-----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, TUnj+5njXfQf46PEiSeW5UbH1y6PcTGNPEJIp6UVS6G7lDS2Fi6l0MB2ZT4GHiv8 CJo1LGItBpFd1ljl9bFIxg== 0000946275-99-000527.txt : 19990924 0000946275-99-000527.hdr.sgml : 19990924 ACCESSION NUMBER: 0000946275-99-000527 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCE FINANCIAL BANCORP CENTRAL INDEX KEY: 0001023398 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 550753533 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21885 FILM NUMBER: 99715514 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 10KSB 1 FORM 10KSB 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, 1999 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. [ ] State issuer's revenues for its most recent fiscal year. $9,941,000 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 August 31, 1999, was $8.1 million. As of August 31, 1999, there were issued and outstanding 971,285 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, 1999. (Part II) 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for the Fiscal Year ended June 30, 1999. (Part III) PART I Advance Financial Bancorp (the "Company") 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" or "Advance Financial") 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 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 of West Virginia, is a federally chartered stock savings bank headquartered in Wellsburg, West Virginia. Advance Financial 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 2 member of and owns capital stock in the FHLB of Pittsburgh, which is one of the 12 regional banks in the FHLB System. Advance Financial 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 Advance Financial is one of many financial institutions serving its market area which consists of Brooke and Hancock counties of West Virginia and portions of Jefferson County, Ohio and Washington County, Pennsylvania. 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 Bank's market area. 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. 3 Lending Activities Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of the Bank's loan portfolio by type of loan on the dates indicated:
June 30, ------------------------------------------------- 1999 1998 ------------------------- ----------------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in Thousands) Type of Loans: Real Estate Loans: One- to four-family(1) ................... $ 59,674 53.45% $ 59,359 58.91% Non-residential .......................... 23,216 20.80 15,581 15.46 Construction ............................. 2,073 1.86 5,017 4.98 Multi-family ............................. 2,689 2.41 1,786 1.77 --------- ---------- --------- -------- Total real estate loans .................... 87,652 78.52 81,743 81.12 --------- ---------- --------- -------- Consumer Loans: Automobile ............................... 8,648 7.74 7,659 7.60 Other .................................... 2,344 2.10 2,347 2.33 Share .................................... 1,360 1.22 1,297 1.29 Home improvement ......................... 1,195 1.07 1,001 .99 Education ................................ 41 .04 42 .04 --------- ---------- --------- -------- Total consumer loans ....................... 13,588 12.17 12,346 12.25 --------- ---------- --------- -------- Commercial loans ........................... 10,388 9.31 6,676 6.63 --------- ---------- --------- --------- Total loans ........................... 111,628 100.00% 100,765 100.00% ========== ========= Less: Loans in process ......................... (1,007) (3,061) Deferred loan origination fees and costs.. (139) (181) Allowance for loan losses ................ (582) (478) --------- -------- Total loans, net ...................... $ 109,900 $ 97,045 ========= ========
------------------------------- (1) At June 30, 1998, includes loans held for sale of $1,455. 4 Loan Maturity Tables The following table sets forth the estimated maturity of the Bank's loan portfolio, including loans held for sale, at June 30, 1999. 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... $ 5,841 $ 2,519 $ 51,314 $ 59,674 Non-residential real estate....... 121 1,076 22,019 23,216 Construction...................... 2,073 -- -- 2,073 Multi-family real estate.......... 14 125 2,550 2,689 Consumer.......................... 862 10,795 1,931 13,588 Commercial........................ 2,134 3,147 5,107 10,388 ------- ------- ------- -------- Total............................. $ 11,045 $ 17,662 $ 82,921 $ 111,628 ======= ======= ======= ========
The following table sets forth the dollar amount of all loans due after June 30, 2000, 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... $ 22,532 $ 31,301 $ 53,833 Non-residential real estate....... 12,240 10,855 23,095 Construction...................... -- -- -- Multi-family...................... 1,418 1,258 2,676 Consumer.......................... 12,726 -- 12,726 Commercial........................ 2,246 6,007 8,253 -------- -------- -------- Total......................... $ 51,162 $ 49,421 $ 100,583 ======= ======= ========
One- to Four-Family Residential Loans. The Bank's primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in the Bank's primary market areas. The Bank's one- to four-family residential loan portfolio also includes second mortgage loans and home equity loans secured by second mortgages. The Bank 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 Bank 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. The Bank also originates construction permanent loans on one- to four-family residences. The Bank retains most of the mortgage loans that it originates. Adjustable-rate mortgage loans, which can adjust annually or every three or five years over the life of the loan depending on the type of the loan, can have maturities of up to 30 years. Fixed-rate loans can have maturities of up to 30 years depending on the type of the loan. For all adjustable-rate mortgage loans, the Bank requires the borrower to qualify at the initial rate. The Bank's 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 5 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. The Bank offers adjustable-rate loans with initial interest rates set below the fully indexed rate. The Bank 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 Bank's cost of funds. Generally, the Bank's standard underwriting guidelines for mortgage loans conform to the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines and most of the Bank's loans are salable in the secondary market. It is the current policy of the Bank to remain a portfolio lender for its adjustable rate loans. Adjustable-rate mortgage loans decrease the risks associated with changes in interest rates by more closely reflecting these changes, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the adjustable-rate mortgage loan documents, thereby potentially limiting their effectiveness during periods of rising interest rates. These risks have not had an adverse effect on the Bank. Non-Residential Real Estate Loans. Non-residential real estate loans consist of loans made for the purpose of purchasing or refinancing the non-residential real estate used as collateral and includes loans secured by 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 lending entails significant additional risks when compared with one- to four-family residential lending. For example, non-residential loans typically involve larger loan balances to single borrowers or groups of related borrowers, the payment experience on such loans typically is dependent on the successful operation of the project and these risks can be significantly impacted by the cash flow of the borrowers and supply and demand conditions in the market for commercial office, retail and warehouse space. Construction Loans. The Bank makes construction loans primarily for the construction of single-family dwellings. Approximately 90% of these loans were made to persons who are constructing properties for the purpose of occupying them. Such loans may also be made to builders to construct properties for sale. Loans made to builders are generally "pure construction" loans which require the payment of interest at fixed rates during the construction period and the payment of the principal in full at the end of the construction period. At June 30, 1999, such loans amounted to $2,073,000. 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, 1999, such loans amounted to $1,923,000. 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%. Consumer Loans. The Bank offers consumer loans in order to provide a wider range of financial services to its customers. Federal savings associations are permitted to make secured and unsecured consumer loans up to 35% of their assets. In addition, savings associations have lending authority above 6 the 35% limitation for certain consumer loans, such as home improvement, credit card, education, savings account or passbook loans. The Bank originates automobile loans with terms of up to 6 years for new automobiles and up to 5 1/2 years for used automobiles. Most of these automobile loans are originated directly by the Bank. The Bank also originates automobile loans indirectly by purchasing such loans from automobile dealers with whom the Bank provides floor plan financing. Indirect automobile loans are underwritten by the Bank and a fee is remitted to the automobile dealer upon the successful underwriting and closing of the loan. The fee is rebated to the Bank, on a pro rata basis, if the loan is repaid within the first six months. The Bank 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 its 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. At June 30, 1999, the Bank had indirect automobile loans of $3,010,000, or, 22.15%, of its total consumer loan portfolio. Commercial Loans. Commercial loans, other than commercial real estate loans, consist of, among other things, 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 Bank 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. Loan Approval Authority and Underwriting. The Bank 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 of the Bank 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 considers all applications for commercial loans up to $250,000, whether secured or unsecured, and all consumer loans in amounts above the lending limit established above. All loans in excess of those limits set for the loan committee 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 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 Bank to determine that title is clear. Historically, the Bank 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. The Bank issues written commitments to prospective borrowers on all approved mortgage loans which generally expire within 30 days of the date of issuance. The Bank charges 7 no commitment fees or points to secure commitments. A customer may lock in a fixed rate for 30 days by depositing a nonrefundable fee with the Bank. 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, 1999, the Bank had $2,104,000 of outstanding commitments to originate loans and $857,000 in undisbursed funds related to construction loans. 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. Non-Performing and Problem Assets Loan Delinquencies. The Bank'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). 8 Non-Performing Assets. The following table sets forth information regarding non-accrual loans, real estate owned, and certain other repossessed assets and loans. As of the dates indicated, the Bank had no loans categorized as troubled debt restructuring within the meaning of SFAS 15. At June 30, ---------------- 1999 1998 ---- ---- (Dollars in Thousands) Loans accounted for on a non-accrual basis: Mortgage loans: One- to four-family................................. $ 90 $185 Multi-family........................................ 2 -- Non-residential..................................... 317 -- Construction........................................ 47 -- Consumer.............................................. -- 2 Commercial............................................ -- 96 ---- ---- Total non-accrual loans........................... 456 283 ---- ---- Accruing loans greater than 90 days past due: Mortgage loans: One- to four-family............................... -- -- Multi-family...................................... -- -- Commercial........................................ -- -- Construction...................................... -- -- Consumer.............................................. 220 169 Commercial............................................ 89 -- ---- ---- Total accruing loans greater than 90 days past due.... 309 169 ---- ---- Total non-performing loans............................ 765 452 Real estate acquired in settlement of loans........... 50 76 Other non-performing assets........................... 9 13 ---- ---- Total non-performing assets........................... $824 $541 ==== ==== Total non-performing loans to total loans............. .69% .45% ==== ==== Total non-performing loans to total assets............ .59% .40% ==== ==== Total non-performing assets to total assets........... .63% .47% ==== ==== Interest income that would have been recorded on loans accounted for on a non-accrual basis was not material for the year ended June 30, 1999. 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 9 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 Bank's classified assets in accordance with the Bank's classification system: At June 30, 1999 ---------------- (In Thousands) Special Mention......... $ 201 Substandard............. 1,049 Doubtful................ 22 Loss.................... -- ------- Total................... $ 1,272 ======= Real Estate Acquired in Settlement of Loans. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired, it is recorded at the fair value at the date of foreclosure less estimated costs of disposition. Allowances for Loan Losses. It is management's policy to provide for losses on unidentified loans in its loan portfolio. A provision for loan losses is charged to operations based on management's evaluation of the losses that may be incurred in the Bank'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 Bank'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. 10 The following table sets forth information with respect to the Bank's allowance for loan losses at the dates indicated:
Year Ended June 30, ------------------- 1999 1998 ---- ---- Dollars in Thousands) Total loans outstanding............................................ $ 111,628 $ 100,765 ========= ========= Average loans outstanding.......................................... 103,764 $ 93,708 ========= ========= Allowance balance (at beginning of period)......................... $ 478 $ 368 Provision: Real estate...................................................... 70 178 Consumer......................................................... 24 40 Commercial....................................................... 56 36 Charge-offs: Real estate...................................................... (8) (6) Consumer......................................................... (20) (34) Commercial....................................................... (20) (118) Recoveries: Real estate...................................................... -- -- Consumer......................................................... 2 14 Commercial....................................................... -- -- --------- --------- Allowance balance (at end of period)............................... $ 582 $ 478 ========= ========= Allowance for loan losses as a percent of total loans outstanding.. .52% .47% ========= ========= Net loans charged off as a percent of average loans outstanding.... .04% .17% ========= =========
11 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, ------------------------------------------------- 1999 1998 --------------------- ------------------------- 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 53.45% $ 128 58.91% Non-residential.......... 230 20.80 89 15.46 Multi-family............. 16 2.41 11 1.77 Construction............. -- 1.86 -- 4.98 Consumer................... 115 12.17 102 12.25 Commercial................. 128 9.31 148 6.63 ---- ---- --- ---- Total................. $ 582 100.00% $ 478 100.00% ==== ====== ===== ====== Investment Activities and Mortgage-Backed Securities General. The Bank 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 Bank has maintained a liquidity portfolio in excess of regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of future yield levels, as well as management's projections as to the short term demand for funds to be used in the Bank's loan origination and other activities. The Bank classifies its investments as securities available for sale or investments securities held to maturity in accordance with SFAS No. 115. At June 30, 1999, the Bank's investment portfolio policy allowed investments in instruments such as U.S. Treasury obligations, U.S. federal agency or federally sponsored agency obligations, municipal obligations, mortgage-backed securities, banker's acceptances, certificates of deposit, federal funds, including FHLB overnight and term deposits (up to six months), as well as investment grade corporate bonds, commercial paper and the mortgage derivative products described below. The Board of Directors may authorize additional investments. The Bank's securities available for sale and investment securities held to maturity portfolios at June 30, 1999 did not contain securities of any issuer with an aggregate book value in excess of 10% of the Bank's equity, excluding those issued by the United States Government or its agencies. 12 Mortgage-Backed Securities. To supplement lending activities, the Bank 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, the principal and interest payments on which 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 such as the Bank. Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and Federal National Mortgage Association ("FNMA"). The Bank's mortgage-backed securities were classified as held to maturity and available for sale at June 30, 1999 and were all issued by GNMA, FNMA or FHLMC, representing participating interests in direct pass-through pools of long-term mortgage loans originated and serviced by the issuers of the securities. 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 typically are issued with stated principal amounts and the securities are backed by pools of mortgages that have loans with interest rates that are within a 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. As a result, the interest rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate or adjustable-rate), as well as 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. Mortgage-backed securities issued by FHLMC, FNMA and GNMA make up a majority of the pass-through certificates market. Investment Activities Investment Portfolio. The following table sets forth the carrying value of the Bank's securities at the dates indicated.
At June 30, ----------------------- 1999 1998 -------- ---------- (In Thousands) Securities held to maturity: Interest-bearing deposits in other financial institutions........... $ 2,964 $ 7,749 U.S. government agency securities................................... 1,000 1,746 FHLB stock.......................................................... 630 622 Mortgage-backed securities.......................................... 2,473 339 ------ ------ Total securities held to maturity................................. 7,067 10,456 ------ ------ Securities available for sale: U.S. government and agency securities............................... 4,361 -- Common stock........................................................ 89 221 Money fund securities............................................... 31 43 Mortgage-backed securities.......................................... 1,833 -- ------ ------ Total securities available for sale............................... 6,314 264 ------ ------ Total investment and mortgage-backed securities....................... $13,381 $10,720 ====== ======
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, 1999. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
At June 30, 1999 ------------------------------------------------------------------------------------------------------ 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.............. $2,964 5.24% $ -- --% $ -- --% $ -- --% $ 2,964 5.24% $ 2,964 U.S. government and agency securities......... -- -- -- -- 500 6.33 500 6.74 1,000 6.54 971 FHLB stock(1)............... 630 6.50 -- -- -- -- -- -- 630 6.50 630 Mortgage-backed securities.. -- -- -- -- -- -- 2,473 6.73 2,473 6.73 2,457 ----- ---- ---- ----- ----- ----- Total securities held to maturity........... 3,594 6.48 -- -- 500 6.33 2,973 6.73 7,067 6.07 7,022 ----- ---- ---- ---- --- ---- ----- ---- ----- ---- ----- Securities available for sale: U.S. government and agency securities......... -- -- 1,470 5.81 1,460 6.50 1,431 8.68 4,361 6.53 4,361 Common stock................ 89 1.40 -- -- -- -- -- -- 89 1.40 89 Money fund securities....... -- -- -- -- 31 7.50 -- -- 31 7.50 31 Mortgage-backed securities.. -- -- -- -- -- -- 1,833 6.44 1,833 6.44 1,833 ----- ----- ----- ----- ----- ----- Total securities available for sale.... 89 1.40 1,470 5.81 1,491 6.52 3,264 6.55 6,314 6.44 6,314 ----- ---- ----- ---- ----- ---- ----- ---- ----- ---- ----- Total investment and mortgage-backed securities.. $3,683 5.36% $1,470 5.81% $1,991 6.47% $6,237 6.84% $13,381 6.25% $13,336 ===== ==== ===== ==== ===== ==== ===== ==== ====== ==== ======
- ---------------------------- (1) Recorded at cost. 14 Sources of Funds General. Deposits are the major external source of the Bank's funds for lending and other investment purposes. The Bank 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 Bank'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, 1999, the Bank had no brokered accounts. Time Deposits. The following table indicates the amount of the Bank's time deposits of $100,000 or more by time remaining until maturity as of June 30, 1999. Maturity Period Time Deposits --------------- ------------- (In Thousands) Within three months.................. $ 700 More than three through six months... 1,032 More than six through nine months.... 1,885 Over nine months..................... 3,641 ------- Total................................ $ 7,258 ====== Borrowings The Bank 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 Bank's stock in the FHLB of Pittsburgh and a portion of the Bank'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 Bank, 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. Employees At June 30, 1999 the Bank had 54 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 Company Regulation 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. Qualified Thrift Lender Test. 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. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL and were acquired in a supervisory acquisition. See "-Regulation of the Bank - Qualified Thrift Lender Test." Regulation of the Bank General. 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. 16 A member of the SAIF pays an annual insurance premium to the FDIC of at least 0.064% of total deposits of that member. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures commercial bank deposits. Most members of BIF pay a lower premium to the FDIC. After 1999, assessments for BIF and SAIF members should be the same. It is expected that these continuing assessments for both SAIF and BIF members will be used to repay outstanding Financing Corporation bond obligations. 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 4% of total adjusted assets (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. Dividend and Other Capital Distribution Limitations. OTS regulations require the Bank to give the OTS 30 days advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Company. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the dividend would (1) reduce the regulatory capital of the Bank below the amount required for the liquidation account established in connection with the conversion from mutual to stock form or (2) reduce the amount of capital of the Bank below the amounts required in accordance with other OTS regulations. Qualified Thrift Lender Test. Savings institutions must meet a QTL test. If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. An association must be in compliance with the QTL test on a monthly basis in nine out of every 12 months. As of June 30, 1999, the Bank was in compliance with its QTL requirement with 74.26% of its assets invested in QTIs. 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. 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 or 5% of its outstanding borrowings to the FHLB of Pittsburgh, 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 17 vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At June 30, 1999, the Bank's actual liquid asset ratio was 13.69%. 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, 1999, the Bank was in compliance with these Federal Reserve Board requirements. Item 2. Description of Property - -------------------------------- (a) Properties. The Bank operates from its main office and two branch office.
Year Leased Location Leased or Owned or Acquired -------- --------------- ----------- 1015 Commerce Street Owned 1984 Wellsburg, West Virginia 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, 1998. 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. (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." 18 (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, 1999 (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. 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 1999 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." 19 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 these items 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, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the two year period ended June 30, 1999, together with the related notes and the independent auditors' report of S. R. Snodgrass, A.C. independent certified public accountants. 2. Schedules omitted as they are not applicable. 20 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 1999 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)
------------------- * 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 10KSB 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. (b) None. 21 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 23, 1999. 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 23, 1999. /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-3.II 2 EXHIBIT 3.II EXHIBIT 3(ii) AMENDED BYLAWS OF ADVANCE FINANCIAL BANCORP ARTICLE I Principal Office The home office of Advance Financial Bancorp (the "Company") shall be at 1015 Commerce Street in the City of Wellsburg, County of Brooke, in the State of West Virginia or at such other place within or without the State of West Virginia as the board of directors shall from time to time determine. The Company may also have offices at such other places within or without the State of West Virginia as the board of directors shall from time to time determine. ARTICLE II Stockholders SECTION 1. Place of Meetings. All annual and special meetings of stockholders shall be held at the principal office of the Company or at such other place within or without the State of West Virginia as the board of directors may determine and as designated in the notice of such meeting. SECTION 2. Annual Meeting. A meeting of the stockholders of the Company for the election of directors and for the transaction of any other business of the Company shall be held annually at such date and time as the board of directors may determine. SECTION 3. Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time by the president or by a majority of the board of directors or by a committee of the board of directors, whose members will be designated from time to time by the board of directors, and which committee will have been delegated the power and authority to call such meetings. SECTION 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the rules and procedures established by the board of directors. The board of directors shall designate, when present, any director or the president to preside at such meetings. SECTION 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose or purposes for which the meeting is called shall be mailed by the secretary or the officer performing such duties, not less than ten days nor more than sixty days before the meeting to each stockholder of record entitled to vote at such meeting. If mailed, notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at the address as it appears on the stock transfer books or records of the Company as of the record date prescribed in Section 6 of this Article II, with postage thereon prepaid. If a stockholder is present at a meeting, or in writing waives notice thereof before or after the meeting, notice of the meeting to such stockholder shall be unnecessary. When any stockholders' meeting, either annual or special, is adjourned for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for thirty days or less or of the business to be transacted at such adjourned meeting, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. Fixing of Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than sixty days, and in case of a meeting of stockholders, not less than ten days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof; provided, however, that the board of directors may fix a new record date for the adjourned meeting. SECTION 7. Voting Lists. The officer or agent having charge of the stock transfer books for shares of the Company shall make, at least ten days before each meeting of stockholders, a complete record of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. The record, for a period of ten days before such meeting, shall be kept on file at the principal office of the Company, and shall be subject to inspection by any stockholder for any purpose germane to the meeting at any time during usual business hours. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder for any purpose germane to the meeting during the whole time of the meeting. The original stock transfer books shall be the only evidence as to who are the stockholders entitled to examine such record or transfer books or to vote at any meeting of stockholders. SECTION 8. Quorum. A majority of the outstanding shares of the Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time, subject to the notice requirements of Section 5 of this Article II. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 9. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed by the stockholder in the manner provided by the Certificate of Incorporation. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the board of directors or by a majority of a committee of the board of directors, whose members will be designated from time to time by the board of directors, and which committee will have been delegated the power and authority to act on behalf of the board of directors. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. SECTION 10. Voting. At each election for directors every stockholder entitled to vote at such election shall be entitled to one vote for each share of stock held by him. Directors shall be elected by a plurality of votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided in the Certificate of Incorporation, by statute, or by these Bylaws, in matters other than the election of directors, a majority of the shares present in person or represented by proxy at a lawful meeting and entitled to vote on the subject matter, shall be sufficient to pass on a transaction or matter. -2- SECTION 11. Voting of Shares in the Name of Two or More Persons. When ownership of stock stands in the name of two or more persons, in the absence of written directions to the Company to the contrary, at any meeting of the stockholders of the Company, any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. SECTION 12. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, trustee, or conservator may be voted by such person, either in person or by proxy, without a transfer of such shares into such person's name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into such receiver's name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Company, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. SECTION 13. Inspectors of Election. In advance of any meeting of stockholders, the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one or three. If the board of directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board of directors or the president may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the meeting or the president. Unless otherwise prescribed by applicable law, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. SECTION 14. Nominating Committee. The board of directors, or a committee of the board of directors delegated such power and authority by the board of directors, shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least twenty days prior to the date of the annual -3- meeting. Provided such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in writing and delivered to the secretary of the Company in accordance with the provisions of Article II, Section 15 of these Bylaws. SECTION 15. Notice for Nominations and Proposals. Nominations of candidates for election as directors at any annual meeting of stockholders may be made (a) by, or at the direction of, a majority of the board of directors or a committee thereof in accordance with Section 14 of these Bylaws or (b) by any stockholder entitled to vote at such annual meeting. Only persons nominated in accordance with the procedures set forth in this Section 15 shall be eligible for election as directors at an annual meeting. Ballots bearing the names of all the persons who have been nominated for election as directors at an annual meeting in accordance with the procedures set forth in this Section 15 shall be provided for use at the annual meeting. Nominations, other than those made in accordance with Section 14 of these Bylaws, shall be made pursuant to timely notice in writing to the Secretary of the Company as set forth in this Section 15. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal office of the Company not less than 60 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Company; provided, however, that with respect to the first scheduled annual meeting, notice by the stockholder must be so delivered or received no later than the close of business on the tenth day following the day on which notice of the date of the scheduled meeting must be delivered or received no later than the close of business on the fifth day preceding the date of the meeting. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director and as to the stockholder giving the notice (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of Company stock which are Beneficially Owned (as defined in Article XIII of the Certificate of Incorporation) by such person on the date of such stockholder notice, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, but not limited to, information required to be disclosed by Items 4, 5, 6 and 7 of Schedule 14A to be filed with the Securities and Exchange Commission (or any successors of such items or schedule or, if no successor to such items exists, then in accordance with these items as they existed upon the date of the adoption of these Bylaws); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Company's books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees and (ii) the class and number of shares of Company stock which are Beneficially Owned by such stockholder on the date of such stockholder notice and, to the extent known, by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. At the request of the board of directors, any person nominated by, or at the direction of, the Board for election as a director at an annual meeting shall furnish to the Secretary of the Company that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Proposals, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the Company as set forth in this Section 15. For stockholder proposals to be included in the Company's proxy materials, the stockholder must comply with all the timing and informational requirements of Rule 14a-8 of the Exchange Act (or any successor regulation or, if no successor regulation exists, then in accordance with the regulation as it existed upon the date of the adoption of these Bylaws). With respect to stockholder proposals to be considered at the annual meeting of stockholders but not included in the Company's proxy materials, the stockholder's notice -4- shall be delivered to, or mailed and received at, the principal office of the Company not less than 60 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Company. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company's books, of the stockholder proposing such business and, to the extent known, any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the Company stock which are Beneficially Owned by the stockholder on the date of such stockholder notice and, to the extent known, by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder notice, and (d) any financial interest of the stockholder in such proposal (other than interests which all stockholders would have). The board of directors may reject any nomination by a stockholder or stockholder proposal not timely made in accordance with the requirements of this Section 15. If the board of directors, or a designated committee thereof, determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 15 in any respect, the Secretary of the Company shall notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is given to the stockholder, as the board of directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the board of directors or such committee reasonably determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Section 15 in any respect, then the board of directors may reject such stockholder's nomination or proposal. The Secretary of the Company shall notify a stockholder in writing whether such stockholder's nomination or proposal has been made in accordance with the time and informational requirements of this Section 15. Notwithstanding the procedures set forth in this paragraph, if neither the board of directors nor such committee makes a determination as to the validity of any nominations or proposals by a stockholder, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the nomination or proposal was made in accordance with the terms of this Section 15. If the presiding officer determines that a nomination or proposal was made in accordance with the terms of this Section 15, the presiding officer shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to such nominee or proposal. If the presiding officer determines that a nomination or proposal was not made in accordance with the terms of this Section 15, the presiding shall so declare at the annual meeting and the defective nomination or proposal shall be disregarded. ARTICLE III Board of Directors SECTION 1. General Powers. The business and affairs of the Company shall be under the direction of its board of directors. The board of directors shall annually elect a president from among its members and may also elect a chairman of the board from among its members. The board of directors shall designate, when present, any director or the president to preside at its meetings. SECTION 2. Number, Term, and Election. The board of directors shall consist of seven (7) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected or qualified. The board of directors shall be classified in accordance with the provisions of the Company's Certificate of -5- Incorporation. The board of directors may increase the number of members of the board of directors but in no event shall the number of directors be increased in excess of fifteen. SECTION 3. Place of Meetings. All annual and special meetings of the board of directors shall be held at the principal office of the Company or at such other place within or without the State of West Virginia as the board of directors may determine and as designated in the notice of such meeting, if necessary. SECTION 4. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this Bylaw at such time and date as the board of directors may determine. SECTION 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the president, the chairman of the board of directors, or by one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place within or without the State of West Virginia as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. SECTION 6. Notice. Written notice of any special meeting shall be given to each director at least two days previous thereto delivered personally or by telegram or at least five days previous thereto delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid if mailed or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary before, during, or after the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 7. Quorum. A majority of the number of directors fixed by Section 2 of Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of Article III. SECTION 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the entire board of directors, unless a greater number is prescribed by these Bylaws, the Certificate of Incorporation, or the laws of Delaware. SECTION 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. -6- SECTION 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the principal office of the Company addressed to the president. Unless otherwise specified herein such resignation shall take effect upon receipt thereof by the president. SECTION 11. Vacancies. Any vacancy occurring in the board of directors shall be filled in accordance with the provisions of the Company's Certificate of Incorporation. Any directorship to be filled by reason of an increase in the number of directors may be filled by the affirmative vote of two-thirds of the directors then in office. The term of such director shall be in accordance with the provisions of the Company's Certificate of Incorporation. SECTION 12. Removal of Directors. Any director or the entire board of directors may be removed for cause and then only in accordance with the provisions of the Company's Certificate of Incorporation. SECTION 13. Compensation. Directors, as such, may receive a stated fee for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Nothing herein shall be construed to preclude any director from serving the Company in any other capacity and receiving remuneration therefor. SECTION 14. Presumption of Assent. A director of the Company who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless the director's dissent or abstention shall be entered in the minutes of the meeting or unless the director shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who votes in favor of such action. ARTICLE IV Committees of the Board of Directors The board of directors may, by resolution passed by a simple majority of a quorum, designate one or more committees, as they may determine to be necessary or appropriate for the conduct of the business of the Company, and may prescribe the duties, constitution, and procedures thereof. Each committee shall consist of one or more directors of the Company. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The board of directors shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to change the members of, to fill vacancies in, and to discharge any committee of the board. Any member of any such committee may resign at any time by giving notice to the Company provided, however, that notice to the board of directors, the chief executive officer, the chairman of such committee, or the secretary shall be deemed to constitute notice to the Company. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless -7- otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of directors at any meeting of the board called for that purpose. ARTICLE V Officers SECTION 1. Positions. The officers of the Company shall include a chief executive officer, president, one or more vice presidents, a secretary, and a treasurer, each of whom shall be elected by the board of directors. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. Election and Term of Office. The officers of the Company shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor shall have been duly elected and qualified, until death or resignation, or until removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contract rights. The board of directors may authorize the Company to enter into an employment contract with any officer in accordance with state law; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. Removal. Any officer may be removed by the vote of the majority of the board of directors whenever, in its judgment, the best interests of the Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise, may be filled by the board of directors for the unexpired portion of the term. SECTION 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors and no officer shall be prevented from receiving such salary by reason of the fact that the officer is also a director of the Company. -8- ARTICLE VI Contracts, Loans, Checks and Deposits SECTION 1. Contracts. To the extent permitted by applicable law, and except as otherwise prescribed by the Company's Certificate of Incorporation or these Bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Company. Such authority may be general or confined to specific instances. SECTION 2. Loans. No loans shall be contracted on behalf of the Company and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Company shall be signed by one or more officers, employees, or agents of the Company in such manner as shall from time to time be determined by resolution of the board of directors. SECTION 4. Deposits. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Company in any of its duly authorized depositories as the board of directors may select. ARTICLE VII Certificates for Shares and Their Transfer SECTION 1. Certificates for Shares. The shares of the Company shall be represented by certificates signed by the president or a vice president and by the treasurer or by the secretary of the Company, and may be sealed with the seal of the Company or a facsimile thereof. Any or all of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Company itself or an employee of the Company. If any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Company with the same effect as if the person were such officer at the date of its issue. SECTION 2. Form of Share Certificates. All certificates representing shares issued by the Company shall set forth upon the face or back that the Company will furnish to any stockholder upon request and without charge a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series. Each certificate representing shares shall state upon the face thereof: that the Company is organized under the laws of the State of Delaware; the name of the person to whom issued; the number and class of shares; the date of issue; the designation of the series, if any, which such certificate represents; and the par value of each share represented by such certificate, or a statement that the shares -9- are without par value. Other matters in regard to the form of the certificates shall be determined by the board of directors. SECTION 3. Payment for Shares. No certificate shall be issued for any share until such share is fully paid. SECTION 4. Form of Payment for Shares. The consideration for the issuance of shares shall be paid in accordance with the provisions of Delaware law. SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record thereof or by such person's legal representative, who shall furnish proper evidence of such authority, or by the person's attorney thereunto authorized by power of attorney duly executed and filed with the Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Company shall be deemed by the Company to be the owner thereof for all purposes. SECTION 6. Stock Ledger. The stock ledger of the Company shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of Article II, or the books of the Company, or to vote in person or by proxy at any meeting of stockholders. SECTION 7. Lost Certificates. The board of directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Company alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or the owner's legal representative, to give the Company a bond in such sum as it may direct as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, stolen, or destroyed. SECTION 8. Beneficial Owners. The Company shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Company shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VIII Fiscal Year; Annual Audit The fiscal year of the Company shall end on the last day of June of each year. The Company shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. -10- ARTICLE IX Dividends Subject to the provisions of the Certificate of Incorporation and applicable law, the board of directors may, at any regular or special meeting, declare dividends on the Company's outstanding capital stock. Dividends may be paid in cash, in property, or in the Company's own stock. ARTICLE X Corporate Seal The corporate seal of the Company shall be in such form as the board of directors shall prescribe. ARTICLE XI Amendments The Bylaws may be altered, amended, or repealed or new Bylaws may be adopted in the manner set forth in the Certificate of Incorporation. -11- EX-13 3 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, 1997 to September 30, 1997 16.75 14.88 .08 October 1, 1997 to December 31, 1997 17.88 16.50 .08 January 1, 1998 to March 31, 1998 20.88 17.38 .08 April 1, 1998 to June 30, 1998 19.50 17.88 .08 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 The number of stockholders of record of common stock as of the record date of August 31, 1999, was approximately 466. 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, 1999, there were 971,285 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 ------------------- 1999 % 1998 % ------------------- Return on average assets (net income divided by average total assets) .64 .78 Return on average equity (net income divided by average equity) 5.22 5.34 Average equity to average assets ratio (average equity divided by average assets) 12.34 14.61 Equity to assets at period end 11.54 13.07 Net interest spread 3.30 3.30 Dividend payout ratio 37.02 37.65 Net yield on average interest-earning assets 3.80 3.98 Non-performing loans to total assets .59 .40 Non-performing loans to total loans .70 .46 Allowance for loan losses to non-performing assets 70.67 88.29 - -------------------------------------------------------------------------------- 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, 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'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. 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, 1999. Changes in rates NPV Ratio (1) Change(2) ---------------- ------------- --------- +300 bp 9.51 % (241) bp +200 bp 10.75 (120) bp +100 bp 11.57 ( 35) bp 0 bp 11.92 -100 bp 12.05 13 bp -200 bp 11.87 ( 5) bp -300 bp 11.86 ( 6) 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. - -------------------------------------------------------------------------------- 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, At June 30, ------------------------------------------------------------ ---------------------- 1999 1998 1999 ----------------------------- ------------------------------ --------------------- Average Average Average Average Average Yield Yield/ Yield/ Balance Interest Cost Balance Interest Cost Balance Cost ---------- -------- -------- --------- ---------- -------- ----------- -------- Interest-earning assets: Loans receivable (1) $103,764 $8,517 8.21% $93,708 $7,737 8.26% $109,338 8.04% Investment securities (2) 9,696 554 5.71% 9,376 640 6.83% 9,936 5.19% Mortgage-backed securities 2,031 121 5.95% 357 33 9.24% 4,365 6.87% ---------- -------- -------- --------- ---------- -------- ----------- -------- Total interest-earning assets 115,491 9,192 7.95% 103,441 8,410 8.13% 123,639 7.77% -------- -------- ---------- -------- -------- Non-interest-earning assets 6,286 5,192 6,464 ---------- --------- ----------- Total assets $121,777 $108,633 $130,103 ========== ========= =========== Interest-bearing liabilities: Interest-bearing demand deposits $19,846 650 3.28% $15,739 559 3.55% $22,028 3.05% Certificates of deposit 59,066 3,257 5.51% 48,808 2,814 5.77% 63,562 5.15% Savings deposits 15,103 404 2.67% 14,589 414 2.84% 16,317 2.72% Short-term borrowings 9,042 486 5.37% 9,716 505 5.20% 9,000 5.30% ---------- -------- -------- --------- ---------- -------- ----------- -------- Total interest-bearing liabilities 103,057 4,797 4.65% 88,852 4,292 4.83% 110,907 4.39% -------- -------- ---------- -------- -------- Non-interest bearing liabilities 3,693 3,907 4,176 ---------- --------- ----------- Total liabilities 106,750 92,759 115,083 Stockholders' equity 15,027 15,874 15,020 ---------- --------- ----------- Total liabilities and stockholders' equity $121,777 $108,633 $130,103 ========== ========= =========== Net interest income $ 4,395 $ 4,118 ======== ========== Interest rate spread (3) 3.30% 3.30% 3.38% ======== ======== ======== Net Yield on interest-earning assets (4) 3.81% 3.98% 3.83% ======== ======== ======== Ratio of average interest-earning assets to average interest-bearing liabilities 112.07% 116.42% 111.48% ======== ======== ========
- ---------------------------------------------------------- (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. - -------------------------------------------------------------------------------- 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, ---------------------------------------------------- 1999 vs 1998 ---------------------------------------------------- Increase (Decrease) Due to ---------------------------------------------------- Volume Rate Net ---------------------------------------------------- (Dollars in Thousands) Interest Income: Loans receivable $830 ($50) $780 Investment securities 22 (108) (86) Mortgage-backed securities 155 (67) 88 ---------------------------------------------------- Total interest-earning assets $1,007 ($225) $782 ---------------------------------------------------- Interest Expense: Interest-bearing demand deposits $146 ($55) $91 Certificates of Deposit 592 (149) 443 Savings Deposits 15 (25) (10) Short-term borrowings (35) 16 (19) ---------------------------------------------------- Total interest-bearing liabilities 718 (213) 505 ---------------------------------------------------- Net change in interest income $289 ($12) $277 ====================================================
Comparison of Financial Condition The Company's total assets increased approximately $15,742,000, or 13.79%, to $129,927,000 at June 30, 1999, from $114,185,000 at June 30, 1998, primarily as a result of the opening in June 1998 of the Wintersville, Ohio branch (the "Wintersville branch"). The Wintersville branch contributed approximately $13,000,000 in loan and deposit growth for the year ended June 30, 1999. Total cash and cash equivalents decreased by $4,724,000 to $4,360,000 at June 30, 1999 from $9,084,000 at June 30, 1998. This decrease was used primarily to purchase investment securities and mortgage-backed securities. Management maintains a level of cash and equivalents, which is desirable to meeting normal cash flow requirements of its customers for the funding of loan requests and repayment of deposits. Investment securities increased $3,471,000 to $5,481,000 at June 30, 1999 from $2,010,000 at June 30, 1998. This increase is primarily the result of the purchase of available for sale agency bonds with call provisions ranging from four months to 18 months and rates averaging 6.43%. 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. Mortgage-backed securities increased $3,967,000 to $4,306,000 at June 30, 1999 from $339,000 at June 30, 1998. This increase is made up of two adjustable rate mortgage-backed instruments and six fixed rate instruments. The adjustable rate instruments were classified as held to maturity due to their ability to absorb interest rate fluctuations. The fixed rate instruments were placed in available for sale for liquidity purposes. The purchase of these eight mortgage-backed securities is a result of management's response to the Company's declining loan portfolio ratio of one to four family mortgages. The ratio of one to four family mortgages has declined as a result of the Company's interest rate management program of selling fixed rate mortgages on the secondary market. - -------------------------------------------------------------------------------- Net loans receivable increased $14,310,000 to $109,900,000 at June 30, 1999 from $95,590,000 at June 30, 1998. The net increase is primarily attributable to increases in non-residential and multi-family mortgages of $8,538,000, commercial loans of $3,712,000, consumer loans of $1,242,000 and one to four family mortgages of $1,769,000, offset by a net decrease in construction and loans in process of $890,000. Such increases are attributable to the economic health of the Bank's primary lending area and the competitive pricing of the Bank's loan products. The funding for the loan growth was provided primarily by an increase in deposits. Deposits increased by $16,787,000 or 18.96% to $105,339,000 at June 30, 1999 from $88,552,000 at June 30, 1998. This increase represents increases in certificate of deposits of $9,616,000, core savings and NOW deposits of $2,427,000, money market demand deposits of $3,169,000,and non-interest-bearing demand deposits of $1,575,000. As noted above, the increase in deposits was primarily from the Wintersville branch. Stockholders equity increased $65,000 to $14,993,000 at June 30, 1999 from $14,928,000 at June 30, 1998. Through June 30, 1999, the Company initiated the payment of dividends of $.32 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. Comparison of the Results of Operations for the Years Ended June 30, 1999 and 1998 Net Income. Net income for the year ended June 30,1999 decreased $64,000 or 7.55% to $784,000 from $848,000 for the same period ended June 30, 1998. The primary reason for the decrease in net income was due to the costs incurred to operate and facilitate the growth of the Wintersville branch. Net Interest Income. The Company's net interest income increased $276,000, or 6.70%, to $4,394,000 for the year ended June 30, 1999 from $4,118,000 for the same period ended 1998. The interest rate spread remained at 3.30% for both periods ended June 30, 1999 and 1998. Interest Income. Total interest income increased $782,000, or 9.30%, to $9,192,000 for the year ended June 30, 1999 from $8,410,000 for the comparable 1998 period. The increase in interest income resulted primarily from an increase in earnings on average loans of $780,000. Average principal balances of loans increased $10,056,000 to $103,764,000 for the year ended June 30, 1999 from $93,708,000 for the comparable 1998 period. However, the yield on interest-earning assets decreased 18 basis points to 7.95% for the year ended June 30, 1999 from 8.13% for the comparable 1998 period. Such decrease in yields for fiscal 1999 was primarily due to the origination of lower yielding investments and mortgage-backed securities, which reflect current market rates of interest. Interest Expense. Total interest expense increased $505,000 or 11.79% to $4,797,000 for the year ended June 30, 1999 compared to $4,292,000 for the comparable 1998 period. The increase in expense is primarily due to an increase in the average volume of interest-bearing demand deposits of $3,436,000 and an increase in the average volume of certificates of deposits of $10,258,000. However, the average cost on interest-bearing liabilities decreased 18 basis points to 4.65% for the year ended June 30, 1999 from 4.83% for the comparable 1998 period. Such decrease reflects an overall decrease in the costs of deposits which was offset slightly by the use of more expensive Federal Home Loan Bank advances. Provision for Loan Losses. For the year ended June 30, 1999, the provision for loan losses was $150,000 as compared to $254,000 for the comparable 1998 period. Net charge-offs for the period ended June 30, 1999 were $45,000 compared to $144,000 for the comparable 1998 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 increased by $191,000, or 34.23%, to $749,000 for the year ended June 30, 1999 compared to $558,000 for the same period ended 1998. Service charges on deposit accounts increased by $106,000, or 39.41%, due to the increase in volume and number of deposit accounts and a slight increase in fees. In addition, there was an increase of $36,000 from the recognition of servicing rights on fixed-rate mortgage loans sold in the secondary market. - -------------------------------------------------------------------------------- Noninterest Expense. Noninterest expense increased $674,000, or 22.07%, to $3,728,000 for the year ended June 30, 1999 from $3,054,000 for the same period ended 1998. Compensation and benefits increased $368,000, or 26.72%, due primarily to additional hiring of employees to operate the Wintersville branch coupled with an increase of $87,000 associated with the funding of the Company's Restricted Stock Plan for employees. Occupancy and equipment increased $204,000, or 53.20%, due primarily to the new Wintersville branch that opened in June 1998. Professional fees decreased by $39,000 in fiscal 1999 due to a decrease in services for compliance with regulatory requirements and employee benefit plans. Data processing increased $45,000, or 15.17%, due primarily to the additional transaction volume that was created by the opening of the Wintersville branch. Other operating expense increased by $96,000 in fiscal 1999 due primarily to an increase in Director's Restricted Stock Plan of $47,000 and an increase of $42,000 as a result of increased operational costs of additional transaction volumes relating to the use of ATMs and credit card programs Income Taxes. Income tax expense decreased $39,000 or 7.49% to $482,000 for the year ended June 30, 1999 compared to $521,000 for the same period ended 1998 due to a 7.54% decrease in income before income taxes. The effective tax rate for income taxes as of the years ended June 30, 1999 and 1998 was 38%. 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 for the year ended June 30, 1999 was $2,821,000 as compared to net cash used by operating activities of $183,000 for the same period ended 1998. This increase in cash was the result of net proceeds from the sale of loans amounting to $1,455,000, amortization, depreciation and loan loss provision of $573,000 and net income of $784,000. Net cash used for investing activities for the year ended June 30, 1999 increased $16,367,000 to $22,420,000 from $6,053,000 for the year ended June 30, 1998. This increase was primarily attributable to a $4,756,000 net increase in loans funded and a $13,537,000 increase in the net amount of investment and mortgage-backed securities purchased coupled with a decrease in the amount used for the purchase of premises and equipment of $1,888,000. Net cash provided by financing activities for the year ended June 30, 1999 increased $6,348,000 to $14,875,000 from $8,527,000 for the same period ended 1998. The increase was primarily a result of an increase in net deposits of $8,305,000 and a reduction in the amount of company stock repurchased for treasury and benefit plans of $1,267,000 coupled with a decrease in net advances from the FHLB of $3,253,000. 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. YEAR 2000 EVALUATION Rapid and accurate data processing is essential to the Company's operations. Many computer programs can only distinguish the final two digits of the year entered (a common programming practice in prior years) and are expected to read entries for the year 2000 as the year 1900 or as zero and an incorrect attempt to compute payment, interest, delinquency and other data. The Company has been evaluating both information technology (computer systems) and non-information technology systems (e.g. vault timers, electronic door lock and elevator controls). Based upon such evaluations; management has determined that the Company has year 2000 risk in three areas: (1) Company's own computers, (2) Computers of others used by the Company's borrowers, and (3) Computers of others who provide the Company with data processing. Company's Own Computers. As of June 30, 1999, the Company has upgraded its computer system to comply with the year 2000 risk. Such costs expended were not material to the financial statements of the Company. The Company does not anticipate any additional costs throughout the remainder of calendar 1999. - -------------------------------------------------------------------------------- Borrowers. The Company has evaluated most of their borrowers and does not believe the year 2000 problem should, on an aggregate basis, impact their ability to make payments to the Company. The Company believes that most of their residential borrowers are not dependent on their home computers for income and that none of their commercial borrowers are so large that the year 2000 problem would render them unable to collect revenue or rent and, in turn, continue to make loan payments to the Company. The Company does not expect any material costs to address this risk area and believes they are year 2000 compliant in this risk area. Data Processing. This risk is primarily focused on one third party service bureau that provides virtually all of the Company's data processing. Effective November of 1998, this service bureau has advised the Company that they are now year 2000 compliant. Contingency Plan. The Company is continuing to monitor any changes to the service bureau and any effects that it might have on their status as year 2000 compliant. If the service bureau fails, the Company will attempt to locate an alternative service bureau that is year 2000 compliant. If the Company is unsuccessful, it will use its existing computer system to enter deposit balances and interest on these accounts. If this labor-intensive approach is necessary, management and employees will become much less efficient. However, the Company believes that they would be able to operate in this manner indefinitely, until their existing service bureau, or their replacement, is able to again provide data processing services. If very few institutional service bureaus were operating in the year 2000, the Company's replacement costs, assuming the Company could negotiate an agreement, could be material. The written contingency and business resumption plan has been completed, validated and tested. In July of 1999, the Board of Directors of the Company approved such plan. The plan is updated for any changes in the Company's mission critical applications. Plan updates and changes through the remainder of 1999 are subject to additional validation, testing, and approval upon implementation. While the Company's year 2000 plan was designed to significantly address the year 2000 problems, the occurrence of the following could negatively impact the Company: (a) utility service companies may be unable to provide the necessary service to implement the Company's data systems or provide sufficient sanitary conditions for its offices; or (b) the Company's service bureau provider could have a major malfunction in their system or their service could be disrupted due to their utility providers, or some combination of the two; or (c) the Company may have to transact its business manually. Successful and timely completion of the year 2000 plan is based upon the Company's best estimates derived from various assumptions of future events which are inherently uncertain, including the progress and results of its external service bureau, testing plans, and all vendors, suppliers and customer readiness. Despite the Company's best efforts to address the year 2000 problems, the vast number of external entities that have direct and indirect business relationships with the Company, such as, customers, vendors, payment system providers and other financial institutions, make it impossible to assure that a failure to achieve compliance by one or more of these entities would not have a material adverse impact on the Company's business or its consolidated financial statements. 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, 1999 and 1998, and the related consolidated statements of income, changes in 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, 1999 and 1998, 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 July 30, 1999 ADVANCE FINANCIAL BANCORP CONSOLIDATED BALANCE SHEET
June 30, ------------------------------------ 1999 1998 -------------- -------------- ASSETS Cash and cash equivalents: Cash and amounts due from banks $ 1,395,704 $ 1,334,831 Interest-bearing deposits with other institutions 2,964,166 7,749,362 ----------- ----------- Total cash and cash equivalents 4,359,870 9,084,193 ----------- ----------- Investment securities: Securities held to maturity (fair value of $970,914 and $1,753,325) 999,896 1,745,667 Securities available for sale 4,481,475 264,020 ----------- ----------- Total investment securities 5,481,371 2,009,687 ----------- ----------- Mortgage-backed securities: Securities held to maturity (fair value of $2,456,645 and $364,031) 2,472,681 339,362 Securities available for sale 1,832,845 - ----------- ----------- Total mortgage-backed securities 4,305,526 339,362 ----------- ----------- Loans held for sale - 1,454,700 Loans receivable (net of allowance for loan losses of $582,280 and $477,654) 109,899,551 95,590,197 Premises and equipment, net 4,084,793 4,082,857 Federal Home Loan Bank stock, at cost 629,500 622,200 Accrued interest receivable 664,058 617,980 Other assets 501,967 384,237 ------------ ------------ TOTAL ASSETS $129,926,636 $114,185,413 ============ ============ LIABILITIES Deposits $105,338,770 $ 88,551,543 Advances from Federal Home Loan Bank 9,000,000 10,000,000 Advance payments by borrowers for taxes and insurance 196,993 193,346 Accrued interest payable and other liabilities 397,421 512,402 ------------ ------------- TOTAL LIABILITIES 114,933,184 99,257,291 ------------ ------------- 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, 1999 and 1998 108,445 108,445 Additional paid in capital 10,316,719 10,288,928 Retained earnings - substantially restricted 7,623,733 7,130,056 Unallocated shares held by Employee Stock Ownership Plan (ESOP) (597,767) (715,158) Unallocated shares held by Restricted Stock Plan (RSP) (682,357) (869,636) Treasury stock (103,165 and 53,802 shares at cost) (1,626,890) (1,000,863) Accumulated other comprehensive loss (148,431) (13,650) ------------- ------------ TOTAL STOCKHOLDERS' EQUITY 14,993,452 14,928,122 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $129,926,636 $114,185,413 ============ ============
See accompanying notes to the consolidated financial statements. - -------------------------------------------------------------------------------- ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30, --------------------------------- 1999 1998 ----------- ------------ INTEREST AND DIVIDEND INCOME Loans $ 8,516,921 $7,736,893 Investment securities 188,158 303,509 Interest-bearing deposits with other institutions 325,233 298,514 Mortgage-backed securities 120,688 33,087 Federal Home Loan Bank stock 40,560 37,973 ----------- ---------- Total interest and dividend income 9,191,560 8,409,976 ----------- ---------- INTEREST EXPENSE Deposits 4,311,105 3,786,395 Advances from Federal Home Loan Bank 486,141 505,356 ----------- ---------- Total interest expense 4,797,246 4,291,751 ----------- ---------- NET INTEREST INCOME 4,394,314 4,118,225 Provision for loan losses 150,000 253,606 ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,244,314 3,864,619 ----------- ---------- NONINTEREST INCOME Service charges on deposit accounts 374,831 268,941 Gain on sale of loans 92,909 97,668 Gain on sale of investments 13,745 - Other income 267,703 191,606 ----------- ---------- Total noninterest income 749,188 558,215 ----------- ---------- NONINTEREST EXPENSE Compensation and employee benefits 1,743,773 1,376,134 Occupancy and equipment 588,702 384,261 Professional fees 143,285 182,041 Advertising 120,726 121,155 Data processing 340,113 295,323 Other operating expenses 791,151 694,913 ----------- ---------- Total noninterest expense 3,727,750 3,053,827 ----------- ---------- Income before income taxes 1,265,752 1,369,007 Income taxes 481,925 520,797 ----------- ---------- NET INCOME $ 783,827 $ 848,210 =========== =========== EARNINGS PER SHARE: Basic $ .83 $ .85 Diluted $ .83 $ .85
See accompanying notes to the consolidated financial statements. ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Unallocated Unallocated Accumulated Total Additional Earnings Shares Shares Other Stock- Common Paid In Substantially Held Held Treasury Comprehensive holders' Stock Capital Restricted By ESOP By RSP Stock Loss Equity ----- ------- ---------- ------- ------ ----- ---- ------ Balance, June 30, 1997 $108,445 $10,221,528 $6,597,836 $(796,195) $ - - $ (6,569) $16,125,045 Comprehensive income: Net income 848,210 848,210 Net unrealized loss on securities (7,081) (7,081) ----------- Comprehensive income 841,129 Purchase of treasury stock (1,000,863) (1,000,863) Purchase of stock for RSP (893,587) (893,587) Accrued compensation expense for RSP 67,583 67,583 RSP forfeited shares (43,632) (43,632) Release of earned ESOP shares 67,400 81,037 148,437 Cash dividends declared ($.32 per share) (315,990) (315,990) ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------- 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 (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 ========== =========== ========== ========== ========== ============ ========== ===========
See accompanying notes to the consolidated financial statements. ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30, -------------------------------------- 1999 1998 --------------- -------------- OPERATING ACTIVITIES Net income $ 783,827 $ 848,210 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 423,127 135,894 Provision for loan losses 150,000 253,606 Gain on sale of investments (13,745) - Gain on sale of loans (92,909) (97,668) Origination of loans held for sale (8,658,980) (8,136,349) Proceeds from the sale of loans 10,206,589 6,779,317 (Increase) decrease in accrued interest receivable (46,078) 37,687 Increase in accrued interest payable 3,644 10,029 Other, net 65,687 (13,339) ------------ -------------- Net cash provided by (used for) operating activities 2,821,162 (182,613) ------------ ------------ INVESTING ACTIVITIES Investment securities held to maturity: Purchases (2,987,051) (1,000,000) Maturities and repayments 3,737,988 7,100,000 Investment securities available for sale: Purchases (4,498,871) (231,875) Maturities and repayments 11,440 11,555 Proceeds from sale 139,995 - Mortgage-backed securities held to maturity: Purchases (2,516,658) - Maturities and repayments 380,968 28,210 Mortgage-backed securities available for sale: Purchases (2,046,363) - Maturities and repayments 149,274 - Purchases of Federal Home Loan Bank Stock (7,300) (45,500) Net increase in loans (14,459,354) (9,703,390) Purchases of premises and equipment (324,250) (2,211,714) ------------- ------------- Net cash used for investing activities (22,420,182) (6,052,714) ------------ ------------ FINANCING ACTIVITIES Net increase in deposits 16,787,227 8,482,465 Proceeds of advances from Federal Home Loan Bank - 7,000,000 Repayments of advances from Federal Home Loan Bank (1,000,000) (4,747,449) Net change in advances for taxes and insurance 3,647 6,608 Purchase of treasury stock (626,027) (1,000,863) Purchase of RSP stock - (893,587) Cash dividends paid (290,150) (320,074) ------------ ---------- Net cash provided by financing activities 14,874,697 8,527,100 ------------ ---------- (Decrease) increase in cash and cash equivalents (4,724,323) 2,291,773 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,084,193 6,792,420 ------------ ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,359,870 $9,084,193 ============ ==========
See accompanying notes to the consolidated financial statements. 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 ---------------------------------------------- In December 1996, Advance Financial Bancorp (the "Company") was formed as part of a corporate reorganization completed in connection with the mutual - to - stock conversion of Advance Financial Savings Bank, (the "Bank"). As a result of this transaction, the Bank and its wholly-owned service corporation subsidiary, Advance Financial Service Corporation of West Virginia became 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, commercial loans, 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 as available for sale or held to maturity upon their acquisition based upon management's intent and ability. 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 Consolidated 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, 1999, there were no loans held for sale. At June 30, 1998, the cost of loans held for sale approximated market value. 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 is classified at the lower of the recorded investment in the property or its fair value minus estimated costs of sale. Prior to foreclosure, the value of the underlying collateral is written down by a charge to the allowance for loan losses, if necessary. 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. 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 -------------------- Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." In adopting Statement No. 130, the Company is required to present comprehensive income and its components in a full set of general-purpose financial statements for all periods presented. The Company has elected to report the effects of Statement No. 130 as part of the Consolidated Statement of Changes in Shareholders' 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, 1999 and 1998 were $4,793,602 and $4,281,722, respectively. Cash payments for income taxes for the fiscal years ended June 30, 1999 and 1998 were $468,000 and $533,795, 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 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 affected based on the fair value of the stock options granted under this plan. Recent Accounting Pronouncements -------------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement provides accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring the recognition of those items as assets or liabilities in the statement of financial position, recorded at fair value. 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. This statement applies prospectively for all fiscal quarters of all years beginning after June 15, 2000. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements (continued) -------------------------------------------- The Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement requires that after the securitization of mortgage loans, an entity classify the resulting mortgage-backed securities or other retained interest based on its ability and intent to sell or hold these securities in accordance with Statement No. 115. This Statement applies to the first fiscal quarter beginning after December 31, 1998. The Company does not believe the effect of the adoption of these accounting statements will be material. 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 effect net income. 2. EARNINGS PER SHARE Basic "Earnings Per Share" (EPS) is based on the weighted average number of common shares outstanding during the year. Diluted EPS is based on the weighted average of common shares outstanding and common share equivalents outstanding during the year. There were no convertible securities which would effect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income for 1999 and 1998 will be used as the numerator. The following table sets forth a reconciliation of the denominator of the basic and diluted earnings per share computation.
1999 1998 ----------- ------------ Denominator: Denominator for basic earnings per share weighted-average shares 946,576 1,001,108 Effect of dilutive securities: Employee stock options - 423 ----------- ------------ Dilutive potential common shares - 423 ----------- ------------ Denominator for diluted earnings per share - adjusted weighted-average assumed conversion 946,576 1,001,531 =========== ============
3. INVESTMENT SECURITIES The amortized cost and estimated fair value of investments at June 30 are as follows:
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 ========== =========== ========== ==========
1998 --------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ---------- ---------- Held-to-maturity ---------------- U.S. Government and Agency Obligations $1,745,667 $ 8,344 $ (686) $1,753,325 ---------- ----------- ---------- ---------- Available-for-sale ------------------ Common stocks 231,875 - (11,250) 220,625 Money Fund Securities 52,827 - (9,432) 43,395 ------------------------ ---------- ------------ Total available for sale 284,702 - (20,682) 264,020 ----------------------- ---------- ----------- Total Investment Securities $2,030,369 $ 8,344 $ (21,368) $2,017,345 ========== ========== ========== ==========
The weighted average interest rate on investment securities was 6.58% and 6.69% at June 30, 1999 and 1998, respectively. The amortized cost and estimated fair value of investment securities at June 30, 1999, 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 $ 105,625 $ 88,750 After one through five years 1,499,730 1,470,238 After five through ten years 2,040,505 1,985,750 After ten years 1,998,385 1,907,651 ---------- ---------- Total $5,644,245 $5,452,389 ========== ========== Gains on sales were $13,745 and $0 for the years ended June 30, 1999 and 1998, respectively. No losses on sales were realized during either year ended June 30, 1999 and 1998. Proceeds on sale of investment securities available for sale were $139,995 and $-0- for the years ended June 30, 1999 and 1998 respectively. 4. MORTGAGE-BACKED SECURITIES The amortized cost and estimated fair value of mortgage-backed securities at June 30 are as follows:
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 ========== ======= ========= ==========
1998 ---------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ------- --------- ---------- Held-to-maturity ---------------- Government National Mortgage Association $ 174,659 $10,875 $ - $ 185,534 Federal Home Loan Mortgage Corporation 164,703 13,794 - 178,497 ---------- ------- --------- ---------- Total mortgage backed securities $ 339,362 $24,669 $ - $ 364,031 ========== ======= ========== ==========
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, 1999. 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. Mortgage backed securities with a book value of $705,780 and a fair value of $703,515 are one year adjustable types currently paying 6%. The remaining instruments are all fixed rate types ranging from 6% to 10%. Certain instruments have been recorded as available for sale based upon managements' 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, 1999 or 1998. 5. LOANS RECEIVABLE Loans receivable are comprised of the following at June 30:
1999 1998 ------------- ------------- Mortgage loans: 1 - 4 family 59,673,803 $57,904,667 Multi-family 2,689,531 1,786,427 Non-residential 23,216,018 15,581,130 Construction 2,073,165 5,017,202 ------------- ------------ Total mortgage loans 87,652,517 80,289,426 ------------- ------------ Consumer loans: Home improvement $ 1,195,518 1,000,801 Automobile 8,647,953 7,659,017 Share loans 1,360,054 1,296,684 Other 2,384,401 2,389,041 ------------ ------------- Total consumer loans 13,587,926 12,345,543 ------------ ------------ Commercial loans 10,387,570 6,675,780 ------------ ------------ Less: Loans in process 1,006,813 3,061,801 Net deferred loan fees 139,369 181,097 Allowance for loan losses 582,280 477,654 ------------ ------------- 1,728,462 3,720,552 ------------ ------------ Total loans $109,899,551 $95,590,197 ============ ===========
Single family mortgage loans serviced for Freddie Mac, which are not included in the Consolidated Balance Sheet, totaled $19,040,615 and $10,972,452 at June 30, 1999 and 1998, 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:
1999 1998 ----------- ------------ Commitments to originate loans Fixed rate $ 637,060 $1,875,700 Variable rate $ 1,467,300 $1,639,200 Loans in process $ 1,006,813 $3,061,801 Unused lines of credit $ 7,456,372 $5,951,178 Letters of credit $ 22,500 $ 48,214
The range of interest rates on fixed rate loan commitments was 7.375% to 9.25% at June 30, 1999. 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. Loan 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. In management's opinion, all of these loans are on substantially the same terms and conditions as loans to other individuals and businesses of comparable creditworthiness. 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, 1999 is as follows: Amount 1998 Additions Collected 1999 --------- ------------- ---------- ----------- $969,459 $1,544,500 $809,935 $1,704,024 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, 1999 and 1998, 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: 1999 1998 ---------- --------- Balance, beginning of period $477,654 $367,779 Add: Provisions charged to operations 150,000 253,606 Loan recoveries 1,529 14,280 ---------- --------- Total 629,183 635,665 Less loans charged off 46,903 158,011 --------- -------- Balance, end of period $582,280 $477,654 ======== ======== Nonperforming loans totaled $765,126 and $449,481 at June 30, 1999 and 1998, respectively. 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. At June 30, 1998, the Company had no loans that met the definition of impaired. 7. PREMISES AND EQUIPMENT, NET Premises and equipment are summarized by major classification as follows: 1999 1998 ----------- ------------ Land $ 303,857 $ 303,857 Buildings and improvements 3,409,515 3,376,313 Furniture, fixtures, and equipment 1,909,094 1,622,477 ----------- ---------- Total 5,622,466 5,302,647 Less accumulated depreciation 1,537,673 1,219,790 ----------- ---------- Premises and equipment, net $ 4,084,793 $4,082,857 =========== ========== Depreciation charged to operations amounted to $322,314 and $184,508 for the years ended June 30, 1999 and 1998, 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: 1999 1998 --------- --------- Investment securities $ 43,509 $ 33,741 Mortgage-backed securities 28,741 6,436 Loans receivable 591,808 577,803 -------- -------- Total $664,058 $617,980 ======== ======== 10. DEPOSITS Deposit accounts are summarized at June 30 as follows:
1999 1998 ---------------------------- ---------------------------- Percent of Percent of Amount Portfolio Amount Portfolio ------------- ----------- ------------ ----------- Non-interest-bearing $ 3,734,867 3.6% $ 2,159,434 2.4% ------------- ------ ------------ ------ Savings accounts 16,379,596 15.6 14,877,841 16.8 NOW accounts 9,060,464 8.6 8,135,315 9.2 Money market accounts 12,447,642 11.8 9,278,592 10.5 ------------- ----- ------------ ------ 37,887,702 36.0 32,291,748 36.5 ------------- ----- ------------ ------ Time certificates of deposit: 2.00 - 4.00% 2,260,291 2.1 1,675,183 1.9 4.01 - 6.00% 45,841,219 43.5 32,688,606 36.9 6.01 - 8.00% 15,614,691 14.8 19,736,572 22.3 ------------- ----- ------------ ------ 63,716,201 60.4 54,100,361 61.1 ------------- ----- ------------ ------ Total $105,338,770 100.0% $88,551,543 100.0% ============ ===== =========== =====
10. DEPOSITS (CONTINUED) The scheduled maturities of time certificates of deposit at June 30, 1999 are as follows: Amount ------ Within one year $46,016,799 Beyond one year but within two years 10,532,169 Beyond two years but within three years 2,703,099 Beyond three years but within five years 2,992,677 Beyond five years 1,471,457 ------------ Total $63,716,201 =========== The Company had time certificates with a minimum denomination of $100,000 in the amount of approximately $7,258,263 and $9,762,016 at June 30, 1999 and 1998, 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: 1999 1998 ---------- ------------ Passbooks $ 404,099 $ 414,293 NOW and Money Market Deposit accounts 649,652 558,786 Time certificates 3,257,354 2,813,316 ---------- ---------- Total $4,311,105 $3,786,395 ========== ========== 11. ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank at June 30 consists of the following: Principal Interest Interest Due Due Rate 1999 1998 ----------- --------- -------- ----------- ------------- Advance 03-25-2002 Monthly 5.51% $3,000,000 $ 3,000,000 Advance 11-04-2002 Monthly 5.37% 5,000,000 5,000,000 Advance 01-23-2008 Monthly 4.88% - 1,000,000 Advance 01-23-2008 Monthly 4.94% 1,000,000 1,000,000 ---------- ------------ $9,000,000 $10,000,000 ========== =========== 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 interest rates with putable options. In addition, the Bank entered into a "RepoPlus" Advance credit arrangement which is renewable annually and incurs no service charges. During 1999, the Bank had a borrowing limit of approximately $52 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. 12. INCOME TAXES The components of income tax expense for the years ended June 30 are summarized as follows: 1999 1998 ---------- --------- Currently payable: Federal $410,461 $435,077 State 59,453 66,422 -------- -------- 469,914 501,499 Deferred 12,011 19,298 -------- -------- Total $481,925 $520,797 ======== ======== The following temporary differences gave rise to deferred tax asset and liabilities:
1999 1998 --------- --------- Deferred tax assets Allowance for loan losses $ 197,975 $162,402 Loan origination fees, net 21,520 32,820 Net unrealized loss on securities 76,464 7,032 Other, net 10,241 11,110 --------- --------- Deferred tax assets 306,200 213,364 --------- -------- Deferred tax liabilities Premise and equipment depreciation 235,712 211,607 Bad debt reserves for tax reporting purposes 91,802 110,162 Other, net 54,867 25,197 --------- --------- Deferred tax liabilities 382,381 346,966 --------- -------- Net deferred tax liabilities $ 76,181 $133,602 ========= ========
During 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. The recapture tax will be paid in six equal installments beginning with the 1998 tax year. At December 31, 1998, the Bank had accumulated $270,005 in post 1987 bad debt reserves. 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:
1999 1998 --------------------- -------------------- Amount Percent Amount Percent Provision at statutory rate $430,356 34.0% $465,331 34.0% State income tax expense, net of federal tax benefit 40,504 3.2 43,839 3.2 Tax exempt interest (8,441) (.7) (6,294) (.5) Other, net 19,506 1.5 17,921 1.3 -------- ----- -------- ----- Actual expense and effective rate $481,925 38.0% $520,797 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 12% 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 $25,579 and $37,019 for the years ended June 30, 1999 and 1998, respectively. 14. RESTRICTED STOCK PLAN (RSP) In 1998, the Board of Directors adopted a RSP for certain directors, 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. As of June 30, 1999, 15,180 shares have been issued to non-employee directors, 23,438 shares have been issued to officers, and 4,760 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 16,856 shares were vested as of June 30, 1999. Total operating expense attributed to the RSP amounted to $201,881 and $67,583 for the years ended June 30, 1999 and 1998 respectively. 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. Compensation expense for the ESOP was $145,182 and $148,437 for the years ended June 30, 1999 and 1998, respectively. The following table represents the components of the ESOP shares: 1999 1998 ---------- ---------- Allocated shares 22,632 11,549 Shares released for allocation 4,338 4,338 Shares distributed (1,922) (1,015) Unreleased shares 59,786 70,869 ------ ------ Total ESOP shares 84,834 85,741 ====== ====== Fair value of unreleased ESOP shares $717,432 $1,293,350 ======== ========== 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, 1999, the initial stock options granted remain outstanding with none being exercised. Effective July 1, 1996, the Company adopted Statement of Financial Accounting Standards Statement No. 123, "Accounting for Stock-Based Compensation." This statement encourages, but does not require the Company to recognize compensation expense for all awards of equity instruments issued. The statement establishes a fair value based method of accounting for stock-based compensation plans. The standard applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities in amounts based on the price of the entity's common stock or other equity instruments. Statement No. 123 permits companies to continue to account for such transactions under Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," but requires disclosure in a note to the financial statements pro forma net income and earnings per share as if the Company had applied the new method of accounting. Under Accounting Principles Board Opinion 25, no compensation expense has been recognized with respect to the options granted under the stock option plans. Had compensation expense been determined on the basis of fair value pursuant to Statement No. 123, net income and earnings per share would have been reduced as follows: 1999 1998 ----------- ---------- Net Income: As reported $783,827 $848,210 ======== ======== Pro forma $767,939 $601,588 ======== ======== Basic Earnings Per Share: As reported $ .83 $ .85 =========== ============ Pro forma $ .81 $ .60 =========== ============ Diluted Earnings Per Share: As reported $ .83 $ .85 =========== ============ Pro forma $ .81 $ .60 =========== ============ The following table presents share data related to the stock option plans: 1999 1998 ------- ------- Outstanding, beginning 65,061 - Granted - 65,061 Exercised - - Forfeited - - ------- ------- Outstanding, ending (at $18.75 per share) 65,061 65,061 ====== ====== 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 1999 and 1998, respectively: expected dividend yield of 2.67% and 1.71%; expected volatility of 8.9% and 20.94%; risk-free interest rate of 6.02% and 5.55%; and expected lives of 8 and 9 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 $20,820 and $5,205 for the years ended June 30, 1999 and 1998, 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, 1999 for all noncancellable equipment and land leases follows: Fiscal Year Ending June 30, Amount --------------- ------ 2000 $ 71,758 2001 73,558 2002 76,338 2003 78,338 2004 77,518 2005 and thereafter 1,827,700 ---------- $2,205,210 ========== 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. 19. OTHER COMPREHENSIVE INCOME Other comprehensive income included 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 available for sale securities includes reclassification adjustments to reclassify gains, net of tax for sales of the related security of $4,673 and $-0- for the years ended June 30, 1999 and 1998. 20. CONVERSION AND REORGANIZATION In accordance with regulations, at the time that the Bank converted from a mutual savings bank to a stock savings bank, a portion of retained earnings was restricted by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. 21. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS The estimated carrying amounts and fair values at June 30 are as follows:
1999 1998 -------------------------------- ------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial assets: Cash and cash equivalents $ 4,359,870 $ 4,359,870 $ 9,084,193 $ 9,084,193 Investment securities Held to maturity 999,896 970,914 1,745,667 1,753,325 Available-for-sale 4,481,475 4,481,475 264,020 264,020 Mortgage-backed securities: Held to maturity 2,472,681 2,456,645 339,362 364,031 Available for sale 1,832,845 1,832,845 - - Loans receivable 109,899,551 110,308,000 95,590,197 96,816,000 Federal Home Loan Bank Stock 629,500 629,500 622,200 622,200 Accrued interest receivable 664,058 664,058 617,980 617,980 Loans held for sale - - 1,454,700 1,454,700 ------------ ------------ ------------ ------------ Total $125,339,876 $125,703,307 $109,718,319 $110,976,449 ============ ============ ============ ============
1999 1998 -------------------------------- ------------------------------ Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial liabilities: Deposits $105,338,770 $105,243,000 $ 88,551,543 $ 88,954,000 Advances from Federal Home Loan Bank 9,000,000 9,000,000 10,000,000 9,992,000 Advance payment by borrowers for taxes and insurance 196,993 196,993 193,346 193,346 Accrued interest payable 50,357 50,357 46,713 46,713 ------------ ------------ ------------ ------------ Total $114,586,120 $114,490,350 $ 98,791,602 $ 99,186,059 ============ ============ ============ ============
21. 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 4. 22. 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 as of June 30, 1999 that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of June 30, 1999, 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, ------------------------------- ------------------------------ 1999 1998 1999 1998 ------------- -------------- ------------- ------------- Total equity $14,993,452 $14,928,122 $13,481,216 $12,804,649 Unrealized loss on debt securities 137,293 6,225 137,293 6,225 ------------- ------------- ------------- -------------- Tier I, core, and tangible capital 15,130,745 14,934,347 13,618,509 12,810,874 Allowance for loan losses 582,280 477,654 582,280 477,654 ------------- ------------- ------------ ------------- Risk-based capital $15,713,025 $15,412,001 $14,200,789 $13,288,528 =========== =========== =========== ===========
22. CAPITAL REQUIREMENTS (CONTINUED) The actual capital amounts and ratios were as follows:
Company at June 30, -------------------------------------------------- 1999 1998 ---------------------- ---------------------- Amount Ratio Amount Ratio ------ ----- ------ ----- Total Capital to Risk-Weighted Assets ------------------------------------- Actual $15,713,025 17.02% $15,412,001 19.27% For Capital Adequacy Purposes 7,385,779 8.00 6,398,080 8.00 To be "Well Capitalized" 9,232,224 10.00 7,997,600 10.00 Tier I Capital to Risk-Weighted Assets Actual $15,130,745 16.39% $14,934,347 18.67% For Capital Adequacy Purposes 3,692,890 4.00 3,199,040 4.00 To be "Well Capitalized" 5,539,334 6.00 4,798,560 6.00 Core Capital to Adjusted Assets Actual $15,130,745 11.58% $14,934,347 12.95% For Capital Adequacy Purposes 5,227,400 4.00 4,612,000 4.00 To be "Well Capitalized" 6,534,250 5.00 5,765,000 5.00 Tangible Capital to Adjusted Assets Actual $15,130,745 11.58% $14,934,347 12.95% For Capital Adequacy Purposes 1,960,530 1.50 1,729,500 1.50 To be "Well Capitalized" N/A N/A N/A N/A
Bank at June 30, ------------------------------------------------------ 1999 1998 --------------------- --------------------------- Amount Ratio Amount Ratio ------ ----- ------ ----- Total Capital to Risk-Weighted Assets Actual $14,200,789 15.79% $13,288,528 17.31% For Capital Adequacy Purposes 7,193,840 8.00 6,139,760 8.00 To be "Well Capitalized" 8,992,300 10.00 7,674,700 10.00 Tier I Capital to Risk-Weighted Assets Actual $13,618,509 15.14% $12,810,874 16.69% For Capital Adequacy Purposes 3,596,920 4.00 3,069,880 4.00 To be "Well Capitalized" 5,395,380 6.00 4,604,820 6.00 Core Capital to Adjusted Assets Actual $13,618,509 10.42% $12,810,874 11.13% For Capital Adequacy Purposes 5,227,400 4.00 4,602,840 4.00 To be "Well Capitalized" 6,534,250 5.00 5,753,550 5.00 Tangible Capital to Adjusted Assets Actual $13,618,509 10.42% $12,810,874 11.13% For Capital Adequacy Purposes 1,960,275 1.50 1,726,065 1.50 To be "Well Capitalized" N/A N/A N/A N/A
23. PARENT COMPANY The following are parent only condensed financial statements: CONDENSED BALANCE SHEET
June 30, 1999 1998 ----------- ----------- ASSETS Cash $ 576 $ 300 Deposits with subsidiary bank 2,170,019 2,819,809 Investment in subsidiary bank 12,883,449 12,089,491 Securities available for sale 88,750 220,625 Loan receivable from ESOP 597,767 715,158 Other assets 9,204 43,136 ----------- ----------- TOTAL ASSETS $ $15,749,765 $15,888,519 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Restricted stock plan payable $ 682,357 $ 869,634 Other liabilities 73,956 90,763 Stockholders' equity 14,993,452 14,928,122 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,749,765 $15,888,519 =========== ===========
CONDENSED STATEMENT OF INCOME
Year Ended June 30, 1999 1998 --------- --------- INCOME Interest income - loans $ 52,536 $ 64,468 Interest income - investments 2,802 16,550 Gain On sale of investments 13,745 -- --------- --------- Total interest income 69,083 81,018 OPERATING EXPENSES 114,542 131,706 --------- --------- Loss before equity in undistributed earnings of subsidiary (45,459) (50,688) Equity in undistributed earnings of subsidiary 807,472 877,871 --------- --------- Income before income taxes 762,013 827,183 Income tax benefit 21,814 21,027 --------- --------- NET INCOME $ 783,827 $ 848,210 ========= =========
23. PARENT COMPANY (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30, 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net income $ 783,827 $ 848,210 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary (807,472) (877,871) Gain on sale of investments (13,745) -- Other, net 46,667 73,833 ----------- ----------- Net cash provided by operating activities 9,277 44,172 ----------- ----------- INVESTING ACTIVITIES Purchase of securities available for sale -- (231,875) Proceeds from sale of investment securities 139,995 -- ESOP loan repayments 117,391 81,037 ----------- ----------- Net cash provided by (used for) investing activities 257,386 (150,838) ----------- ----------- FINANCING ACTIVITIES Purchase of Treasury Stock (626,027) (1,000,863) Cash dividends paid (290,150) (320,074) ----------- ----------- Net cash used for financing activities (916,177) (1,320,937) ----------- ----------- Decrease in cash and cash equivalents (649,514) (1,427,603) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,820,109 4,247,712 ----------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,170,595 $ 2,820,109 =========== ===========
38 EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS As independent auditors, we hereby consent to the incorporation of our report, dated July 30, 1999, incorporated by reference in this annual report of Advance Financial Bancorp on Form 10KSB for the year ended June 30, 1999, 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 23, 1999 EX-27 5 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1000 12-MOS JUN-30-1999 JUN-30-1999 1,395 2,964 0 0 6,314 3,473 3,428 109,900 582 129,927 105,339 0 594 9,000 0 0 108 14,885 129,927 8,517 675 0 9,192 4,311 4,797 4,394 150 14 3,728 1,266 1,266 0 0 784 .83 .83 3.80 456 309 0 0 478 48 2 582 582 0 557
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