increased $33,596,000, $41,414,000, $10,689,000
and $14,868,000, respectively. The net increases in loans, cash deposits and
investment securities was funded by the increase in deposits, primarily as a
result of the deposit acquisition, and by the issuance of $7,200,000 of Capital
Trust Securities by Advance Statutory Trust I, a wholly owned subsidiary of the
Company.
Interest-bearing deposits with other financial institutions increased
$41,414,000 to $51,409,029 at March 31, 2003 from $9,995,389 at June 30, 2002.
The increase is the result of the completion of the deposit assumption from
Second National Bank of Warren on February 7, 2003. The net liabilities assumed
amounted to $81,600,000 from the transaction. The Company's management began
investing funds during the prior quarter by switching the Company's strategy
from selling to retaining fixed rate 1-4 family mortgage loans. Also, during the
prior quarter, management had begun the process of investing into short-term
callable agency securities, as well as adjustable rate and 5 to 7 year balloon
mortgage-backed securities. The effects of these investment and lending
strategies are discussed below. It is management's intent and desire to have
most of the excess liquidity resulting from the branch acquisition invested by
June 30, 2003, however, the full deployment of the funds may take longer than
anticipated.
-13-
Investment securities increased $10,689,000 to $23,687,996 at March 31, 2003
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 call
provisions ranging from 7 to 10 years. The increase is also due in part to a net
increase in callable agency securities of $7,500,000. During the nine months
ended March 31, 2003, the Company has had 10 agency securities totalling
$5,500,000 called. These investments were replaced by similar agency securities
in terms of amounts and maturities. The weighted average yield on the securities
called was 4.01% while the average yield on the investments replacing these
securities was 2.75%. The decrease in yield is due to the current interest rate
environment of decreasing yields.
Mortgage-backed securities increased $14,868,000 to $24,055,564 at March 31,
2003 from $9,187,872 at June 30, 2002. The increase is due to the purchase of 10
securities totalling $18,700,000. These securities have an average yield of
3.78% and average lives ranging from 2.0 to 5.25 years. The purchase of these
securities was offset by accelerated prepayments of higher yielding securities
of $3,800,000 for the nine months ended March 31, 2003 due to the current rate
environment for 1-4 family mortgages.
Loans receivable, net increased $33,596,000 to $205,741,879 at March 31, 2003
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 indirect automobile loans which increased $22,116,000, $1,800,000
$1,135,000 and $3,721,000, respectively. The increase in 1-4 family mortgages
includes approximately $20,900,000 for the six-month period October 2002 to
March 2003. The increase over this period is due to a change in management
strategy to increase the Company's interest-earning assets as a result of the
deposit assumption and branch purchase of the Steubenville, Ohio branch offices
from the Second National Bank of Warren, Ohio. The majority of these 1-4 family
mortgage loans would have been sold in periods prior to this change in strategy.
The increase in indirect automobile loans is the result of new relationships the
company has developed with floor plan automobile dealership customers over the
nine-month period ended March 31, 2003.
Office properties and equipment, net increased $1,228,000 to $5,129,635 at March
31, 2003 from $3,901,592 at June 30, 2002. The increase is primarily the result
of two projects. The first is the construction and furnishing of the Bank's de
novo branch facility at the Hollywood Plaza in Steubenville, Ohio which opened
for business on September 18, 2002 with a total cost of $850,000. The second is
the market value assessment for $370,000 for the purchased assets of the
Steubenville, Ohio branch offices of the Second National Bank of Warren.
Goodwill and other intangibles, net increased $4.7 million and $1.8 million,
respectively at March 31, 2003 from $0 at June 30, 2002. The increases are the
result of the calculated premium paid to The Second National Bank of Warren,
Ohio for the deposit assumption and branch purchase of their two Steubenville,
Ohio branches. The Other Intangibles, net represents the Core Deposit Intangible
from the deposit assumption. The value was derived from an independent core
study performed after the branch acquisition. This intangible is being amortized
over an estimated ten (10) calendar years.
Deposits increased $100,422,000 to $275,481,062 at March 31, 2003 from
$175,058,743 at June 30, 2002. The increase includes $88,260,000 from the
deposit assumption and branch purchase as discussed above. Net of these assumed
deposits, regular deposits have increased $12,200,000 for the nine-month period
ended March 31, 2003. This change includes an increase in certificates of
deposit of $8,426,000, while core savings and NOW accounts have increased
$4,700,000 and $1,400,000, respectively. Offsetting these increases is a
decrease in core money market accounts of $2,400,000. The increase in
certificates and decrease in money market accounts reflects the customer's
preference to obtain higher yields in the current interest rate environment by
extending the term of their investments. Deposit growth over the nine-month
period has gone from an increase of $7,500,000 during three-month period ended
September 2002 to an increase of only $800,000 for the three-month period ended
March 31, 2003. This trend of slowing of deposit growth is a result of a change
in management strategy during the nine-month period. Due to the recent deposit
assumption, the company has not used high cost certificate of deposit specials
to fund asset growth. This change in strategy is only expected to continue until
all excess liquidity received from the deposit assumption has been reinvested
into higher yielding assets.
On December 19, 2002, the Company participated in a pooled trust preferred
offering. The rate on the securities is at 3-month LIBOR plus 3.25% adjusted
quarterly, the beginning rate was 4.66% and expired on March 26, 2003. On March
26, 2003, the effective rate of the securities was lowered to 4.54% and is
effective until June 26, 2003. The securities are written with a 30 year
maturity and a five year call provision.
Accrued interest payable and other liabilities increased $1,052,000 to
$1,670,141 at March 31, 2003 from $618,232 at June 30, 2002. The increase
includes a purchase accounting adjustment of $402,000 as a result of a market
value adjustment on the certificates of deposit assumed from the Steubenville
branches of the Second National Bank of Warren. Also, the increase includes a
$300,000 timing transaction for loans prepaid and refinanced with Freddie Mac as
of March 31, 2003.
-14-
Stockholders' equity increased approximately $1,156,000 to $19,379,677 at March
31, 2003 from $18,223,746 at June 30, 2002. This increase was the result of net
income of $1,258,000 for the period, the recognition of shares in the Employee
Stock Ownership Plan and Restricted Stock Plan of $134,000 and an increase in
the net unrealized gain on securities of $83,000. These increases were offset by
the payment of cash dividends of $319,000.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2003 AND 2002
Net interest income increased $257,000 or 15.52%, to $1,913,000 for the three
months ended March 31, 2003 from $1,656,000 for the comparable period ended
2002. The increase in net interest income resulted primarily from an increase in
the average volume of the underlying principle balances in interest earning
assets and liabilities. The net interest spread for the three months ended March
31, 2003, decreased to 2.67% from 3.08% for the comparable period ended 2002.
The 41 basis point decrease in the net interest rate spread for the current
three month period was primarily due to a 120 basis point decline in average
yields on assets which was offset by a 79 basis point decline in average cost of
funds. The increase in interest-bearing deposits with other institutions as a
result of the deposit assumption of The Second National Bank of Warren's
Steubenville, Ohio branches has contributed to a decline in the net interest
margin and net interest spread of the Company. See "Average Balance Sheet" for
the three-month periods ended March 31, 2003 and 2002.
Net interest income increased $836,000 or 17.69%, to $5,562,000 for the
nine-months ended March 31, 2003 from $4,726,000 for the comparable period ended
2002. The increase in net interest income resulted primarily from an increase in
the average volume of the underlying principle balances in interest earning
assets and liabilities. The net interest spread for the nine months ended March
31, 2003 decreased to 2.96% from 3.05% for the comparable period ended 2002. The
9 basis point decrease in the net interest rate spread for the current nine
month period was primarily the result of a 115 basis point decline in average
yields on assets which was offset by a 106 basis point decline in average cost
of funds. The increase in interest-bearing deposits with other institutions as a
result of the deposit assumption of Second National Bank of Warren's
Steubenville, Ohio branches has contributed to a decline in the net interest
margin and net interest spread of the Company. See "Average Balance Sheet" for
the nine-month periods ended March 31, 2003 and 2002.
The provision for loan losses increased $66,000 to $122,000 for the three months
ended March 31, 2003 from $56,000 for the comparable period ended 2002. The
provision increased $71,000 to $276,000 for the nine months ended March 31, 2003
from $205,000 for the comparable period ended 2002. The increase in the
provision for loan losses was precipitated by an increase in loan volume. In
determining the adequacy of the allowance for loan losses, management reviews
and evaluates on a quarterly basis the potential risk in the loan portfolio.
This evaluation process is documented by management and approved by the
Company's Board of Directors. The evaluation is performed by senior members of
management with years of lending and review experience. Management evaluates
homogenous consumer-oriented loans, such as 1-4 family mortgage loans and retail
consumer loans, based upon all or a combination of delinquencies, loan
concentrations and charge-off experience. Management supplements this analysis
by reviewing the local economy, 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".
Noninterest income increased $86,000 or 29.51%, to $378,000 for the three months
ended March 31, 2003 from $292,000 for the comparable period ended 2002.
Noninterest income increased $131,000 or 13.77% to $1,082,000 for the nine
months ended March 31, 2003 from $951,000 for the comparable period ended 2002.
For the three and nine month periods of 2003, miscellaneous fees and fees on
deposit accounts increased by $57,000 and $126,000, respectively, as a result of
an increase in core customers and related activity.
-15-
For the three and nine month periods of 2003, gains on sales of fixed rate loans
and income from loan servicing activity decreased $2,000 and $5,000,
respectively, as a result of the change in management strategy toward retaining
fixed rate 1-4 family mortgage loans that would have been sold in prior periods,
as noted above in the loan discussion. Until such time as the funds acquired in
the deposit 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 should continue to decline
accordingly.
Noninterest expense increased $339,000 or 26.12%, to $1,638,000 for the three
months ended March 31, 2003, from $1,299,000 for the comparable 2002 period.
Noninterest expense increased $698,000 or 18.81%, to $4,409,000 for the nine
months ended March 31, 2003 from $3,711,000 for the comparable period ended
2002. For the three and nine month periods ended March 31, 2003, compensation
and employee benefits increased $140,000 and $261,000, respectively. The
increase in compensation and employee benefits for the three and nine month
periods ended March 31, 2003 due to the four branch acquisitions and de novo
branch opening over the past two fiscal years totalled $83,000 and $180,000,
respectively. Occupancy and equipment, professional fees, marketing and data
processing expenses have increased by $144,000 and $303,000 for the three and
nine-month periods ended March 31, 2003, respectively. Such increases are
primarily due to the operation of the four new branches acquired since September
2001 and the opening of the de novo branch in September 2002. For the three and
nine month period ended March 31, 2003, other expenses have increased $55,000
and $134,000, respectively. The increase in other expense is due to increases in
supplies and communications of $25,000 and $40,000, in fees paid for ATM and
consumer card usage of $9,000 and $35,000, and in fees paid to the Federal
Reserve for item processing of $5,000 and $9,000, for the three and nine month
periods, respectively. Each of these increases are primarily related to customer
activity due to the increase in the Company's core customers created primarily
by four branch purchases and the de novo branch opening over the past two fiscal
years.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had commitments to fund loans of approximately
$4,599,844. These loan commitments are expected to be funded by April 30, 2003.
Management monitors both the Company's equity capital ratio and the Bank's total
risk-based, Tier I risk-based and Tier I leveraged capital ratios in order to
assess compliance with regulatory guidelines. At March 31, 2003, both the
Company and the Bank exceeded the minimum capital requirements, including
risk-based and leveraged capital ratios. The Company's equity capital ratio and
the Bank's total risk-based, Tier I risk-based and Tier I leverage ratios are
4.01% and 10.93%, 10.38% and 5.83%, respectively, at March 31, 2003.
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume and
(ii) changes in rate. Changes not solely attributable to rate or volume, are
allocated to changes in rate due to rate sensitivity of interest-earning assets
and interest-bearing liabilities.
Three Months Ended March 31,
-----------------------------------
2003 Vs 2002
-----------------------------------
Increase (Decrease)
Due to
-----------------------------------
Volume Rate Net
-----------------------------------
Interest Income:
Loans $ 628,542 $(319,128) $309,414
Investments 485,331 (309,336) 175,995
-----------------------------------
Total interest-earning assets 1,113,873 (628,464) 485,409
-----------------------------------
Interest Expense
Core Deposits 161,380 (207,282) (45,902)
Certificates of Deposit 460,994 (281,957) 179,037
FHLB Borrowings 1,253 - 1,253
Other Borrowings 94,036 - 94,036
-----------------------------------
Total interest-bearing liabilities 717,663 (489,239) 228,424
-----------------------------------
Change in net interest income $ 396,210 $(139,225) $256,985
===================================
-16-
RATE/VOLUME ANALYSIS (Continued)
Nine Months Ended March 31,
-------------------------------------
2003 Vs 2002
-------------------------------------
Increase (Decrease)
Due to
-------------------------------------
Volume Rate Net
-------------------------------------
Interest Income:
Loans $1,825,280 $(1,207,506) $ 617,774
Investments 644,199 (550,656) 93,543
-------------------------------------
Total interest-earning assets 2,469,479 (1,758,162) 711,317
-------------------------------------
Interest Expense
Core Deposits 390,963 (432,374) (41,411)
Certificates of Deposit 895,255 (1,071,273) (176,018)
FHLB Borrowings (1,196) - (1,196)
Other Borrowings 94,036 - 94,036
-------------------------------------
Total interest-bearing liabilities 1,379,058 (1,503,647) (124,589)
-------------------------------------
Change in net interest income $1,090,421 $ (254,515) $ 835,906
=====================================
-17-
Average Balance Sheet for the Three-Month Period ended March 31
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
Three-Month Period Ended March 31,
-----------------------------------------------------------------
2003 2002
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- -------- -------- ----------
Interest-earning assets:
Loans receivable (1) $198,431 $3,372 6.80% $164,617 $3,063 7.44%
Investment securities (2) 53,000 325 2.45% 19,498 182 3.74%
Mortgage-backed securities 15,597 175 4.49% 9,386 142 6.05%
-------- ------ ---- -------- ------ ----
Total interest-earning assets 267,028 3,872 5.80% 193,501 3,387 7.00%
------ ---- ------ ----
Non-interest-earning assets 13,449 7,988
-------- --------
Total assets $280,477 $201,489
======== ========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 43,285 168 1.55% $ 26,140 157 2.41%
Certificates of deposit 136,232 1,246 3.66% 97,405 1,068 4.38%
Savings deposits 42,607 163 1.53% 33,189 220 2.65%
FHLB Borrowings 21,167 288 5.44% 20,000 286 5.73%
Other Borrowings 7,200 94 5.66% - - -
-------- ------ ---- -------- ------ ------
Total interest-bearing liabilities 250,491 1,959 3.13% 176,734 1,731 3.92%
------ ---- ------ ------
Non-interest bearing liabilities 10,730 7,299
-------- --------
Total liabilities 261,221 184,033
Stockholders' equity 19,256 17,456
-------- --------
Total liabilities and stockholders'
equity $280,477 $201,489
======== ========
Net interest income $1,913 $1,656
====== ======
Interest rate spread (3) 2.67% 3.08%
==== ====
Net Yield on interest-earning assets (4) 2.87% 3.42%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 106.60% 109.49%
====== ======
- ------------------------
(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.
-18-
Average Balance Sheet for the Nine-Month Period ended March 31
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
Nine-Month Period Ended March 31,
-------------------------------------------------------------------
2003 2002
--------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- ----------
Interest-earning assets:
Loans receivable (1) $184,904 $9,712 7.00% $153,968 $ 9,094 7.88%
Investment securities (2) 34,837 743 2.84% 18,920 620 4.37%
Mortgage-backed securities 11,097 416 5.00% 9,538 445 6.23%
-------- ------- ------ -------- ------- ------
Total interest-earning assets 230,838 10,871 6.28% 182,426 10,159 7.43%
------- ------ ------- ------
Non-interest-earning assets 10,638 7,695
-------- --------
Total assets $241,476 $190,121
======== ========
Interest-bearing liabilities:
Interest-bearing demand deposits $34,171 449 1.75% $23,815 449 2.51%
Certificates of deposit 117,430 3,367 3.82% 93,697 3,537 5.03%
Savings deposits 38,496 526 1.82% 28,134 573 2.72%
FHLB Borrowings 20,789 873 5.60% 20,000 874 5.83%
Other Borrowings 2,400 94 5.66% - - -
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 213,286 5,309 3.32% 165,646 5,433 4.38%
------- ------ ------- ------
Non-interest bearing liabilities 9,270 7,417
-------- --------
Total liabilities 222,556 173,063
Stockholders' equity 18,920 17,058
-------- --------
Total liabilities and stockholders'
equity $241,476 $190,121
======== ========
Net interest income $ 5,562 $ 4,726
======= =======
Interest rate spread (3) 2.96% 3.05%
====== ======
Net Yield on interest-earning assets (4) 3.21% 3.45%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.23% 110.13%
====== ======
- ------------------
(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.
-19-
RISK ELEMENTS
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days past due, other real estate
loans and repossessed assets. A loan is classified as nonaccrual when, in the
opinion of management, there are serious doubts about collectibility of interest
and principal. At the time the accrual of interest is discontinued, future
income is recognized only when cash is received. Renegotiated loans are those
loans which terms have been renegotiated to provide a reduction or deferral of
principal or interest as a result of the deterioration of the borrower.
March 31, June 30,
2003 2002
--------- --------
Loans on a nonaccrual basis $ 926 $ 864
Loans past due 90 days or more and still accruing 689 1,148
------ ------
Total nonperforming loans 1,615 2,012
------ ------
Other real estate 810 645
Repossessed assets 11 18
------ ------
Total nonperforming assets $2,436 $2,675
------ ------
Nonperforming loans as a percentage of total net loans 0.78% 1.17%
===== =====
Nonperforming assets as a percentage of total assets 0.75% 1.25%
===== =====
Allowance for loan losses to nonperforming loans 60.92% 48.16%
===== =====
Nonaccrual loans at March 31, 2003, consisted of $502,483 in one-to-four family
residential mortgages, $197,822 in multi-family mortgages, and $225,498 in
non-residential real estate mortgages.
The Company considers a loan impaired when it is probable that the borrower will
not repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on one-to-four
family properties and all consumer loans represent large groups of
smaller-balance, homogenous loans that are to be collectively evaluated.
Management considers an insignificant delay, which is defined as less than 90
days by the Company, will not cause a loan to be classified as impaired. A loan
is not impaired during the period of delay in payment if the Company expects to
collect all amounts due including interest accrued at the contractual interest
rate during the period of delay. All loans identified as impaired are evaluated
independently by management. The Company estimates credit losses on impaired
loans through the allowance for loan losses by evaluating the recorded
investment in the impaired loan to the estimated present value of the underlying
collateral or the present value of expected cash flows.
As of March 31, 2003, the total investment in impaired loans was $580,946, and
such amount was subject to a specific allowance for loan losses of $80,530. The
average investment in the impaired loans for the nine-month period ended March
31, 2003 was $936,776. The interest income potential based upon the original
terms of the contracts of these impaired loans was $69,908 for the nine-month
period ended March 31, 2003. A total of $39,024 of interest income has been
recognized for the nine-month period ended March 31, 2003.
-20-
During the nine-month period ended March 31, 2003, the Company foreclosed upon
two loans with combined balances of $376,921 that were classified as impaired at
June 30, 2002. As a result of the foreclosure action, the assets collateralizing
the loans were added to "Other Real Estate" in the amount of $270,000, which
resulted in a write down to the allowance for loan losses during the period
ended March 31, 2003 of $137,517.
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 March 31, 2003
and June 30, 2002:
March 31, June 30,
2003 2002
------------- -------------
Mortgage loans:
1-4 family $113,779,221 $91,663,131
Multi-family 8,092,751 6,864,328
Non-residential 38,282,488 36,146,830
Construction 6,210,959 4,338,936
------------ ------------
166,365,419 139,013,225
------------ ------------
Consumer Loans:
Home Improvement 919,569 943,384
Automobile-Direct 8,206,375 7,377,763
Automobile-Indirect 13,519,515 9,798,701
Share loans 1,822,643 1,589,842
Other 2,555,479 2,613,244
------------ ------------
27,023,581 22,322,934
------------ ------------
Commercial Loans 17,531,294 14,824,483
Less:
Loans in process 4,087,926 2,961,044
Net deferred loan fees 106,982 84,643
Allowance for loan losses 983,489 969,088
------------ ------------
5,178,397 4,014,775
------------ ------------
Total $205,741,897 $172,145,867
============ ============
-21-
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.
-22-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
NONE
Item 2 - Changes in Securities and Use of Proceeds
-----------------------------------------
NONE
Item 3 - Defaults upon Senior Securities
-------------------------------
NOT APPLICABLE
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
NONE
Item 5 - Other Information
-----------------
NONE
Item 6 - Exhibits and reports on Form 8-K
--------------------------------
(a) List of Exhibits:
3 (i) Certificate of Incorporation of Advance Financial Bancorp*
3 (ii) Amended Bylaws of Advance Financial Bancorp
4 (i) Specimen Stock Certificate*
4 (ii) Shareholders Rights Plan**
10 Employment Agreement between the Bank and Stephen M. Gagliardi***
10.1 1998 Stock Option Plan****
10.2 Restricted Stock Plan and Trust Agreement****
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.
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advance Financial Bancorp
Date: May 13, 2003 By: /s/ Stephen M. Gagliardi
-------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: May 13, 2003 By: /s/ Stephen M. Magnone
-------------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)
-24-
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 officer 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: May 13, 2003 /s/ Stephen M. Magnone
-----------------------------------
Stephen M. Magnone
Treasurer (Chief Financial Officer)
-25-
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 officer 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: May 13, 2003 /s/ Stephen M. Gagliardi
-------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
-26-