-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QGIq4aHOp8x2QyxJ72Z34e4gDszT65PN0QgHQkqxUktmyQprdbc8XFiInNBC155C sG/i0Pet8lgyvuID0fs/9Q== /in/edgar/work/0000946275-00-000455/0000946275-00-000455.txt : 20000930 0000946275-00-000455.hdr.sgml : 20000930 ACCESSION NUMBER: 0000946275-00-000455 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCE FINANCIAL BANCORP CENTRAL INDEX KEY: 0001023398 STANDARD INDUSTRIAL CLASSIFICATION: [6035 ] IRS NUMBER: 550753533 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-21885 FILM NUMBER: 730216 BUSINESS ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 BUSINESS PHONE: 3047373531 MAIL ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 10KSB40 1 0001.txt FORM 10KSB40 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2000 ------------- OR [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . ------------ ------------ Commission File No. 0-21885 Advance Financial Bancorp -------------------------------------------------------- (Name of Small Business Issuer in Its Charter) Delaware 55-0753533 - --------------------------------------------- ------------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1015 Commerce Street, Wellsburg, West Virginia 26070 - ---------------------------------------------- ------------------------ (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number, Including Area Code: (304) 737-3531 -------------- Securities registered under to Section 12(b) of the Exchange Act: None ------ Securities registered under to Section 12(g) of the Exchange Act: Common Stock, par value $0.10 per share --------------------------------------- Preferred Share Purchase Rights ------------------------------- (Title of Class) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $11,404,000 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the average bid and asked price of the registrant's Common Stock on the Nasdaq Smallcap Market at August 31, 2000, was $7.7 million. As of August 31, 2000, there were issued and outstanding 932,285 shares of the registrant's Common Stock. Transition Small Business Disclosure Format (check one): YES NO X --- --- DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year ended June 30, 2000. (Part II) 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for the Fiscal Year ended June 30, 2000. (Part III) PART I Advance Financial Bancorp (the "Company" or "Registrant") may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-KSB and the exhibits thereto), in its reports to Stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and savings habits; and the success of the Company at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the company. Item 1. Business - ----------------- General The Company is a Delaware corporation organized in September 1996 at the direction of Advance Financial Savings Bank (the "Bank") to acquire all of the capital stock that the Bank issued in its conversion from the mutual to stock form of ownership (the "Conversion"). On December 31, 1996, the Bank completed the Conversion and became a wholly owned subsidiary of the Company. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage provided that the Bank retains a specified amount of its assets in housing-related investments. The Company conducts no significant business or operations of its own other than holding all of the outstanding stock of the Bank. References to the Company or Registrant generally refers to the consolidated entity which includes the main operating company, the Bank, unless the context indicates otherwise. The Bank is a federally chartered stock savings bank headquartered in Wellsburg, West Virginia. It is subject to examination and comprehensive regulation by the Office of Thrift Supervision ("OTS") and its deposits are federally insured by the Savings Association Insurance Fund ("SAIF"). The Bank is a 1 member of and owns capital stock in the FHLB of Pittsburgh, which is one of the 12 regional banks in the FHLB System. The Bank operates a traditional savings bank business, attracting deposit accounts from the general public and using those deposits, together with other funds, primarily to originate and invest in loans secured by one- to four-family residential real estate, non-residential real estate, and commercial loans. To a lesser extent, the Bank also originates multi-family real estate loans and consumer loans. Competition The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Registrant's market area of Brooke and Hancock counties of West Virginia and portions of Jefferson County, Ohio and Washington County, Pennsylvania. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage bankers. 2 Lending Activities The following table sets forth the composition of the Registrant's loan portfolio in dollar amounts and in percentages of the respective portfolios at the dates indicated.
June 30, ------------------------------------------------- 2000 1999 -------------------- -------------------- Amount Percent Amount Percent ------ ------- -------- ------- (Dollars in Thousands) Type of Loans: - ------------- Real Estate Loans: One- to four-family .......................$ 62,163 50.81% $ 59,674 53.45% Non-residential............................ 24,544 20.06 23,216 20.80 Multi-family .............................. 5,470 4.47 2,689 2.41 Construction............................... 3,242 2.65 2,073 1.86 ------- ------ ------- ------- Total real estate loans 95,419 77.99 87,652 78.52 ------ ------ ------- ------ Consumer Loans: Automobile................................. 10,904 8.91 8,648 7.74 Other...................................... 2,653 2.17 2,344 2.10 Share...................................... 1,406 1.15 1,360 1.22 Home improvement........................... 1,439 1.18 1,195 1.07 Education.................................. 23 0.02 41 .04 -------- ------ --------- ------- Total consumer loans 16,425 13.43 13,588 12.17 ------ ------ ------- ------ Commercial business loans.................... 10,500 8.58 10,388 9.31 ------ ------ ------- ------- Total loans 122,344 100.00% 111,628 100.00% ====== ====== Less: Loans in process........................... (1,813) (1,007) Deferred loan origination fees and costs... (128) (139) Allowance for loan losses.................. (682) (582) ------- ------- Total loans, net $119,721 $109,900 ======= =======
3 Loan Maturity Tables The following table sets forth the estimated maturity of the Registrant's loan portfolio, including loans held for sale, at June 30, 2000. The table does not include prepayments or scheduled principal repayments. All mortgage loans are shown as maturing based on contractual maturities.
Due after Due within 1 through Due after 1 year 5 years 5 years Total ---------- --------- --------- ---------- (In Thousands) One- to four-family real estate..... $ 7,073 $ 2,111 $52,979 $ 62,163 Non-residential real estate......... 35 1,196 23,313 24,544 Multi-family real estate............ 8 267 5,195 5,470 Construction........................ 3,242 - - 3,242 Consumer loans...................... 1,301 11,941 3,183 16,425 Commercial business loans........... 1,295 4,281 4,924 10,500 ------- ------- ------- -------- Total............................... $12,954 $19,796 $89,594 $122,344 ======= ======= ======= ========
The following table sets forth as of June 30, 2000 the dollar amount of all loans due after June 30, 2001, which have fixed interest rates and floating or adjustable interest rates. Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ------- (In Thousands) One- to four-family real estate.... $20,997 $34,093 $ 55,090 Non-residential real estate........ 10,539 13,962 24,501 Multi-family real estate........... 2,358 3,112 5,470 Consumer loans..................... 15,124 - 15,124 Commercial business loans.......... 5,220 3,985 9,205 ------- ------- -------- Total.......................... $54,238 $55,152 $109,390 ======= ======= ======== One- to Four-Family Residential Loans. The Registrant's primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in its primary market areas. The Registrant generally originates owner-occupied one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or selling price of the mortgaged property without requiring mortgage insurance. The Registrant will originate a mortgage loan in an amount up to 95% of the lesser of the appraised value or selling price of a mortgaged property, however, mortgage insurance is required for the amount in excess of 80% of such value. Non-owner-occupied residential mortgage loans are originated up to 80% of the lesser of the appraised value or selling price of the property. Fixed-rate loans can have maturities of up to 30 years depending on the type of loan. For all adjustable-rate mortgage loans, the Registrant requires the borrower to qualify at the initial index interest rate. The adjustable-rate mortgage loans provide for periodic interest rate adjustments of plus or minus 1% to 2% with a maximum adjustment over the term of the loan as set forth in the loan agreement and usually ranges from 6% to 7% above the initial interest rate depending on the terms of the loan. Adjustable-rate mortgage loans reprice every year, every three years or every five years, and provide for terms of up to 30 years with most loans having terms of between 15 and 30 years. 4 The Registrant offers adjustable-rate mortgage loans indexed to the weekly average of the one year U.S. Treasury bill. Interest rates charged on mortgage loans are competitively priced based on market conditions and the Registrant's cost of funds. Generally, the Registrant's standard underwriting guidelines for mortgage loans conform to the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines and most of the Registrant's loans are salable in the secondary market. It is the current policy of the Registrant to remain a portfolio lender for its adjustable rate loans. Adjustable rate loans do have higher credit risks compared to fixed-rate loans due to the possibility of borrower default when interest rates reset higher and monthly payment amounts increase. The Registrant's one-to four-family residential loan portfolio also includes second mortgage loans and home equity loans. Such loans are generally secured by second liens on one-to four-family residential real estate. At June 30, 2000, such loans totalled $10,614,000 or 17%, of the Registrant's one-to four- family residential loan portfolio. Non-Residential Real Estate Loans. Non-residential real estate loans consist of loans primarily consist of mixed residential and commercial use property, professional office buildings, churches and restaurants. Loans secured by non-residential property may be originated in amounts up to 80% of the appraised value for a maximum term of 20 years. Non-residential real estate loans have significantly more risk than one-to four-family mortgage loans due to the usually higher loan amounts and the credit risk, which arises from concentration of principal in a smaller number of loans, the effects of general economic conditions on income producing property and the difficulty of evaluating and monitoring the loans. Construction Loans. The Registrant originates construction loans primarily for the construction of single family dwellings. Loans made to builders are generally "pure construction" loans which require the payment of interest at fixed rates during the construction term and the payment of the principal in full at the end of the construction period, which generally is for a term of 12 months. At June 30, 2000, construction loans to builders totalled $460,000. Loans made to individual property owners are either pure construction loans or "construction-permanent" loans which generally provide for the payment of interest only during a construction period, after which the loans convert to a permanent loan at fixed or adjustable interest rates having terms similar to other one- to four-family residential loans. At June 30, 2000 construction on loans to individuals totalled $2,782,000. Construction financing generally has a higher degree of credit risk than one-to four-family residential loans. The risk is dependent largely on the value of the property when completed as compared to the estimated cost, including interest, of building the property. If the estimated value is inaccurate, the Registrant may have a completed project with a value too low to assure full repayment of the loan. Construction loans made to builders who are building to resell have a maximum loan-to-value ratio of 80% of the appraised value of the property. Construction loans to individuals who intend to occupy the finished premises generally have a maximum loan-to-value ratio of 80%. Multi-Family. Multi-family loans are primarily secured by apartment houses, located in the Registrant's primary market area. Loans secured by multi-family property may be originated in amounts up to 75% of the appraised value with either fixed or adjustable rates of interest. Fixed rate interest loans have maturities generally of up to 20 years, with principal and interest payments calculated on a 20 year amortization period. Adjustable rate loans typically have a 15 to 30 year amortization period,with repricing following every year, three years, or five years. Multi-family loans have credit risks similar to non-residential real estate loans. 5 Consumer Loans. Consumer loans primarily consist of direct and indirect automobile loans. Direct automobile loans are generally originated with terms of up to 6 years for new automobiles and up to 5 1/2 years for used automobiles. Indirect automobile loans are purchased from automobile dealers with whom the Registrant provides floor plan financing. Indirect automobile loans are underwritten by the Registrant and a fee is remitted to the automobile dealer upon the successful underwriting and closing of the loan. The fee is rebated to the Registrant, on a pro rata basis, if the loan is repaid within the first six months. The Registrant generally does not have recourse against the automobile dealer in the event of a default by the borrower. Each indirect auto loan is originated in accordance with the Registrant's underwriting standards and procedures, which are intended to assess the applicant's ability to repay the amounts due on the loan and the adequacy of the financed vehicle as collateral. Direct and indirect automobile loans are secured by the new or used automobile. At June 30, 2000, automobile loans totalled $10,903,000 or, 66%, of the Registrant's consumer loan portfolio. Of this amount, indirect automobile loans totalled $4,954,000. Loans secured by assets that depreciate rapidly, such as automobiles, are generally considered to entail greater risks than one-to four-family residential loans. The Registrant also makes a variety of other loans that totalled $5,522,000, or 34%, of total consumer loans at June 30, 2000. Included in this total are home improvement loans, credit card loans, loan secured by deposit accounts (share loans) and educational loans. Underwriting standards for these loans vary based on the loan type and the creditworthiness of the borrower. Commercial Business Loans. Commercial business loans primarily consist of commercial lines of credit (which include automobile floor plan lines of credit), commercial vehicle loans, and working capital loans and are typically secured by residential or commercial property, receivables or inventory, vehicles comprising the automobile floor plan, or some other form of collateral. Floor plan financing involves continuing financing for an automobile dealer that is secured by automobiles physically located on the dealer's lot. The Registrant holds the title to the automobiles during the pendency of the sale. Floor plan financing typically involves high loan origination volume and repayment within 90 days of origination. Credit risks involved are similar to commercial real estate loans (non-residential and multi-family loans) with loan repayment often dependent upon the business generating sufficient cash flow. However, commercial business loans carry even more credit risk than commercial real estate loans due to the nature of the collateral underlying the loan. Loan Approval Authority and Underwriting. The Registrant has established various lending limits for its officers and maintains a loan committee. A report of all mortgage loans originated is presented to the Board of Directors monthly. The President and Senior Vice President each have the authority to approve applications for mortgage loans up to $100,000, consumer loans up to $40,000 for secured loans and up to $10,000 for unsecured loans. Eight other loan officers have authority to approve secured credit applications in varying amounts up to $35,000. The loan committee reviews all applications for commercial loans up to $250,000, whether secured or unsecured, and all consumer loans in amounts above the lending limit described above. All loans the loan which committee does not review require the consideration and approval of the entire Board of Directors. Upon receipt of a completed loan application from a prospective borrower, a credit report is generally ordered, income and certain other information is verified and, if necessary, additional financial information is requested. An appraisal from a licensed fee appraiser of the real estate intended to be used as security for the proposed loan is obtained. For construction/permanent loans, funds advanced during the construction phase are held in a loan-in-process account and disbursed based upon various stages of 6 completion in accordance with the results of inspection reports that are based upon physical inspection of the construction by a loan officer. For real estate loans, each title is reviewed by the attorney for the Registrant to determine that title is clear. Historically, the Registrant has not required title insurance except in those instances where the attorney has seen a need for title insurance. Borrowers must also obtain fire and casualty insurance. Flood insurance is also required for loans on property that is located in a flood zone. Loan Commitments. Written loan commitments are given to prospective borrowers on all approved mortgage loans which generally expire within 30 days of the date of issuance. No commitment fees or points to secure commitments are charged to prospective borrowers. However, a customer may lock in a fixed rate for 30 days by depositing a nonrefundable fee with the Registrant. In some instances, after a review of the rate, terms, and circumstances, commitments may be renewed or extended beyond the 30-day limit. At June 30, 2000, the Registrant had $283,000 of outstanding commitments to originate loans and $1,245,000 in undisbursed funds related to construction loans. Non-Performing and Problem Assets Loan Delinquencies. The Registrant's collection procedures provide that when a mortgage loan is 30 days past due, a delinquent notice is sent to the borrower and a late charge is imposed in accordance with the mortgage or Deed of Trust agreement. If payment is still delinquent after 90 days, the borrower will receive a notice of default establishing a date by which the borrower must bring the account current or foreclosure proceedings will be instituted. Late charges are also imposed in accordance with the mortgage or Deed of Trust agreement. If the delinquency continues, similar subsequent efforts are made to eliminate the delinquency. If the loan continues in a delinquent status for 90 days past due and no repayment plan is in effect, the account is turned over to an attorney for foreclosure. Management meets regularly to determine when foreclosure proceedings should be initiated and the borrower is notified when foreclosure has been commenced. Loans are reviewed on a monthly basis and are placed on non-accrual status when considered doubtful of collection by management. Generally, loans past due 90 days or more as to principal or interest and, in the opinion of management, are not adequately secured to insure the collection of the entire outstanding balance of the loan including accrued interest are placed on non-accrual status. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent cash payments are applied to interest income. Loans are returned to accrual status when, in management's judgment, the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original terms). 7 Non-Performing Assets. The following table sets forth information regarding nonaccrual loans and real estate owned, as of the dates indicated. The Registrant has no loans categorized as troubled debt restructurings within the meaning of the Statement of Financial Accounting Standards ("SFAS") 15 and no impaired loans within the meaning of SFAS 114, as amended by SFAS 118. Interest income that would have been recorded on loans accounted for on a nonaccrual basis under the original terms of such loans was not material for the year ended June 30, 2000. At June 30, ------------- 2000 1999 ---- ---- (Dollars in Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family ............................ $286 $ 90 Non-residential ................................ 16 -- Construction ................................... -- 317 Commercial ..................................... -- 47 Consumer ......................................... 2 2 Commercial ....................................... -- -- ---- ---- Total non-accrual loans ...................... 304 456 ---- ---- Accruing loans greater than 90 days past due: Mortgage loans: One- to four-family .......................... -- -- Non-residential .............................. -- -- Construction ................................. -- -- Multi-family ................................. -- -- Consumer ......................................... 189 220 Commercial ....................................... -- 89 ---- ---- Total accruing loans greater than 90 days past due 189 309 ---- ---- Total non-performing loans ....................... 493 765 Real estate acquired in settlement of loans ...... 407 50 Other non-performing assets ...................... 21 9 ---- ---- Total non-performing assets ...................... $921 $824 ==== ==== Total non-performing loans to total loans ........ .41% .69% ==== ==== Total non-performing loans to total assets ....... .34% .59% ==== ==== Total non-performing assets to total assets ...... .63% .63% ==== ==== Classified Assets. OTS regulations provide for a classification system for problem assets of insured institutions. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not 8 warranted. Assets may be designated "special mention" because of potential weakness that does not currently warrant classification in one of the aforementioned categories. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. The following table sets forth the Registrant's classified assets in accordance with its classification system: At June 30, 2000 ---------------- (In Thousands) Special Mention.................. $ 475 Substandard...................... 1,122 Doubtful......................... 41 Loss............................. - ------ Total............................ $1,638 ----- Allowances for Loan Losses. A provision for loan losses is charged to operations based on management's evaluation of the losses that may be incurred in the Registrant's loan portfolio. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers the Registrant's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, any existing guarantees, past performance of the loan, available documentation for the loan, legal impediments to collection, financial condition of the borrower, and current economic conditions. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required. 9 The following table sets forth information with respect to the Registrant's allowance for loan losses at the dates indicated:
Year Ended June 30, ----------------------- 2000 1999 --------- --------- (Dollars in Thousands) Total loans outstanding ......................................... $ 122,344 $ 111,628 ========= ========= Average loans outstanding ....................................... 116,825 103,764 ========= ========= Allowance balance (at beginning of period) ...................... $ 582 $ 478 Provision: Real estate ................................................... 57 70 Consumer ...................................................... 64 24 Commercial .................................................... 54 56 Charge-offs: Real estate ................................................... -- (8) Consumer ...................................................... (54) (20) Commercial .................................................... (25) (20) Recoveries: Real estate ................................................... -- -- Consumer ...................................................... 4 2 Commercial .................................................... -- -- --------- --------- Allowance balance (at end of period) ............................ $ 682 $ 582 ========= ========= Allowance for loan losses as a percent of total loans outstanding .56% .52% ========= ========= Net loans charged off as a percent of average loans outstanding . .06% .04% ========= =========
10 Analysis of the Allowance for Loan Losses The following table sets forth the allocation of the allowance by category, which management believes can be allocated only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future loss and does not restrict the use of the allowance to absorb losses in any category. June 30, ----------------------------------------- 2000 1999 ------------------- ------------------- Percent of Percent of Loans in Loans in Each Each Category Category to Total to Total Amount Loans Amount Loans ------ -------- ------ --------- (Dollars in Thousands) Types of Loans Real Estate: One- to four-family...........$ 93 50.81% $ 93 53.45% Non-residential .............. 270 20.06 230 20.80 Multi-family.................. 33 4.47 16 2.41 Construction.................. -- 2.65 -- 1.86 Consumer........................ 129 13.43 115 12.17 Commercial...................... 157 8.58 128 9.31 ------ ------ ---- ------ Total......................$ 682 100.00% $582 100.00% ====== ====== ==== ====== Investment Activities The Registrant is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and certain other investments. The level of liquid assets varies depending upon several factors, including: (i) the yields on investment alternatives, (ii) management's judgment as to the attractiveness of the yields then available in relation to other opportunities, (iii) expectation of future yield levels, and (iv) management's projections as to the short-term demand for funds to be used in loan origination and other activities. Investment securities, including mortgage-backed securities, are classified at the time of purchase, based upon management's intentions and abilities, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are classified as held to maturity and are stated at cost and adjusted for amortization of premium and accretion of discount, which are computed using the level yield method and recognized as adjustments of interest income. All other debt securities are classified as available for sale to serve principally as a source of liquidity. Current regulatory and accounting guidelines regarding investment securities (including mortgage backed securities) require the Registrant to categorize securities as "held to maturity," "available for sale" or "trading." As of June 30, 2000, Registrant had securities (including mortgage-backed securities) classified as "held to maturity" and "available for sale" in the amount of $8,781,000 and $9,791,000, respectively and had no securities classified as "trading." Securities classified as "available for sale" are reported for financial reporting purposes at the fair market value with net changes in the market value from period to period included as a separate component of stockholders' equity, net of income taxes. At June 30, 2000, the Registrant's securities available for sale had an amortized cost of $10,247,000 and market 11 value of $9,791,000 (unrealized loss of $456,000). Changes in the market value of securities available for sale do not affect the Company's income. In addition, changes in the market value of securities available for sale do not affect the Bank's regulatory capital requirements or its loan-to-one borrower limit. At December 31, 1999, the Registrant's investment portfolio policy allowed investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S. federal agency or federally sponsored agency obligations, (iii) local municipal obligations, (iv) mortgage-backed securities, (v) banker's acceptances, (vi) certificates of deposit, and (vii) investment grade corporate bonds, and commercial paper. The board of directors may authorize additional investments. As a source of liquidity and to supplement Registrant's lending activities, the Registrant has invested in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. Mortgage-backed securities represent a participation interest in a pool of single-family or other type of mortgages. Principal and interest payments are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors, like us. The quasi-governmental agencies guarantee the payment of principal and interest to investors and include the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and Federal National Mortgage Association ("FNMA"). Mortgage-backed securities typically are issued with stated principal amounts. The securities are backed by pools of mortgages that have loans with interest rates that are within a set range and have varying maturities. The underlying pool of mortgages can be composed of either fixed rate or adjustable rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. The interest rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate or adjustable rate) and the prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Mortgage-backed securities issued by FHLMC, GNMA, and FNMA make up a majority of the pass- through certificates market. At June 30, 2000, the Registrant's securities portfolio did not contain securities of any issuer, other than those issued by U.S. government or its agencies, with an aggregate book value in excess of 10% of the Registrant's equity. 12 Investment Portfolio. The following table sets forth the carrying value of the Registrant's securities at the dates indicated. At June 30, ------------------ 2000 1999 ------- -------- (In Thousands) Securities held to maturity: Interest-bearing deposits in other financial institutions $ 4,642 $ 2,964 U.S. government agency securities ....................... 1,250 1,000 FHLB stock .............................................. 800 630 Mortgage-backed securities .............................. 2,089 2,473 ------- ------- Total securities held to maturity ..................... 8,781 7,067 ------- ------- Securities available for sale: U.S. government and agency securities ................... 8,129 4,361 Common stock ............................................ 80 89 Money fund securities ................................... 26 31 Mortgage-backed securities .............................. 1,556 1,833 ------- ------- Total securities available for sale ................... 9,791 6,314 ------- ------- Total investment and mortgage-backed securities ........... $18,572 $13,381 ======= ======= 13 The following table sets forth information regarding the scheduled maturities, carrying values, market value and weighted average yields for the Bank's investment securities portfolio at June 30, 2000. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
At June 30, 2000 ------------------------------------------------------------------------------------------------------ Less than 1 to Over 5 to Over 10 Total 1 year 5 years 10 years years Securities ------------------ ---------------- ----------------- ---------------- ----------------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Securities held to maturity: Interest-bearing deposits in other financial institutions.............. $4,642 6.35% $ - -% $ - -% $ - -% $4,642 6.35% $4,642 U.S. government and agency securities......... - - 750 6.53 - - 500 6.74 1,250 6.63 1,188 FHLB stock.................. 800 7.00 - - - - - - 800 7.00 800 Mortgage-backed securities................ - - - - - - 2,089 6.65 2,089 6.65 2,027 ------ ---- ------ ---- ------ ---- ------ ---- ------- ---- ------ Total securities held to maturity.............. 5,442 6.45 750 6.53 - - 2,589 6.67 8,781 6.52 8,657 ------ ---- ------ ---- ------ ---- ------ ---- ------- ---- ------ Securities available for sale: U.S. government and agency securities............... - - 2,900 6.41 1,416 6.92 3,813 7.45 8,129 6.99 8,129 Common stock................ 80 3.00 - - - - - - 80 3.00 80 Money fund securities................ - - - - 26 4.91 - - 26 4.91 26 Mortgage-backed securities................ - - - - - 1,556 6.21 1,556 6.21 1,556 ------ ---- ------ ---- ------ ---- ------ ---- ------- ---- ------ Total securities available for sale.... 80 3.00 2,900 6.41 1,442 6.52 5,369 7.09 9,791 6.83 9,791 ------ ---- ------ ---- ------ ---- ------ ---- ------- ---- ------ Total investment and mortgage-backed securities.................. $5,522 6.40% $3,650 6.43% $1,442 6.52% $7,958 6.95% $18,572 6.68% $18,448 ====== ==== ====== ==== ====== ==== ====== ==== ======= ==== =======
14 Sources of Funds General. Deposits are the major external source of the Registrant's funds for lending and other investment purposes. The Registrant derives funds from amortization and prepayment of loans and, to a much lesser extent, maturities of investment securities, borrowings, mortgage-backed securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. Deposits. Consumer and commercial deposits are attracted principally from within the Registrant's primary market area through the offering of a selection of deposit instruments including regular savings accounts, money market accounts, and term certificate accounts. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit, and the interest rate, among other factors. At June 30, 2000, the Registrant had no brokered accounts. Time Deposits. The following table indicates the amount of the Registrant's time deposits of $100,000 or more by time remaining until maturity as of June 30, 2000. Maturity Period Time Deposits --------------- ------------- (In Thousands) Within three months............................ $1,462 More than three through six months............. 1,189 More than six through nine months.............. 2,024 Over nine months............................... 2,011 ------ Total................................. $6,686 ===== Borrowings The Registrant may obtain advances from the FHLB of Pittsburgh to supplement its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically secured by a pledge of the Registrant's stock in the FHLB of Pittsburgh and a portion of the Registrant's first mortgage loans and certain other assets. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The Registrant, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At June 30, 2000, borrowings with the FHLB totalled $10,500,000, of which $2,500,000 were short-term. Employees At June 30, 2000, the Registrant had 53 full-time and 4 part-time employees. None of the Bank's employees are represented by a collective bargaining group. The Bank believes that its relationship with its employees is good. Regulation Set forth below is a brief description of certain laws which related to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. 15 Recent Regulation The Gramm-Leach-Bliley Act (the "Act") became effective March 11, 2000, which permits qualifying bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. A qualifying national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development, and real estate investment, through a financial subsidiary of the bank. The Act also prohibits new unitary thrift holding companies from engaging in nonfinancial activities or from affiliating with an nonfinancial entity. As a grandfathered unitary thrift holding company, the Company will retain its authority to engage in nonfinancial activities. However, the Act will have few direct effects on the operations or powers of federal savings associations or of savings and loan holding companies. The Act imposes significant new financial privacy obligations and reporting requirements on all financial institutions, including federal savings associations. Specifically, the statute, among other things, will require financial institutions (a) to establish privacy policies and disclose them to customers both at the commencement of a customer relationship and on an annual basis and (b) to permit customers to opt out of a financial institution's disclosure of financial information to nonaffiliated third parties. The Act requires the federal financial regulators to promulgate regulations implementing these provisions within six months of enactment, and the statute's privacy requirements will take effect one year after enactment. Regulation of the Company General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions, provided the Bank satisfies the Qualified Thrift Lender ("QTL") test. The Act terminated the "unitary thrift holding company exemption" for all companies that applied to acquire savings associations after May 4, 1999. Since the Company is grandfathered under this provision of the Act, its unitary holding company powers and authorities were not affected. However, if the Company were to acquire control of an additional savings association, its business activities would be subject to restriction under the Home Owners' Loan Act. Furthermore, if the Company were in the future to sell control of the Bank to any other company, such company would not succeed to the Company's grandfathered status under the Act and would be subject to the same business activity restrictions. See "- Regulation of the Bank - Qualified Thrift Lender Test." 16 Regulation of the Bank General. Set forth below is a brief description of certain laws that relate to the regulation of the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that are found in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Insurance of Deposit Accounts. The deposit accounts held by the Bank are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The Bank is required to pay insurance premiums based on a percentage of its insured deposits to the FDIC for insurance of its deposits by the SAIF. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures commercial bank deposits. The FDIC has set the deposit insurance assessment rates for SAIF-member institutions for the first six months of 2000 at 0% to .027% of insured deposits on an annualized basis, with the assessment rate for most savings institutions set at 0%. In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212% of insured deposits to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. Loans to One Borrower. A savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the associations's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of the unimpaired capital and surplus, under certain circumstances. At June 30, 2000, the Registrant's lending limit for loans to one borrower was approximately $2,253,000 and had no outstanding commitments that exceeded the loans to one borrower limit at the time originated or committed. 17 Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of total adjusted assets, and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions, including cash dividends. A savings association that is a subsidiary of a savings and loan holding company, such as the Bank must file an application or a notice with the OTS at least 30 days before making a capital distribution. Savings associations are not required to file an application for permission to make a capital distribution and need only file a notice if the following conditions are met: (1) they are eligible for expedited treatment under OTS regulations, (2) they would remain adequately capitalized after the distribution, (3) the annual amount of capital distribution does not exceed net income for that year to date added to retained net income for the two preceding years, and (4) the capital distribution would not violate any agreements between the OTS and the savings association or any OTS regulations. Any other situation would require an application to the OTS. The OTS may disapprove an application or notice if the proposed capital distribution would: (i) make the savings association undercapitalized, significantly undercapitalized, or critically undercapitalized; (ii) raise safety or soundness concerns; or (iii) violate a statue, regulation, or agreement with the OTS (or with the FDIC), or a condition imposed in an OTS-approved application or notice. Further, a federal savings association, like the Bank, cannot distribute regulatory capital that is needed for its liquidation account. Qualified Thrift Lender Test. Federal savings institutions must meet one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings institution must either (i) be deemed a "domestic building and loan association" under the Internal Revenue Code by maintaining at least 60% of its total assets in specified types of assets, including cash, certain government securities, loans secured by and other assets related to residential real property, educational loans and investments in premises of the institution or (ii) satisfy the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at least 65% of its "portfolio assets" in certain"Qualified Thrift Investments" (defined to include residential mortgages and related equity investments, certain mortgage-related securities, small business loans, student loans and credit card loans, and 50% of certain community development loans). For purposes of the statutory QTL test, portfolio assets are defined as total assets minus intangible assets, property used by the institution in conducting its business, and liquid assets equal to 10% of total assets. A savings institution must maintain its status as a QTL on a monthly basis in at least nine out of every 12 months. A failure to qualify as a QTL results in a number of sanctions, including the imposition of certain operating restrictions and a restriction on obtaining additional advances from its FHLB. At June 30, 2000, the Bank was in compliance with its QTL requirement. Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. 18 As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. Liquidity Requirements. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At June 30, 2000, the Bank was in compliance with these Federal Reserve Board requirements. Item 2. Description of Property - -------------------------------- (a) Properties. The Registrant operates from its main office and two branch offices. Year Leased Location Leased or Owned or Acquired - -------- --------------- ----------- MAIN OFFICE: 1015 Commerce Street Owned 1984 Wellsburg, West Virginia BRANCH OFFICES: 1409 Main Street Leased (1) 1996 Follansbee, West Virginia 805 Main Street Wintersville, Ohio Leased (2) 1997 - ----------------------- (1) The Bank holds a 40 year lease on the land upon which its branch office is located. The Bank owns the branch building. In addition, the Bank owns property at 901 Main Street, Follansbee, West Virginia, which was formerly a branch office. (2) The Wintersville office opened June 8, 1999. The Bank holds a ten year lease (with two five year renewal options) on the land upon which its branch office is located. The Bank owns the branch building. (b) Investment Policies. See "Item 1. Business" above for a general description of the Bank's investment policies and any regulatory or Board of Directors' percentage of assets limitations regarding certain investments. The Bank's investments are primarily acquired to produce income, and to a lesser extent, possible capital gain. 19 (1) Investments in Real Estate or Interests in Real Estate. See "Item 1. Business - Lending Activities and - Regulation of the Bank," and "Item 2. Description of Property." (2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending Activities and - Regulation of the Bank." (3) Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities and - Regulation of the Bank." (c) Description of Real Estate and Operating Data. Not Applicable. Item 3. Legal Proceedings - -------------------------- There are various claims and lawsuits in which the Company or the Bank are periodically involved, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Bank's business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year. PART II Item 5. Market for Common Equity and Related Stockholder Matters - ----------------------------------------------------------------- The information contained under the section captioned "Stock Market Information" of the Company's Annual Report to stockholders for the fiscal year ended June 30, 2000 (the "Annual Report") is incorporated herein by reference. Item 6. Management's Discussion and Analysis or Plan of Operation - ------------------------------------------------------------------ The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. Item 7. Financial Statements - ----------------------------- The Registrant's financial statements listed under Item 13 are incorporated herein by reference. Item 8. Changes in and Disagreements with Accountants On Accounting and - -------------------------------------------------------------------------------- Financial Disclosure. --------------------- Not applicable. 20 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance - -------------------------------------------------------------------------------- with Section 16(a) of the Exchange Act. --------------------------------------- The information required under this item is incorporated herein by reference to the Proxy Statement for the 2000 Annual Meeting (the "Proxy Statement") contained under the sections captioned "Section 16(a) Beneficial Ownership Reporting Compliance," "Proposal I - Election of Directors," and "- Biographical Information." Item 10. Executive Compensation - -------------------------------- The information required by this item is incorporated by reference to the Proxy Statement contained under the section captioned "Director and Executive Officer Compensation." Item 11. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners (b) Security Ownership of Management The information required by items (a) and (b) is incorporated herein by reference to the Proxy Statement contained under the sections captioned "Principal Holders" and "Proposal I - Election of Directors." (c) Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. Item 12. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the Proxy Statement contained under the section captioned "Certain Relationships and Related Transactions." Item 13. Exhibits, List, and Reports on Form 8-K - ------------------------------------------------ (a) Listed below are all financial statements and exhibits filed as part of this report. 1. The consolidated balance sheets of Advance Financial Bancorp and Subsidiary as of June 30, 2000 and 1999 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the two years ended June 30, 2000, together with the related notes and the independent auditors' report of S. R. Snodgrass, A.C. independent certified public accountants. 21 2. Schedules omitted as they are not applicable. 3. The following exhibits are included in this Report or incorporated herein by reference:
(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) Shareholder 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 **** 13 Portions of the 2000 Annual Report to Stockholders 21 Subsidiaries of the Registrant (See "Item 1- Description of Business") 23 Consent of S.R. Snodgrass, A.C. 27 Financial Data Schedule (electronic filing only)
(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 with the SEC on July 17, 1997. *** Incorporated by reference to the June 30, 1997 Form 10-KSB filed with the SEC on September 24, 1997. **** Incorporated by reference to the Proxy Statement for the Special Meeting of Stockholders on January 20, 1998 and filed with the SEC on December 12, 1997. ***** Incorporated by reference to the June 30, 1999 Form 10-KSB filed with the SEC on September 28, 1999. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of September 28, 2000. ADVANCE FINANCIAL BANCORP By: /s/Stephen M. Gagliardi ----------------------------------------------- Stephen M. Gagliardi President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of September 28, 2000.
/s/Stephen M. Gagliardi /s/George H. Johnson - ----------------------------------------------- --------------------------------------------- Stephen M. Gagliardi George H. Johnson President, Chief Executive Officer and Director Director (Principal Executive Officer) /s/John R. Sperlazza /s/Steven D. Martino - ----------------------------------------------- --------------------------------------------- John R. Sperlazza Steven D. Martino Director Senior Vice President /s/William E. Watson /s/Gary Young - ----------------------------------------------- --------------------------------------------- William E. Watson Gary Young Director Director /s/James R. Murphy /s/William B. Chesson - ----------------------------------------------- --------------------------------------------- James R. Murphy William B. Chesson Director Director /s/Stephen M. Magnone - ----------------------------------------------- Stephen M. Magnone Treasurer (Principal Accounting Officer)
EX-13 2 0002.txt EXHIBIT 13 EXHIBIT 13 ADVANCE FINANCIAL BANCORP Corporate Profile Advance Financial Bancorp (the "Company") is a Delaware corporation organized in September 1996 at the direction of Advance Financial Savings Bank (the "Bank") to acquire all of the capital stock that the Bank issued in its conversion from a mutual to a stock form of ownership (the "Conversion"). On December 31, 1996, the Bank completed the Conversion and became a wholly owned subsidiary of the Company. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage provided that the Bank retains a specified amount of its assets in housing-related investments. The Company conducts no significant business or operations of its own other than holding all the outstanding stock of the Bank and investing the Company's portion of the net proceeds obtained in the Conversion. The Bank chartered in 1935 under the name Advance Federal Savings and Loan Association of West Virginia, is a federally chartered stock savings bank headquartered in Wellsburg, West Virginia. The Bank is subject to examination and comprehensive regulation by the Office of Thrift Supervision and its deposits are federally insured by the Savings Association Insurance Fund. The Bank is a member of and owns stock in the Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional banks in the FHLB System. The Bank operates a traditional savings bank business, attracting deposit accounts from the general public and using those deposits, together with other funds, primarily to originate and invest in loans secured by one to four family residential real estate, non-residential real estate and commercial loans. To a lesser extent, the Bank also originates multi-family real estate loans and consumer loans. Stock Market Information The Company's common stock has been traded on the NASDAQ SmallCap Market under the trading symbol of "AFBC" since it commenced trading in January 1997. The following table reflects high and low bid quotations as published by NASDAQ. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.
Dividends Date High ($) Low ($) Declared ($) ---- -------- ------- ------------ July 1, 1998 to September 30, 1998 18.13 13.88 .08 October 1, 1998 to December 31, 1998 14.38 12.63 .08 January 1, 1999 to March 31, 1999 13.50 11.63 .08 April 1, 1999 to June 30, 1999 12.63 10.44 .08 July 1, 1999 to September 30, 1999 12.50 12.00 .10 October 1, 1999 to December 31, 1999 13.75 11.63 .10 January 1, 2000 to March 31, 2000 13.50 10.00 .10 April 1, 2000 to June 30, 2000 11.00 9.00 .10
The number of stockholders of record of common stock as of the record date of August 31, 2000, was approximately 452. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. At August 31, 2000, there were 932,285 shares outstanding. The Company's ability to pay dividends to stockholders is dependent upon the dividends it receives from the Bank. The Bank may not declare or pay a cash dividend on any of its stock if the effect thereof would cause the Bank's regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with the conversion, or (2) the regulatory capital requirements imposed by the OTS. Selected Financial Ratios and Other Data For the Years Ended June 30 -------------------- 2000 % 1999 % -------------------- Return on average assets (net income divided by average total assets) .63 .64 Return on average equity (net income divided by average equity) 6.01 5.22 Average equity to average assets ratio (average equity divided by average assets) 10.53 12.34 Equity to assets at period end 10.37 11.54 Net interest spread 3.25 3.30 Dividend payout ratio 37.78 37.02 Net yield on average interest-earning assets 3.71 3.81 Non-performing loans to total assets .34 .59 Non-performing loans to total loans .41 .70 Allowance for loan losses to non-performing assets 74.06 70.67 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, Year 2000 issues and general economic conditions. Advance Financial Bancorp (the "Company") undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview The Company conducts no significant business or operations of its own other than holding all of the outstanding stock of Advance Financial Savings Bank (the "Bank"). The Company's results from operations are primarily dependent on its net interest income, which is the difference between the interest earned on its assets, primarily loans and investments, and the interest expense on its liabilities, primarily deposits and borrowings. Net interest income may be affected significantly by general economic and competitive conditions and policies of regulatory agencies, particularly those with respect to market interest rates. The results of operations are also significantly influenced by the level of noninterest expenses, such as compensation and employee benefits, noninterest income, such as service charges on deposit related services, and the Company's provision for loan losses. Asset and Liability Management The Company's net interest income is sensitive to changes in interest rates, as the rates paid on interest-bearing liabilities generally change faster than the rates earned on interest-earning assets. As a result, net interest income will frequently decline in periods of rising interest rates and increase in periods of decreasing interest rates. To mitigate the impact of changing interest rates on net interest income, the Company manages interest rate sensitivity and asset/liability products through an asset/liability management committee (the "Committee"). The Committee meets as necessary to determine the rates of interest for loans and deposits. Rates on deposits are primarily based on the Company's need for funds and on a review of rates offered by other financial institutions in the Company's market area. Interest rates on loans are primarily based on the interest rates offered by other financial institutions in the Company's market area, as well as, the Company's cost of funds. The Committee manages the imbalance between its interest-earning assets and interest-bearing liabilities through the determination and adjustment of asset/liability composition and pricing strategies. The Committee then monitors the impact of the interest rate risk and earnings consequences of such strategies for consistency with the Company's liquidity needs, growth and capital adequacy. The Committee's principal strategy is to reduce the interest rate sensitivity of interest-earning assets and attempt to match the maturities of interest-earning assets with interest-bearing liabilities, while allowing for a mismatch in an attempt to increase net interest income. In an effort to reduce interest rate risk and protect itself from the negative effects of rapid or prolonged changes in interest rates, the Company has also instituted certain asset and liability management measures, including underwriting long-term fixed rate loans that are saleable in the secondary market, offering longer term deposit products and diversifying the loan portfolio into shorter term consumer and commercial business loans. In addition, the Company originates one year, three-year and five year adjustable rate mortgage loans. 7 Net Portfolio Value The Company computes amounts by which the net present value of cash flow assets, liabilities and off balance sheet items ("NPV") would change in the event of a range of assumed changes in market interest rates. The computations estimate the effect on the Company's NPV from instantaneous and permanent 1% to 3% (100 to 300 basis points) increases or decreases in market interest rates. Based upon the Office of Thrift Supervision assumptions, the following table presents the Company's NPV at June 30, 2000. Changes in rates NPV Ratio (1) Change(2) ---------------- ------------- --------- +300 bp 9.14 % (279) bp +200 bp 10.39 (154) bp +100 bp 11.42 ( 51) bp 0 bp 11.93 -100 bp 12.11 18 bp -200 bp 11.58 ( 35) bp -300 bp 11.22 ( 71) bp (1) Calculated as the estimated NPV divided by present value of total assets. (2) Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates. These calculations indicate that the Company's NPV could not only be adversely affected by increases in interest rates but also could be adversely affected by a decrease in interest rates of 200 or 300 basis points. In addition, the Company may be deemed to have more than a normal level of interest rate risk under applicable regulatory capital requirements. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in such computations. Although certain assets and liabilities may have similar maturity or periods of repricing they may react at different times and in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable rate mortgages, generally have features, which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making calculations set forth above. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. 8 Average Balance Sheet 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.
Year Ended June 30, Month Ended June 30, ---------------------------------------------------------------- ----------------------- 2000 1999 2000 ------------------------------ ------------------------------- ----------------------- Average Average Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost -------- -------- ---------- -------- -------- ---------- --------- ----------- Interest-earning assets: Loans receivable (1) $116,825 $9,564 8.19% $103,764 $8,517 8.21% $119,718 8.32% Investment securities(2) 13,627 879 6.45% 9,696 554 5.71% 14,516 6.08% Mortgage-backed securities 3,936 256 6.49% 2,031 121 5.95% 3,664 6.73% -------- ------- ------ ------- ------- ------ -------- --------- Total interest- earning assets 134,388 10,699 7.96% 115,491 9,192 7.95% 137,898 8.04% ------- ------ ------- ------ --------- Non-interest-earning assets 7,151 6,286 6,994 -------- ------- -------- Total assets $141,539 121,777 $144,892 ======== ======= ======== Interest-bearing liabilities: Interest-bearing demand deposits $20,630 691 3.35% $19,846 650 3.28% $20,396 3.19% Certificates of deposits 71,005 3,849 5.42% 59,066 3,257 5.51% 75,506 5.53% Savings deposits 16,958 459 2.71% 15,103 404 2.67% 17,640 2.76% FHLB borrowings 12,812 717 5.60% 9,042 486 5.37% 10,250 5.00% -------- ------- ------ ------- ------- ------ -------- --------- Total interest- bearing liabilities 121,405 5,716 4.71% 103,057 4,797 4.65% 123,792 4.70% ------- ------ ------- ------ --------- Non-interest bearing liabilities 5,237 3,693 6,059 -------- ------- -------- Total liabilities 126,642 106,750 129,851 Stockholders' equity 14,897 15,027 15,041 -------- ------- -------- Total liabilities and stockholders' equity $141,539 $121,777 $144,892 ======== ======= ======== Net interest income $4,983 $4,395 ====== ====== Interest rate spread (3) 3.25% 3.30% 3.34% ====== ======= ====== Net Yield on interest- earning assets (4) 3.71% 3.81% 3.81% ====== ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 110.69% 112.07% 111.39% ====== ====== ======
- -------------- (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. 9 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 (changes in average volume multiplied by old rate) and (ii ) changes in rate (changes in rate multiplied by old average volume). Changes, which are 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.
Year Ended June 30, ---------------------------- 2000 vs 1999 ---------------------------- Increase (Decrease) Due to ---------------------------- Volume Rate Net ---------------------------- (Dollars in Thousands) Interest Income: Loans receivable $1,062 $(15) $1,047 Investment securities 311 15 326 Mortgage-backed securities 134 1 135 ---------------------------- Total interest-earning assets 1,507 1 1,508 ---------------------------- Interest Expense: Interest-bearing demand deposits 26 16 42 Certificates of Deposit 621 (30) 591 Savings Deposits 50 5 55 FHLB borrowings 211 20 231 ---------------------------- Total interest-bearing liabilities 908 11 919 ---------------------------- Net change in interest income $599 $(10) $589 ============================
Comparison of Financial Condition The Company's total assets increased approximately $15,338,000, or 11.81%, to $145,264,000 at June 30, 2000, from $129,927,000 at June 30, 1999. At June 30, 2000, deposits and Federal Home Loan Bank ("FHLB") advances increased $13,592,000 and $1,500,000, respectively. These increases were used to fund loan demand and to purchase investment securities. Total cash and cash equivalents increased by $1,392,000 to $5,752,000 at June 30, 2000 from $4,360,000 at June 30, 1999. This additional liquidity enables the Company's management to help manage interest rate risk in the current interest rate environment by being less dependent on outside funding to meet loan demand. Investment securities available for sale increased by $3,753,000 to $8,235,000 at June 30, 2000 from $4,481,000 at June 30, 1999. This increase includes approximately $1,470,000 in three FHLB bonds with callable options ranging from 3 months to 6 months and an effective weighted average interest rate of 7.11%. The funding for these bonds came from the strong deposit growth. The increase also includes the purchase of a $2,500,000 15-year FHLB bond in August 1999 with a callable option of one year and effective interest yield of 8.1%. The funding for this bond came from a FHLB advance that matured in August 2000 and had an effective cost of funds of 5.94%. Currently, management has elected to replace the short term funding for this bond by using $1,000,000 of current liquidity and using $1,500,000 from the Company's Line of Credit at the FHLB. The cost of funding with the Line of Credit ranges from 6.5% to 6.8%, currently. Management has classified these investments as available for sale for liquidity purposes while maximizing interest yields in excess of the federal overnight rates paid on interest-bearing demand deposits. 10 Net loans receivable increased $9,822,000 to $119,721,000 at June 30, 2000 from $109,900,000 at June 30, 1999. The net increase was spread over the entire portfolio. Loans secured by 1-4 family residences increased $2,490,000 due to demand of ARMs and the bank's "no fee" Equity Line of Credit program. The Bank's "no fee" program ended during November 1999. Multi-family residential loans and non-residential real estate loans increased by $2,780,000 and $1,328,000, respectively, due to the strong demand for the Company's competitively priced ARM products. Construction loans increased $1,169,000 due to the Company's competitive loan product. Automobile loans increased $2,255,000 of which $1,944,000 were "dealer loans" written by automobile dealership customers of the Company. The funding for the loan growth was provided primarily by an increase in deposits. Deposits increased by $13,592,000 or 12.90% to $118,931,000 at June 30, 2000 from $105,339,000 at June 30, 1999. Within the deposit line item, certificates of deposit increased by $12,295,000 to $76,012,000 at June 30, 2000 from $63,716,000 at June 30, 1999. This increase is primarily the result of four certificate of deposit specials. The first was called "Advantage 2000", this certificate of deposit offered above market rates on certificates of deposit at 5.25% for 12 months and 5.50% for 18 months. The "advantage" of this product was that the customers had a 10-day option at the end of 1999 to redeem the certificate with no penalty. This successful special was offered from June 1999 to September 20, 1999. During the ten day option period of 1999, the Company had approximately $2,350,000 of the "Advantage 2000" certificates redeemed without penalty which was approximately 35% of the total amount deposited in the certificate product. The Company was able to retain all but approximately $330,000 of the redeemed certificates with customers generally transferring the funds into another of the certificate products called "Fives are Wild", this certificate special offered above market interest rates on certificates of deposit of 5.55% for five months, 5.75% for ten months, 6.0% for 15 or 18 months, and 6.07% for 21 months. The "Fives are Wild" special began in mid October and ended on March 29, 2000. In mid January of 2000, the Company offered a third certificate of deposit special that paid above market interest rates of 6% for 6 months, 6.25% for 12 months, 6.35% for 24 months and 6.89% for 36 months. As with previous specials, this special was well received by the area consumers. This special ended on March 29, 2000, as well. The fourth and final special offered by the Company offered above market interest rates on certificates of deposit of 6.1% for seven months, 6.5% for eleven months, 6.85% for 13 months and 7% for 19 months. This special was well received by area consumers and more specifically to current customers, as it has helped the Company in retaining matured deposits from previous specials. This special began in early April 2000 and is currently still being offered. We believe, though there is no assurance, that we can retain the growth in our certificate of deposit accounts. Savings deposits increased $1,271,000 while demand deposits increased $25,000 for the one-year period. The demand deposit increase was primarily the net result of an increase in non-interest bearing deposits of $1,320,000, and a decrease in NOW and money market deposits of $1,253,000 and $41,000, respectively. Advances from the FHLB increased by $1,500,000 to $10,500,000 at June 30, 2000 from $9,000,000 at June 30, 1999. This is a net increase involving multiple transactions. The first transaction was to add a $2,500,000 advance with a weighted average rate of 5.94% that has a one-year maturity of August of 2000. The proceeds of this advance were used to purchase a FHLB bond described above under investment securities. The second transaction was to increase an existing $1,000,000 callable advance to $3,000,000 with a weighted average rate of 5.52% that has an initial call date in October 2001. The additional $2,000,000 in proceeds from this advance were used to fund a three year adjustable rate mortgage loan originated in October 1999. The third transaction was to not renew a $3,000,000 advance that was called in June 2000 due to the Company's liquidity position. In addition to the increases and changes to advances from the FHLB discussed above, during the quarter ended December 31, 1999, the FHLB called all three outstanding advances at June 30, 1999, amounting to $9,000,000. The Company elected to renew these advances at the proposed higher rates offered by the FHLB. The new weighted average rate of the renewed $9,000,000 in advances increased to 5.63% from 5.37% prior to the calls. In June 2000, one of these advances for $3,000,000 was called again, and the company elected not to renew the funds as discussed above. Stockholders equity increased $75,000 to $15,068,000 at June 30, 2000 from $14,993,000 at June 30, 1999. Through June 30, 2000, the Company initiated the payment of dividends of $.40 per share, while maintaining capital ratios well in excess of regulatory guidelines. The Board of Directors will determine future dividend policies in light of earnings and financial condition of the Company, including applicable governmental regulations and policies. 11 Comparison of the Results of Operations for the Years Ended June 30, 2000 and 1999 Net Interest Income. The Company's net interest income increased $588,000, or 13.39%, to $4,983,000 for the year ended June 30, 2000 from $4,394,000 for the same period ended 1999. 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 decreased to 3.25% for the period ended June 30, 2000 from 3.30% for the same period ended 1999. The average yield on interest earning assets increased 1 basis point to 7.96% at June 30, 2000 from 7.95% for the comparable period ended 1999. The average cost of funds increased 6 basis points to 4.71% for the year ended June 30, 2000 from 4.65% for the comparable period ended 1999. Interest and Dividend Income. Total interest and dividend income increased $1,507,000, or 16.40%, to $10,699,000 for the year ended June 30, 2000 from $9,192,000 for the comparable 1999 period. The increase was primarily due to an increase in earnings on loans of $1,047,000 as the average principle balance increased $13,061,000 to $116,825,000 at June 30, 2000 from $103,764,000 for the comparable 1999 period. Interest and dividend income on investments and interest bearing deposits with other financial institutions increased approximately $460,000 as average principle balances increased $5,836,000 to $17,563,000 at June 30, 2000 from $11,727,000 for the comparable 1999 period. See Average Balance Sheet Table included herein for additional detail. Interest Expense. Total interest expense increased $919,000 or 19.15% to $5,716,000 for the year ended June 30, 2000 compared to $4,797,000 for the same period ended 1999. The increase was primarily due to an increase in interest on deposits of $688,000 as the average balance increased $14,577,000 to $108,593,000 for the year ended June 30, 2000 from $94,015,000 for the comparable 1999 period. Interest expense on advances increased $231,000 as the average balance increased $3,770,000 to $12,812,000 for the year ended June 30, 2000 from $9,042,000 for the comparable 1999 period. See Average Balance Sheet included herein for additional detail. Provision for Loan Losses. For the year ended June 30, 2000, the provision for loan losses was $175,000 as compared to $150,000 for the comparable 1999 period. Net charge-offs for the period ended June 30, 2000 were $75,000 compared to $45,000 for the comparable 1999 period. Management continually evaluates the adequacy of the allowance for loan losses, which encompasses the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. While the loan mix has changed slightly over the past two years, management believes that the underlying collateral supporting such loans provides adequate coverage. The Company maintains a desirable level in its loan loss provisions based upon the Company's review of the market, loan portfolio, and overall assessment of the adequacy of the valuation allowance. There can be no assurance, however, that additional provisions will not be required in future periods. Noninterest Income. Noninterest income decreased $44,000, or 5.88%, to $705,000 for the year ended June 30, 2000 compared to $749,000 for the same period ended 1999. For the year ended June 30, 2000, gains on sales of fixed rate mortgages and related servicing rights decreased by $164,000. These decreases are due to the lack of demand of fixed rate mortgages as a result of the changing interest rate environment during the year ended June 30, 2000 in comparison to the rate environment during the same period ended 1999. Offsetting these decreases for the year ended June 30, 2000 are increases in service charges on deposit accounts of $64,000 and ATM and Consumer Card income of $35,000 and $19,000, respectively. These increases are due primarily to increased customer activity. Noninterest Expense. Noninterest expense increased $312,000, or 8.36%, to $4,040,000 for the year ended June 30, 2000 from $3,728,000 for the same period ended 1999. Compensation and benefits increased $192,000, or 11.03%, due to the hiring of additional employees for loan collection, accounting and data processing, as well as, additional costs of living increases for all full time employees. Occupancy and equipment increased $89,000, or 15.11%, due primarily to the incurrence of real estate taxes for the Wintersville branch of $18,000 and an increase in combined equipment depreciation and maintenance of $61,000. Professional fees decreased by $34,000 primarily due to the preparation of regulatory reports internally that were previously outsourced. Data processing charges decreased $41,000 due to the conversion to in-house item processing in January 2000. The decrease in data processing is offset by similar increases in "occupancy and equipment" for depreciation and maintenance and in "other expenses" for supplies and postage, which increased $32,000. Anticipated future decreases in data processing will be offset by similar increases in similar expense line items. Other expenses increased $118,000 due primarily to, supplies and postage as discussed above, additional Ohio franchise tax due to the Wintersville branch of $41,000, and increases for ATM and Consumer Card expense of $20,000 and $22,000, respectively. Income Taxes. Income tax expense increased $96,000 to $578,000 for the year ended June 30, 2000 compared to $482,000 for the same period ended 1999. The effective tax rate for income taxes as of the years ended June 30, 2000 and 1999 was 39% and 38%, respectively. 12 Liquidity and Capital Resources. The Company's primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, funds provided from operations and advances from the FHLB of Pittsburgh. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predicable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions, and competition. The Company uses its resources primarily to fund existing and future loan commitments, maturing certificates of deposit and demand deposit withdraws, investments in other interest-bearing assets, maintenance of necessary liquidity, and to meet operating expenses. Net cash provided by operating activities decreased $1,132,000 to $1,689,000 for the year ended June 30, 2000 compared to $2,821,000 for the same period ended 1999. This decrease was mainly the result of a decline in the net fixed rate mortgage loans made and sold as a result of the current interest rate environment for the period ended June 30, 2000 in comparison to the interest rate environment for the comparable 1999 period. Net proceeds from the sale of loans for the period ended June 30, 2000 were $9,000 in comparison to $1,548,000 for the comparable period ended 1999. Net cash used for investing activities for the year ended June 30, 2000 decreased $7,969,000 to $14,451,000 from $22,420,000 for the year ended June 30, 1999. This decrease was attributable to a decrease in lending and investing activity of $4,105,000 and $3,890,000, respectively. The decrease in lending activity is a direct result of the current interest rate environment in comparison to the interest rate environment for the prior period. The decrease in investing activity is a result of the Company reducing excess liquidity in the prior period. Net cash provided by financing activities for the year ended June 30, 2000 decreased $721,000 to $14,154,000 from $14,875,000 for the same period ended 1999. The decease was primarily a result of a decrease in net deposits of $3,195,000 offset by an increase in net FHLB advances of $2,500,000. Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, adverse publicity relating to the savings and loan industry and similar matters. Management monitors projected liquidity needs and determines the level desirable based in part on the Company's commitments to make loans and management's assessment of the Bank's ability to generate funds. 13 SNODGRASS Certified Public Accountants and Consultants [LOGO] Report of Independent Auditors Board of Directors and Stockholders Advance Financial Bancorp We have audited the accompanying consolidated balance sheet of Advance Financial Bancorp and subsidiary as of June 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advance Financial Bancorp and subsidiary as of June 30, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/S.R. Snodgrass, A.C. Steubenville, Ohio August 3, 2000 14
S.R. Snodgrass, A.C. 626 North Fourth Street Steubenville, OH 43952-1982 Phone: 740-282-2771 Facsimile: 740-282-1606
ADVANCE FINANCIAL BANCORP CONSOLIDATED BALANCE SHEET
June 30, 2000 1999 --------------- --------------- ASSETS Cash and cash equivalents: Cash and amounts due from banks $ 1,109,746 $ 1,395,704 Interest-bearing deposits with other institutions 4,641,878 2,964,166 ------------ ------------ Total cash and cash equivalents 5,751,624 4,359,870 ------------ ------------ Investment securities: Securities held to maturity (fair value of $1,187,625 and $ 970,914) 1,249,672 999,896 Securities available for sale 8,234,637 4,481,475 ------------ ------------ Total investment securities 9,484,309 5,481,371 ------------ ------------ Mortgage-backed securities: Securities held to maturity (fair value of $2,027,016 and $2,456,645) 2,089,010 2,472,681 Securities available for sale 1,556,172 1,832,845 ------------ ------------ Total mortgage-backed securities 3,645,182 4,305,526 ------------ ------------ Loans receivable (net of allowance for loan losses of $682,103 and $582,280) 119,721,308 109,899,551 Premises and equipment, net 4,070,295 4,084,793 Federal Home Loan Bank stock, at cost 800,000 629,500 Accrued interest receivable 870,955 664,058 Other assets 920,767 501,967 ------------ ------------ TOTAL ASSETS $145,264,440 $129,926,636 ============ ============ LIABILITIES Deposits $118,930,939 $105,338,770 Advances from Federal Home Loan Bank 10,500,000 9,000,000 Advance payments by borrowers for taxes and insurance 203,320 196,993 Accrued interest payable and other liabilities 561,907 397,421 ------------ ------------ TOTAL LIABILITIES 130,196,166 114,933,184 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.10 par value; authorized 500,000 shares; none issued - - Common stock, $.10 par value, 2,000,000 shares authorized; 1,084,450 shares issued at June 30, 2000 and 1999 108,445 108,445 Additional paid in capital 10,329,885 10,316,719 Retained earnings - substantially restricted 8,181,053 7,623,733 Unallocated shares held by Employee Stock Ownership Plan (ESOP) (510,915) (597,767) Unallocated shares held by Restricted Stock Plan (RSP) (505,849) (682,357) Treasury stock (152,165 and 103,165 shares at cost) (2,233,265) (1,626,890) Accumulated other comprehensive loss (301,080) (148,431) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 15,068,274 14,993,452 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $145,264,440 $129,926,636 ============ ============
See accompanying notes to the consolidated financial statements. 15 ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30, 2000 1999 ------------ ----------- INTEREST AND DIVIDEND INCOME Loans $ 9,563,641 $8,516,921 Investment securities 652,439 188,158 Interest-bearing deposits with other institutions 175,184 325,233 Mortgage-backed securities 255,555 120,688 Federal Home Loan Bank stock 51,781 40,560 ----------- ---------- Total interest and dividend income 10,698,600 9,191,560 ----------- ---------- INTEREST EXPENSE Deposits 4,998,754 4,311,105 Advances from Federal Home Loan Bank 717,212 486,141 ----------- ---------- Total interest expense 5,715,966 4,797,246 ----------- ---------- NET INTEREST INCOME 4,982,634 4,394,314 Provision for loan losses 174,600 150,000 ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,808,034 4,244,314 ----------- ---------- NONINTEREST INCOME Service charges on deposit accounts 438,984 374,831 Gain on sale of loans 8,957 92,909 Gain on sale of investments - 13,745 Other income 257,162 267,703 ----------- ---------- Total noninterest income 705,103 749,188 ----------- ---------- NONINTEREST EXPENSE Compensation and employee benefits 1,936,149 1,743,773 Occupancy and equipment 677,675 588,702 Professional fees 108,979 143,285 Advertising 107,770 120,726 Data processing 299,306 340,113 Other operating expenses 909,622 791,151 ----------- ---------- Total noninterest expense 4,039,501 3,727,750 ----------- ---------- Income before income taxes 1,473,636 1,265,752 Income taxes 577,876 481,925 ----------- ---------- NET INCOME $ 895,760 $ 783,827 =========== ========== EARNINGS PER SHARE: Basic $ 1.01 $ .83 Diluted $ 1.01 $ .83
See accompanying notes to the consolidated financial statements. 16 ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Accumulated Additional Earnings Unallocated Unallocated Other Total Common Paid In Substantially Shares Held Shares Held Treasury Comprehensive Stockholders' Stock Capital Restricted By ESOP By RSP Stock Loss Equity -------- ---------- ------------- ----------- ----------- ----------- ------------- ------------- Balance, June 30, 1998 $108,445 $10,288,928 $7,130,056 $(715,158) $(869,636) $(1,000,863) $(13,650) $14,928,122 Comprehensive income: Net income 783,827 783,827 Net unrealized loss on securities, net of reclassification adjustment, net of tax benefit of $64,759 (134,781) (134,781) ----------- Comprehensive income 649,046 Purchase of treasury stock (626,027) (626,027) Accrued compensation expense for RSP 201,881 201,881 RSP forfeited shares (14,602) (14,602) Release of earned ESOP shares 27,791 117,391 145,182 Cash dividends declared ($.32 per share) (290,150) (290,150) -------- ----------- ---------- --------- --------- ----------- --------- ----------- Balance, June 30, 1999 108,445 10,316,719 7,623,733 (597,767) (682,357) (1,626,890) (148,431) 14,993,452 Comprehensive income: Net income 895,760 895,760 Net unrealized loss on securities, net of tax benefit of $78,637 (152,649) (152,649) ----------- Comprehensive income 743,111 Purchase of treasury stock (606,375) (606,375) Accrued compensation expense for RSP 197,591 197,591 RSP forfeited shares (21,083) (21,083) Release of earned ESOP shares 13,166 86,852 100,018 Cash dividends declared ($.40 per share) (338,440) (338,440) -------- ----------- ---------- --------- --------- ----------- --------- ----------- Balance, June 30, 2000 $108,445 $10,329,885 $8,181,053 $(510,915) $(505,849) $(2,233,265) $(301,080) $15,068,274 ======== =========== ========== ========= ========= =========== ========= ===========
See accompanying notes to the consolidated financial statements. 17 ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30, 2000 1999 --------------- --------------- OPERATING ACTIVITIES Net income $ 895,760 $ 783,827 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 560,757 423,127 Provision for loan losses 174,600 150,000 Gain on sale of investments - (13,745) Gain on sale of loans (8,957) (92,909) Origination of loans held for sale (2,297,188) (8,658,980) Proceeds from the sale of loans 2,306,145 10,206,589 Increase in accrued interest receivable (206,897) (46,078) Increase in accrued interest payable 138,151 3,644 Other, net 126,392 65,687 -------------- ------------- Net cash provided by operating activities 1,688,763 2,821,162 -------------- ------------- INVESTING ACTIVITIES Investment securities held to maturity: Purchases (249,453) (2,987,051) Maturities and repayments - 3,737,988 Investment securities available for sale: Purchases (4,467,656) (4,498,871) Maturities and repayments 506,330 11,440 Proceeds from sale - 139,995 Mortgage-backed securities held to maturity: Purchases - (2,516,658) Maturities and repayments 381,374 380,968 Mortgage-backed securities available for sale: Purchases - (2,046,363) Maturities and repayments 253,257 149,274 Purchases of Federal Home Loan Bank Stock (170,500) (7,300) Net increase in loans (10,353,855) (14,459,354) Purchases of premises and equipment (350,187) (324,250) -------------- ------------- Net cash used for investing activities (14,450,690) (22,420,182) -------------- ------------- FINANCING ACTIVITIES Net increase in deposits 13,592,169 16,787,227 Proceeds of advances from Federal Home Loan Bank 16,000,000 - Repayment of advances from Federal Home Loan Bank (17,000,000) (1,000,000) Net increase in short term advances from Federal Home Loan Bank 2,500,000 - Net change in advances for taxes and insurance 6,327 3,647 Purchase of treasury stock (606,375) (626,027) Cash dividends paid (338,440) (290,150) -------------- ------------- Net cash provided by financing activities 14,153,681 14,874,697 -------------- ------------- Increase (decrease) in cash and cash equivalents 1,391,754 (4,724,323) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,359,870 9,084,193 -------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,751,624 $ 4,359,870 ============== =============
See accompanying notes to the consolidated financial statements 18 ADVANCE FINANCIAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows: Nature of Operations and Basis of Presentation ---------------------------------------------- Advance Financial Bancorp (the "Company") is the holding company of Advance Financial Savings Bank, (the "Bank"). The Bank and its wholly-owned service corporation subsidiary, Advance Financial Service Corporation of West Virginia are wholly-owned subsidiaries of the Company. The Company and its subsidiaries derive substantially all their income from banking and bank-related services which include interest earnings on residential real estate, commercial real estate, and consumer loan financing, as well as interest earnings on investment securities, interest-bearing deposits with other financial institutions, and charges for deposit services to its customers. The Bank is a federally chartered stock savings bank located in Wellsburg, WV. The Company and the Bank are subject to regulation and supervision by the Office of Thrift Supervision. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and its wholly-owned subsidiary, Advance Financial Service Corporation of West Virginia. All material intercompany balances and transactions have been eliminated in consolidation. The Company's fiscal year end for financial reporting is June 30. For regulatory and income tax reporting purposes, the Company reports on a December 31 calendar year basis. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The major accounting policies and practices are summarized below. Investment Securities Including Mortgage-Backed Securities ---------------------------------------------------------- Debt and Equity securities consist of mortgage-backed securities, U.S. Government and federal agency obligations, money funds and common stock. Securities are classified , at the time of purchase based upon management's intention and ability, as available for sale or held to maturity. The company does not hold any securities as trading. Securities classified as held to maturity are stated at cost and adjusted for amortization of premium and accretion of discount, which are computed using a level yield method and are recognized as adjustments of interest income. Securities classified as available for sale are carried at estimated fair value with unrealized holding gains and losses reflected as a separate component of shareholders' equity. Realized gains and losses on the sale of debt and equity securities are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned. Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership in an institution, which is wholly-owned by other financial institutions. This equity security is accounted for at cost and reported separately on the accompanying balance sheet. Loans Held for Sale ------------------- Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance through charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method. At June 30, 2000 and 1999, there were no loans held for sale. 19 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans ----- Loans are stated at unpaid principal balances, less loans in process, net deferred loan fees, and the allowance for loan losses. Interest on loans is credited to income as earned on an accrual basis. Loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan's yield. The Company is amortizing these amounts over the contractual life of the related loans using the interest method. A loan is considered 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, homogeneous 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 a 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 based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of said collateral. Impaired loans or portions thereof, are charged-off when it is determined that a realized loss has occurred. Until such time, an allowance for loan losses is maintained for estimated losses. Cash receipts on impaired loans are applied first to accrued interest receivable, unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan, in which case the portion of the receipts related to interest is recognized as income. Loans considered to be nonperforming include nonaccrual loans, accruing loans delinquent more than 90 days and restructured loans. A loan, including an impaired loan, is classified as nonaccrual when collectability is in doubt. When a loan is placed on nonaccrual status, unpaid interest is reversed and an allowance is established by a charge to income equal to all accrued interest. Income is subsequently recognized only to the extent that cash payments are received. Loans are returned to accrual status when, in management's judgement, the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original terms). Allowance for Loan Losses ------------------------- The allowance for loan losses represents the amount which management estimates is adequate to provide for potential losses in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management's periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term. Real Estate Acquired in Settlement of Loans ------------------------------------------- Real estate acquired in settlement of loans are reported at the lower of cost or fair value at the acquisition date, and subsequently at the lower of its new cost or fair value minus estimated selling costs. Costs represents the unpaid loan balance at the acquisition date plus expenses, when appropriate, incurred to bring the property to a salable condition. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on their disposition are included in other expenses. Premises and Equipment ---------------------- Land is carried at cost; buildings and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed primarily by the straight-line method based upon the estimated useful lives of the assets, which range from five to forty years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. 20 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes ------------ Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period. The Company and its subsidiary file a consolidated income tax return. Earnings per Share ------------------ The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders, adjusted for the effects of any dilutive securities, by the weighted-average number of common shares outstanding, adjusted for the effects of any dilutive securities. Comprehensive Income -------------------- The Company is required to present comprehensive income in a full set of general purpose financial statements for all periods presented. Other comprehensive income (loss) is comprised exclusively of unrealized holding gains (losses) on the available for sale securities portfolio. The Company has elected to report the effects of other comprehensive income (loss) as part of the Statement of Changes in Stockholders' Equity. Cash Flow Information --------------------- The Company has defined cash and cash equivalents as cash on hand, amounts due from depository institutions, and overnight deposits with the Federal Home Loan Bank and the Federal Reserve Bank. Cash payments for interest for the fiscal years ended June 30, 2000 and 1999 were $5,577,815 and $4,793,602, respectively. Cash payments for income taxes for the fiscal years ended June 30, 2000 and 1999 were $501,622 and $468,000, respectively. Stock Options ------------- The Company maintains a stock option plan for the directors, officers, and employees. The stock options typically have expiration terms of ten years subject to certain extensions and early terminations. The per share exercise price of a stock option shall be, at a minimum, equal to the fair value of a share of common stock on the date the option is granted. Because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company's financial statements. If applicable, pro forma net income and earnings per share would be presented to reflect the impact of the stock option plan assuming compensation expense had been effected based on the fair value of the stock options granted under this plan. Recent Accounting Pronouncements -------------------------------- In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral Date of FASB No. 133--and amendment of FASB No. 133." The statement delays the effective date for one year of SFAS No. 133, to fiscal years beginning after June 15, 2000. SFAS No.'s 133 and 137 apply to quarterly and annual financial statements. The Company does not believe that there will be a material impact on its financial condition or results of operation upon adoption of SFAS No. 133. Statement No. 133, precludes a held-to-maturity security from being designated as a hedged item, however, at the date of initial application of this statement, an entity is permitted to transfer any held-to-maturity security into the available-for-sale or trading categories. The unrealized holding gain or loss on such transferred securities shall be reported consistent with the requirements of Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Such transfers do not raise an issue regarding an entity's intent to hold other debt securities to maturity in the future. 21 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Reclassification of Comparative Amounts --------------------------------------- Certain comparative account balances for the prior period have been reclassified to conform to the current period classifications. Such reclassifications did not affect net income. 2. Earnings Per Share ------------------ There were no convertible securities, which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation. 2000 1999 ----------- ----------- Weighted-average common shares outstanding 1,084,450 1,084,450 Average treasury stock shares (132,011) (65,310) Average unearned ESOP and RSP shares (62,054) (72,564) --------- --------- Weighted -average common shares and common stock equivalents used to calculate basic earnings per share 890,385 946,576 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 890,385 946,576 ========= ========= 22 3. INVESTMENT SECURITIES The amortized cost and estimated market value of investments are as follows:
2000 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ----------- ----------- Held-to-maturity ---------------- U.S. Government and Agency Obligations $1,249,672 $ - $ (62,047) $1,187,625 ---------- ----------- ---------- ---------- Available-for-sale ------------------ U.S. Government and Agency Obligations 8,469,628 - (341,201) 8,128,427 Common stocks 105,625 - (25,625) 80,000 Money Fund Securities 34,026 - (7,816) 26,210 ---------- ----------------------- ---------- Total available for sale 8,609,279 - (374,642) 8,234,637 ---------- ----------- ----------- ---------- Total Investment Securities $9,858,951 $ - $(436,689) $9,422,262 ========== =========== ========== ==========
1999 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ----------- ----------- Held-to-maturity ---------------- U.S. Government and Agency Obligations $ 999,896 $ - $(28,982) $ 970,914 ---------- ----------- -------- ----------- Available-for-sale ------------------ U.S. Government and Agency Obligations 4,498,042 - (136,664) 4,361,378 Common stocks 105,625 - (16,875) 88,750 Money Fund Securities 40,682 - (9,335) 31,347 ---------- ----------- ---------- ---------- Total available for sale 4,644,349 - (162,874) 4,481,475 ---------- ----------- ---------- ---------- Total Investment Securities $5,644,245 $ - $(191,856) $5,452,389 ========== =========== ========== ==========
The weighted average interest rate on investment securities was 6.95% and 6.58% at June 30, 2000 and 1999, respectively. The amortized cost and estimated fair value of debt securities at June 30, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties. Amortized Fair Cost Value ----------- ----------- One year or less $ - $ - After one through five years 3,719,540 3,628,450 After five through ten years 1,500,000 1,415,999 After ten years 4,499,760 4,271,603 ---------- ---------- Total $9,719,300 $9,316,052 ========== ========== Proceeds received on securities as a result of sales and calls prior to maturity were $500,000 and $139,995 for the years ended June 30, 2000 and 1999, respectively. Gains on sales were $0 and $13,745 for the years ended June 30, 2000 and 1999, respectively. No losses on sales were realized during either year ended June 30, 2000 and 1999. 23 4. MORTGAGE-BACKED SECURITIES The amortized cost and estimated market value of mortgage-backed securities are as follows:
2000 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ----------- ------------ Held-to-maturity ---------------- Government National Mortgage Association $ 579,864 $ 3,017 $ (5,320) $ 577,561 Federal Home Loan Mortgage Corporation 131,343 7,922 - 139,265 Federal National Mortgage Association 1,377,803 - (67,613) 1,310,190 ---------- ---------- --------- ----------- Total held to maturity 2,089,010 10,939 (72,933) 2,027,016 ---------- ---------- --------- ----------- Available-for-sale ------------------ Government National Mortgage Association 1,223,787 - (61,487) 1,162,300 Federal National Mortgage Association 413,923 - (20,051) 393,872 ----------- ---------- --------- ----------- Total available for sale 1,637,710 - (81,538) 1,556,172 ---------- ---------- --------- ----------- Total Mortgage backed securities $3,726,720 $ 10,939 $(154,471) $3,583,188 ========== ========== ========= ===========
1999 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ----------- ------------ Held-to-maturity ---------------- Government National Mortgage Association $ 837,676 $ 7,701 $ (2,465) $ 842,912 Federal Home Loan Mortgage Corporation 133,581 9,893 - 143,474 Federal National Mortgage Association 1,501,424 - (31,165) 1,470,259 ---------- --------- ----------- ---------- Total held to maturity 2,472,681 17,594 (33,630) 2,456,645 ---------- --------- ----------- ---------- Available-for-sale ------------------ Government National Mortgage Association 1,413,784 - (48,958) 1,364,826 Federal National Mortgage Association 481,081 - (13,062) 468,019 ---------- --------- ----------- ---------- Total available for sale 1,894,865 - (62,020) 1,832,845 ---------- --------- ----------- ---------- Total Mortgage backed securities $4,367,546 $ 17,594 $ (95,650) $4,289,490 ========== ========= ========== ==========
Mortgage-backed securities provide for periodic, generally monthly payments of principal and interest and have contractual maturities ranging from ten to thirty years at June 30, 2000. However, due to expected repayment terms being significantly less than the underlying mortgage loan pool contractual maturities, the estimated lives of these securities could be significantly shorter. As of June 30, 2000, mortgage-backed securities with a book value of $476,741 and a fair value of $471,421 are one year adjustable types currently paying 7.125%. The remaining instruments are all fixed rate types ranging from 6.25% to 10%. Certain instruments have been classified as available for sale based upon management's' evaluation of liquidity needs while optimizing return at the time of purchase. There were no sales of mortgage-backed securities for either period ended June 30, 2000 or 1999. 24 5. LOANS RECEIVABLE Loans receivable are comprised of the following at June 30: 2000 1999 ------------ ------------- Mortgage loans: 1 - 4 family $ 62,163,992 $ 59,673,803 Multi-family 5,469,906 2,689,531 Non-residential 24,543,795 23,216,018 Construction 3,241,801 2,073,165 ------------ ------------ Total mortgage loans 95,419,494 87,652,517 ------------ ------------ Consumer loans: Home improvement 1,439,387 1,195,518 Automobile 10,903,416 8,647,953 Share loans 1,406,328 1,360,054 Other 2,675,498 2,384,401 ------------ ------------ Total consumer loans 16,424,629 13,587,926 ------------ ------------ Commercial loans 10,500,256 10,387,570 ------------ ------------ Less: Loans in process 1,812,877 1,006,813 Net deferred loan fees 128,091 139,369 Allowance for loan losses 682,103 582,280 ------------ ------------ 2,623,071 1,728,462 ------------ ------------ Total loans $119,721,308 $109,899,551 ============ ============ Single family mortgage loans serviced for Freddie Mac, which are not included in the Consolidated Balance Sheet, totaled $19,682,946 and $19,040,615 at June 30, 2000 and 1999, respectively. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of financial condition. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. No losses are anticipated by management as a result of these commitments. The following represents financial instruments whose contract amounts represent credit risk at June 30: 2000 1999 ------------ ------------ Commitments to originate loans Fixed rate $ 119,000 $ 637,060 Variable rate $ 163,962 $ 1,467,300 Loans in process $ 1,812,877 $ 1,006,813 Unused lines of credit $ 6,734,552 $ 7,456,372 Letters of credit $ 55,000 $ 22,500 The range of interest rates on fixed rate loan commitments was 8.375% to 8.50% at June 30, 2000. 25 5. LOANS RECEIVABLE (Continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally expire within 30 days or have other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held consists primarily of single-family residences and income-producing commercial properties. In the normal course of business, loans are extended to directors, executive officers and their associates. A summary of loan activity for those directors, executive officers, and their associates with loan balances in excess of $60,000 for the year ended June 30, 2000 is as follows: Balance Amount Balance 1999 Additions Collected 2000 ---------- ----------- --------- ---------- $1,704,024 $14,500 $223,236 $1,495,288 The Company's primary business activity is with customers located within its local trade area. Residential, consumer, and commercial loans are granted. The Company also selectively funds loans originated outside of its trade area provided such loans meet its credit policy guidelines. Although the Company has a diversified loan portfolio, at June 30, 2000 and 1999, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area. 6. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses for the years ended June 30 is summarized as follows: 2000 1999 -------- -------- Balance, beginning of period $582,280 $477,654 Add: Provisions charged to operations 174,600 150,000 Loan recoveries 4,273 1,529 -------- -------- Total 761,153 629,183 Less: loans charged off 79,050 46,903 -------- -------- Balance, end of period $682,103 $582,280 ======== ======== Nonperforming loans totaled $484,195 and $765,126 at June 30, 2000 and 1999 respectively. At June 30, 2000, the company had no loans that met the definition of impaired. At June 30, 1999, the total investment in impaired loans was $385,922. The entire $385,922 was subject to a specific allowance for loan losses of $25,468. The average investment in impaired loans during the year ended June 30, 1999 was $377,753, and interest income recognized during the year was $12,315. The interest income potential based upon the original term of the contracts on these impaired loans was $31,313 for the year ended June 30, 1999. 26 7. PREMISES AND EQUIPMENT, NET Premises and equipment are summarized by major classification as follows: 2000 1999 ---------- ---------- Land $ 303,857 $ 303,857 Buildings and improvements 3,421,642 3,409,515 Furniture, fixtures, and equipment 2,210,790 1,909,094 ---------- ---------- Total 5,936,289 5,622,466 Less accumulated depreciation 1,865,994 1,537,673 ---------- ---------- Premises and equipment, net $4,070,295 $4,084,793 ========== ========== Depreciation charged to operations amounted to $364,686 and $322,314 for the years ended June 30, 2000 and 1999, respectively. 8. FEDERAL HOME LOAN BANK STOCK The Bank is a member of the Federal Home Loan Bank System. As a member, the Bank maintains an investment in the capital stock of the Federal Home Loan Bank of Pittsburgh, at cost, in an amount not less than the greater of 1% of its outstanding home loans or 5% of its outstanding borrowings to the Federal Home Loan Bank of Pittsburgh as calculated at December 31 of each year. 9. ACCRUED INTEREST RECEIVABLE Accrued interest receivable consists of the following: 2000 1999 ---------- ---------- Investment securities $160,874 $ 43,509 Mortgage-backed securities 18,991 28,741 Loans receivable 691,090 591,808 -------- -------- Total $870,955 $664,058 ======== ======== 10. DEPOSITS Deposit accounts are summarized as follows:
2000 1999 ----------------------------- --------------------------- Percent of Percent of Amount Portfolio Amount Portfolio ------------ ---------- ------------ ---------- Non-interest-bearing $ 5,054,410 4.3% $ 3,734,867 3.6% ------------ ----- ------------ ----- Savings accounts 17,651,027 14.8 16,379,596 15.6 NOW accounts 7,807,308 6.6 9,060,464 8.6 Money market accounts 12,406,664 10.4 12,447,642 11.8 ------------ ----- ------------ ----- 37,864,999 31.8 37,887,702 36.0 ------------ ----- ------------ ----- Time certificates of deposit: 2.00 - 4.00% 2,101,639 1.8 2,260,291 2.1 4.01 - 6.00% 42,621,436 35.8 45,841,219 43.5 6.01 - 8.00% 31,288,455 26.3 15,614,691 14.8 ------------ ----- ------------ ----- 76,011,530 63.9 63,716,201 60.4 ------------ ----- ------------ ----- Total $118,930,939 100.0% $105,338,770 100.0% ============ ===== ============ =====
27 10. DEPOSITS (CONTINUED) The scheduled maturities of time certificates of deposit at June 30, 2000 are as follows: Amount ------------- Within one year $49,095,230 Beyond one year but within two years 15,681,607 Beyond two years but within three years 8,277,541 Beyond three years but within five years 2,382,553 Beyond five years 574,599 ----------- Total $76,011,530 =========== The Company had time certificates with a minimum denomination of $100,000 in the amount of approximately $6,685,503 and $7,258,263 at June 30, 2000 and 1999, respectively. Deposits in excess of $100,000 are not federally insured. The Company does not have any brokered deposits. Interest expense by deposit category for the years ended June 30 is as follows: 2000 1999 ------------ ----------- Passbooks $ 458,723 $ 404,099 NOW and Money Market Deposit accounts 690,941 649,652 Time certificates 3,849,090 3,257,354 ---------- --------- $4,998,754 $4,311,105 ========== ========== 11. ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank consists of the following: Principal Interest Interest Due Due Rate 2000 1999 ----------- -------- -------- ------------ ---------- Advance 08-03-2000 Annually 5.94% $ 2,500,000 $ - Advance 06-30-2005 Monthly 6.36% 5,000,000 - Advance 10-22-2009 Monthly 5.52% 3,000,000 - Advance 03-25-2002 Monthly 5.51% - 3,000,000 Advance 11-04-2002 Monthly 5.37% - 5,000,000 Advance 01-23-2008 Monthly 4.94% - 1,000,000 ------------ ---------- $10,500,000 $9,000,000 =========== ========== These borrowings are subject to the terms and conditions of the Advances, Collateral Pledge and Security Agreement between the Federal Home Loan Bank of Pittsburgh and the Bank. All advances have fixed rates with putable options with the exception of the advance due August 3, 2000, that has no putable option. In addition, the Bank entered into a "RepoPlus" Advance credit arrangement, which is renewable annually and incurs no service charges. During 2000, the Bank had a borrowing limit of approximately $62 million with a variable rate of interest, based upon the FHLB's cost of funds. All borrowings from the FHLB are secured by a blanket lien on qualified collateral, defined principally as investment securities and mortgage loans which are owned by the Bank free and clear of any liens or encumbrances. 28 12. INCOME TAXES The components of income tax expense for the years ended June 30 are summarized as follows: 2000 1999 ---------- --------- Currently payable: Federal $531,869 $410,461 State 85,531 59,453 -------- -------- 617,400 469,914 Deferred (39,524) 12,011 ---------- --------- Total $577,876 $481,925 ======== ======== The following temporary differences gave rise to deferred tax asset and liabilities: 2000 1999 ---------- ---------- Deferred tax assets Allowance for loan losses $ 231,915 $ 197,975 Loan origination fees, net 16,773 21,520 Net unrealized loss on securities 155,101 76,464 Other, net 10,241 10,241 ---------- ---------- Deferred tax assets 414,030 306,200 ---------- ---------- Deferred tax liabilities Premise and equipment depreciation 253,176 235,712 Tax reserve for loan losses 64,261 91,802 Other, net 54,613 54,867 ---------- ---------- Deferred tax liabilities 372,050 382,381 ---------- ---------- Net deferred tax asset (liability) $ 41,980 $ (76,181) ---------- ----------- On August 20, 1996, the Small Business Job Protection Act (the "Act") was signed into law. The Act eliminated the percentage of taxable income bad debt deduction for thrift institutions for tax years beginning after December 31, 1995. The Act provides that bad debt reserves accumulated prior to 1988 be exempt from recapture. Bad debt reserves accumulated after 1987 are subject to recapture. The recapture tax will be paid in six equal installments beginning with the 1998 tax year. At December 31, 1995, the Bank had $324,005 in bad debt reserves in excess of the base year. Subject to prevailing corporate tax rates, the Bank owes $64,261 in federal income taxes, which is reflected as a deferred tax liability. The reconciliation between the actual provision for income taxes and the amount of income taxes which would have been provided at statutory rates for the years ended June 30 is as follows:
2000 1999 -------------------- ---------------------- Amount Percent Amount Percent ------ ------- ------ ------- Provision at statutory rate $501,036 34.0% $430,356 34.0% State income tax expense, net of federal tax benefit 56,450 3.8 40,504 3.2 Tax exempt interest (12,693) (.9) (8,441) (.7) Other, net 33,083 2.3 19,506 1.5 -------- ---- -------- ---- Actual expense and effective rate $577,876 39.2% $481,925 38.0% ======== ==== ======== ====
13. RETIREMENT PLAN The Company has a profit-sharing plan with a 401(k) feature. The 401(k) allows employees to make contributions to the plan up to 10% of their annual compensation. The Company will match 50% of the employees' voluntary contributions up to 3% of the employee's compensation. Additional employer contributions are made at the discretion of the Board of Directors. The plan covers substantially all employees with more than one year's service. The Company's contributions for the benefit of covered employees amounted to $32,988 and $25,579 for the years ended June 30, 2000 and 1999, respectively. 29 14. RESTRICTED STOCK PLAN (RSP) In 1998, the Board of Directors adopted a RSP for directors, certain officers and employees, which was approved by stockholders at a special meeting held on January 20, 1998. The objective of this Plan is to enable the Company and the Bank to retain its corporate officers, key employees, and directors who have the experience and ability necessary to manage these entities. Directors, officers, and key employees who are selected by members of a Board appointed committee are eligible to receive benefits under the RSP. The non-employee directors of the Company and the Bank serve as trustees for the RSP, which has the responsibility to invest all funds contributed by the Bank to the Trust created for the RSP. On February 23, 1998, the Trust purchased with funds contributed by the Bank, 43,378 shares of the common stock of the Company. At June 30, 2000, 15,180 shares have been issued to non-employee directors, 26,844 shares have been issued to officers, and 1,354 shares remained unissued. Directors, officers, and key employees who terminate their association with the Company shall forfeit the right to any shares which were awarded but not earned. Shares are vested over a four-year period from their grant date. A total of 24,614 shares were vested as of June 30, 2000. Total operating expense attributed to the RSP amounted to $197,591 and $201,881 for the years ended June 30, 2000 and 1999. 15. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) In conjunction with the Bank's conversion from mutual to stock, the Bank adopted an ESOP for the benefit of officers and employees who have met certain eligibility requirements related to age and length of service. An ESOP trust was created, and acquired 86,756 shares of common stock in the Company's initial public offering, using proceeds of a loan obtained from the Company, which bears interest at the Wall Street Journal prime rate, adjusted quarterly. The loan, which is secured by the shares of stock purchased, calls for quarterly interest over a ten year period and annual principal payments of $86,756. The Bank makes quarterly contributions to the trust to allow the trust to make the required loan payments to the Company. Shares are released from collateral based upon the proportion of annual principle payments made on the loan each year and allocated to qualified employees. As shares are released from collateral, the Bank reports compensation expense based upon the amounts contributed or committed to be contributed each year and the shares become outstanding for earnings per share computations. Dividends paid on allocated ESOP shares are recorded as a reduction in retained earnings. Dividends paid on unallocated shares were added to participant accounts and reported as compensation for the year ended June 30, 1999, however, for the year ended June 30, 2000, dividends paid on unallocated shares were used to reduce the company's contribution to the ESOP plan. Compensation expense for the ESOP was $100,018 and $145,182 for the years ended June 30, 2000 and 1999, respectively. The following table represents the components of the ESOP shares: 2000 1999 -------- -------- Allocated shares 30,252 22,632 Shares released for allocation 4,338 4,338 Shares distributed (1,056) (1,056) Unreleased shares 52,166 59,786 -------- -------- Total ESOP share 85,700 85,700 ======== ======== Fair value of unreleased shares $554,264 $717,432 ======== ======== 30 16. STOCK OPTION PLAN In December 1997, the Board of Directors adopted a Stock Option Plan for the directors, officers, and employees, which was approved by stockholders at a special meeting held on January 20, 1998. An aggregate of 108,445 shares of authorized but unissued common stock of the Company were reserved for future issuance under the plan. The stock options typically have expiration terms of ten years subject to certain extensions and early terminations. The per share exercise price of a stock option shall be, at a minimum, equal to the fair value of a share of common stock on the date the option is granted. Proceeds from the exercise of the stock options are credited to common stock for the aggregate par value and the excess is credited to additional paid-in capital. On January 20, 1998, qualified stock options were granted for the purchase of 65,061 shares exercisable at the market price of $18.75 per share at a rate of one fourth per year beginning January 20, 1998. All options expire ten years from the date of grant. At June 30, 2000, the initial stock options granted remain outstanding with none being exercised. The Company accounts for its stock option plan under provisions of APB Opinion No. 25, " Accounting for Stock Issued to Employees," and related interpretations. Under this opinion, no compensation expense has been recognized with respect to the plan because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the grant date. Had compensation expense for the stock option plan been recognized in accordance with the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, " Accounting for Stock-based Compensation," net income applicable to common stock, basic and dilutive net income per common share, for the years ended June 30 would have been as follows: 2000 1999 ------------ -------------- Net Income: As reported $ 895,760 $ 783,827 ============ ============== Pro forma $ 895,357 $ 767,939 ============ ============== Basic Earnings Per Share: As reported $ 1.01 $ .83 ============ ============== Pro forma $ 1.01 $ .81 ============ ============== Diluted Earnings Per Share: As reported $ 1.01 $ .83 ============ ============== Pro forma $ 1.01 $ .81 ============ ============== The following table presents share data related to the stock option plans: 2000 1999 -------- -------- Outstanding, beginning 65,061 65,061 Granted - - Exercised - - Forfeited - - -------- -------- Outstanding, ending (at $18.75 per share) 65,061 65,061 ======== ======== 31 16. STOCK OPTION PLAN (CONTINUED) The fair value of the option grant was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grant in 2000 and 1999, respectively: expected dividend yield of 4.0% and 2.67%; expected volatility of 6.7% and 8.9%; risk-free interest rate of 6.13% and 6.02%; and expected lives of 7 and 8 years. Dividend Equivalent Rights may be granted concurrently with any option granted. These rights provide that upon the payment of a dividend on the Common Stock, the holder of such Options shall receive payment of compensation in an amount equivalent to the dividend payable as if such Options had been exercised and such Common Stock held as of the dividend date. Dividend Equivalent Rights were granted concurrently with respect to the stock options granted in 1998. Compensation expense resulting from Dividend Equivalent Rights was $26,024 and $20,820 for the year ended June 30, 2000 and 1999, respectively. 17. PREFERRED SHARE PURCHASE RIGHTS PLAN In July 1997, the Board of Directors adopted a Preferred Share Purchase Rights Plan and correspondingly issued one Preferred Share Purchase Right ("a Right") for each share of common stock of the Company. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of the Company's junior Participating Preferred Stock, Series A ("Preferred Shares"), at a price of $37.00 per one-hundredth of a Preferred Share. The Rights will not be exercisable or separable from the common shares until ten business days after a person or group acquire 15% or more or tenders for 50% or more of the Company's outstanding common shares. The Plan also provides that if any person or group becomes an "Acquiring Person," each Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will entitle its holder to receive upon exercise that number of common shares having a market value of two times the exercise price of the Right. In the event the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to receive upon exercise of the Right, at the Right's then current exercise price, that number of the acquiring company's common shares having a market value of two times the exercise price of the Right. The company is entitled to redeem the Rights at a price of one cent per Right at any time prior to them becoming exercisable, and the Rights expire on July 17, 2007. The Plan was designed to protect the interest of the Company's shareholders against certain coercive tactics sometimes employed in takeover attempts. 18. COMMITMENTS AND CONTINGENT LIABILITIES Lease Commitments ----------------- The future lease commitments as of June 30, 2000 for all noncancellable equipment and land leases follows: Fiscal Year Ending June 30, Amount --------------- ------ 2001 $ 73,617 2002 76,417 2003 78,417 2004 77,669 2005 75,420 2006 and thereafter 2,140,900 ----------- $ 2,522,440 =========== Litigation ---------- The Company is involved in litigation arising in the normal course of business. Management believes that liabilities, if any, arising from these proceedings will not have a material adverse effect on the consolidated financial position, operating results, or liquidity. 32 19. OTHER COMPREHENSIVE INCOME Other Comprehensive income in the Consolidated Statement of Stockholders' Equity consists solely of unrealized gains and losses on available for sale securities. The change in net unrealized loss on securities available for sale securities includes reclassification adjustments to reclassify gains, net of tax for sales of the related security of $0 and $4,673 for the years ended June 30, 2000 and 1999. 20. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS The estimated carrying amounts and fair values are as follows:
2000 1999 -------------------------------- ---------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value -------------- --------------- ------------ ------------- Financial assets: Cash and cash equivalents $ 5,751,624 $ 5,751,624 $ 4,359,870 $ 4,359,870 Investment securities Held to maturity 1,249,672 1,187,625 999,896 970,914 Available-for-sale 8,234,637 8,234,637 4,481,475 4,481,475 Mortgage-backed securities: Held to maturity 2,089,010 2,027,016 2,472,681 2,456,645 Available for sale 1,556,172 1,556,172 1,832,845 1,832,845 Loans receivable 119,721,308 119,150,000 109,899,551 110,308,000 Federal Home Loan Bank Stock 800,000 800,000 629,500 629,500 Accrued interest receivable 870,955 870,955 664,058 664,058 ------------- ------------- ------------ ------------ Total $ 140,273,378 $ 139,578,029 $125,339,876 $125,703,307 ============= ============= ============ ============
2000 1999 -------------------------------- --------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value -------------- ------------- ------------- ----------- Financial liabilities: Deposits $ 118,930,939 $ 118,299,000 $105,338,770 $105,243,000 Advances from Federal Home Loan Bank 10,500,000 10,418,000 9,000,000 9,000,000 Advance payment by borrowers for taxes and insurance 203,320 203,320 196,993 196,993 Accrued interest payable 189,508 189,508 50,357 50,357 ------------- ------------- ------------ ------------ Total $ 129,823,767 $ 129,109,828 $114,586,120 $114,490,350 ============= ============= ============ ============
33 20. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED) Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms. Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument. If no readily available market exists, the fair value estimates for financial instruments should be based upon management's judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values. As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company. The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions: Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest --------------------------------------------------------------------------- Receivable, Accrued Interest Payable, and Advance Payment by Borrowers for --------------------------------------------------------------------------- Taxes and Insurance ------------------- The fair value is equal to the current carrying value. Investment Securities, Mortgage-backed Securities, and Loans Held for Sale -------------------------------------------------------------------------- The fair value of investment securities, mortgage-backed securities and loans held for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Loans, Deposits, and Advances from Federal Home Loan Bank --------------------------------------------------------- The fair value of loans is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and employs discount rates that consider reinvestment opportunities, operating expenses, non-interest income, credit quality, and prepayment risk. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end. Fair values for time deposits and advances from Federal Home Loan Bank are estimated using a discounted cash flow calculation and applies contractual costs currently being offered in the existing portfolio to current market rates being offered for deposits and notes of similar remaining maturities. Commitments to Extend Credit ---------------------------- These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments are presented in Note 5. 34 21. CAPITAL REQUIREMENTS The Company, on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by the federal regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the entity's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the entities' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by the regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of tangible and core capital (as defined in the regulations) to adjusted assets (as defined). Management believes that as of June 30, 2000 the Company and the Bank meet all capital adequacy requirements to which they are subject. As of June 30, 2000, the most recent notification from the Company's and Bank's primary regulatory authorities have categorized the entity as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum tangible, core, and risk-based ratios. There have been no conditions or events since that notification that management believes have changed the Company's or the Bank's category. The following table reconciles the Company's and Bank's capital under generally accepted accounting principles to regulatory capital:
Company Bank ------------------------------- ------------------------------- June 30, June 30, 2000 1999 2000 1999 ------------- ----------- ------------- ------------- Total equity $ 15,068,274 $14,993,452 $ 14,241,112 $13,481,216 Unrealized loss on securities (301,080) (148,431) (284,163) (137,293) -------------- ------------ -------------- ----------- Tier I, core, and tangible capital 15,369,354 15,141,883 14,525,275 13,618,509 Allowance for loan losses 682,103 582,280 682,103 582,280 -------------- ------------ -------------- ----------- Risk-based capital $ 16,051,457 $15,724,163 $ 15,207,378 $14,200,789 ============= =========== ============= ===========
35 21. CAPITAL REQUIREMENTS (CONTINUED) The actual capital amounts and ratios were as follows:
Company at June 30, -------------------------------------------------------- 2000 1999 ---------------------------- ------------------------- Amount Ratio Amount Ratio -------------- --------- ------------- -------- Total Capital to Risk-Weighted Assets ------------------------------------- Actual $ 16,051,457 16.06% $15,724,163 17.03% For Capital Adequacy Purposes 7,994,160 8.00 7,385,779 8.00 To be "Well Capitalized" 9,992,700 10.00 9,232,224 10.00 Tier I Capital to Risk-Weighted Assets -------------------------------------- Actual $ 15,369,354 15.38% $15,141,883 16.40% For Capital Adequacy Purposes 3,997,080 4.00 3,692,890 4.00 To be "Well Capitalized" 5,995,620 6.00 5,539,334 6.00 Core Capital to Adjusted Assets ------------------------------- Actual $ 15,369,354 10.56% $15,141,883 11.59% For Capital Adequacy Purposes 5,822,620 4.00 5,227,400 4.00 To be "Well Capitalized" 7,278,280 5.00 6,534,250 5.00 Tangible Capital to Adjusted Assets ----------------------------------- Actual $ 15,369,354 10.56% $15,141,883 11.59% For Capital Adequacy Purposes 2,183,480 1.50 1,960,530 1.50 To be "Well Capitalized" N/A N/A N/A N/A Bank at June 30, ----------------------------------------------------------- 2000 1999 ----------------------------- ------------------------- Amount Ratio Amount Ratio --------------- --------- ------------- ------- Total Capital to Risk-Weighted Assets ------------------------------------- Actual $ 15,207,378 15.23% $ 14,200,789 15.79% For Capital Adequacy Purposes 7,987,760 8.00 7,193,840 8.00 To be "Well Capitalized" 9,984,700 10.00 8,992,300 10.00 Tier I Capital to Risk-Weighted Assets -------------------------------------- Actual $ 14,525,275 14.55% $ 13,618,509 15.14% For Capital Adequacy Purposes 3,993,880 4.00 3,596,920 4.00 To be "Well Capitalized" 5,990,820 6.00 5,395,380 6.00 Core Capital to Adjusted Assets ------------------------------- Actual $ 14,525,275 9.94% $ 13,618,509 10.42% For Capital Adequacy Purposes 5,846,400 4.00 5,227,400 4.00 To be "Well Capitalized" 7,308,000 5.00 6,534,250 5.00 Tangible Capital to Adjusted Assets ----------------------------------- Actual $ 14,525,275 9.94% $ 13,618,509 10.42% For Capital Adequacy Purposes 2,192,400 1.50 1,960,275 1.50 To be "Well Capitalized" N/A N/A N/A N/A
36 EX-23 3 0003.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS As independent auditors, we hereby consent to the incorporation of our report, dated August 3, 2000, incorporated by reference in this annual report of Advance Financial Bancorp on Form 10-KSB for the year ended June 30, 2000, into the Company's previously filed Form S-8 Registration Statement File No. 333-74681. /s/S.R. Snodgrass, A.C. S.R. Snodgrass, A.C. Steubenville, Ohio September 28, 2000 EX-27 4 0004.txt FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1000 12-MOS JUN-30-2000 JUN-30-2000 1,110 4,642 0 0 9,791 3,339 3,215 120,403 682 145,264 118,931 2,500 765 8,000 0 0 108 14,960 145,264 9,564 1,135 0 10,699 4,999 5,716 4,983 175 0 4,040 1,474 1,474 0 0 896 1.01 1.01 3.71 304 189 0 0 582 79 4 682 682 0 0
-----END PRIVACY-ENHANCED MESSAGE-----