EXHIBIT 13
<PAGE>
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.
<TABLE>
<CAPTION>
Dividends
Date High ($) Low ($) Declared ($)
---- -------- ------- ------------
<S> <C> <C> <C>
July 1, 1998 to September 30, 1998 18.13 13.88 .08
October 1, 1998 to December 31, 1998 14.38 12.63 .08
January 1, 1999 to March 31, 1999 13.50 11.63 .08
April 1, 1999 to June 30, 1999 12.63 10.44 .08
July 1, 1999 to September 30, 1999 12.50 12.00 .10
October 1, 1999 to December 31, 1999 13.75 11.63 .10
January 1, 2000 to March 31, 2000 13.50 10.00 .10
April 1, 2000 to June 30, 2000 11.00 9.00 .10
</TABLE>
The number of stockholders of record of common stock as of the record date
of August 31, 2000, was approximately 452. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At August 31, 2000, there were 932,285 shares outstanding. The
Company's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the conversion, or (2) the
regulatory capital requirements imposed by the OTS.
<PAGE>
Selected Financial Ratios and Other Data
For the Years Ended
June 30
--------------------
2000 % 1999 %
--------------------
Return on average assets
(net income divided by average total assets) .63 .64
Return on average equity
(net income divided by average equity) 6.01 5.22
Average equity to average assets ratio
(average equity divided by average assets) 10.53 12.34
Equity to assets at period end 10.37 11.54
Net interest spread 3.25 3.30
Dividend payout ratio 37.78 37.02
Net yield on average interest-earning assets 3.71 3.81
Non-performing loans to total assets .34 .59
Non-performing loans to total loans .41 .70
Allowance for loan losses to non-performing assets 74.06 70.67
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, Year 2000 issues and general economic conditions. Advance
Financial Bancorp (the "Company") undertakes no obligation to publicly release
the results of any revisions to those forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Overview
The Company conducts no significant business or operations of its own other
than holding all of the outstanding stock of Advance Financial Savings Bank (the
"Bank").
The Company's results from operations are primarily dependent on its net
interest income, which is the difference between the interest earned on its
assets, primarily loans and investments, and the interest expense on its
liabilities, primarily deposits and borrowings. Net interest income may be
affected significantly by general economic and competitive conditions and
policies of regulatory agencies, particularly those with respect to market
interest rates. The results of operations are also significantly influenced by
the level of noninterest expenses, such as compensation and employee benefits,
noninterest income, such as service charges on deposit related services, and the
Company's provision for loan losses.
Asset and Liability Management
The Company's net interest income is sensitive to changes in interest
rates, as the rates paid on interest-bearing liabilities generally change faster
than the rates earned on interest-earning assets. As a result, net interest
income will frequently decline in periods of rising interest rates and increase
in periods of decreasing interest rates.
To mitigate the impact of changing interest rates on net interest income,
the Company manages interest rate sensitivity and asset/liability products
through an asset/liability management committee (the "Committee"). The Committee
meets as necessary to determine the rates of interest for loans and deposits.
Rates on deposits are primarily based on the Company's need for funds and on a
review of rates offered by other financial institutions in the Company's market
area. Interest rates on loans are primarily based on the interest rates offered
by other financial institutions in the Company's market area, as well as, the
Company's cost of funds.
The Committee manages the imbalance between its interest-earning assets and
interest-bearing liabilities through the determination and adjustment of
asset/liability composition and pricing strategies. The Committee then monitors
the impact of the interest rate risk and earnings consequences of such
strategies for consistency with the Company's liquidity needs, growth and
capital adequacy. The Committee's principal strategy is to reduce the interest
rate sensitivity of interest-earning assets and attempt to match the maturities
of interest-earning assets with interest-bearing liabilities, while allowing for
a mismatch in an attempt to increase net interest income.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Company
has also instituted certain asset and liability management measures, including
underwriting long-term fixed rate loans that are saleable in the secondary
market, offering longer term deposit products and diversifying the loan
portfolio into shorter term consumer and commercial business loans. In addition,
the Company originates one year, three-year and five year adjustable rate
mortgage loans.
7
<PAGE>
Net Portfolio Value
The Company computes amounts by which the net present value of cash flow
assets, liabilities and off balance sheet items ("NPV") would change in the
event of a range of assumed changes in market interest rates. The computations
estimate the effect on the Company's NPV from instantaneous and permanent 1% to
3% (100 to 300 basis points) increases or decreases in market interest rates.
Based upon the Office of Thrift Supervision assumptions, the following table
presents the Company's NPV at June 30, 2000.
Changes in rates NPV Ratio (1) Change(2)
---------------- ------------- ---------
+300 bp 9.14 % (279) bp
+200 bp 10.39 (154) bp
+100 bp 11.42 ( 51) bp
0 bp 11.93
-100 bp 12.11 18 bp
-200 bp 11.58 ( 35) bp
-300 bp 11.22 ( 71) bp
(1) Calculated as the estimated NPV divided by present value of total assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
These calculations indicate that the Company's NPV could not only be
adversely affected by increases in interest rates but also could be adversely
affected by a decrease in interest rates of 200 or 300 basis points. In
addition, the Company may be deemed to have more than a normal level of
interest rate risk under applicable regulatory capital requirements.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market
interest rates, prepayments, and deposit run-offs, and should not be relied
upon as indicative of actual results. Certain shortcomings are inherent in
such computations. Although certain assets and liabilities may have similar
maturity or periods of repricing they may react at different times and in
different degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities
may lag behind changes in market interest rates. Certain assets, such as
adjustable rate mortgages, generally have features, which restrict changes in
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making calculations set
forth above. Additionally, an increased credit risk may result as the ability
of many borrowers to service their debt may decrease in the event of an
interest rate increase.
8
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended June 30, Month Ended June 30,
---------------------------------------------------------------- -----------------------
2000 1999 2000
------------------------------ ------------------------------- -----------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost
-------- -------- ---------- -------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $116,825 $9,564 8.19% $103,764 $8,517 8.21% $119,718 8.32%
Investment securities(2) 13,627 879 6.45% 9,696 554 5.71% 14,516 6.08%
Mortgage-backed
securities 3,936 256 6.49% 2,031 121 5.95% 3,664 6.73%
-------- ------- ------ ------- ------- ------ -------- ---------
Total interest-
earning assets 134,388 10,699 7.96% 115,491 9,192 7.95% 137,898 8.04%
------- ------ ------- ------ ---------
Non-interest-earning assets 7,151 6,286 6,994
-------- ------- --------
Total assets $141,539 121,777 $144,892
======== ======= ========
Interest-bearing
liabilities:
Interest-bearing
demand deposits $20,630 691 3.35% $19,846 650 3.28% $20,396 3.19%
Certificates of deposits 71,005 3,849 5.42% 59,066 3,257 5.51% 75,506 5.53%
Savings deposits 16,958 459 2.71% 15,103 404 2.67% 17,640 2.76%
FHLB borrowings 12,812 717 5.60% 9,042 486 5.37% 10,250 5.00%
-------- ------- ------ ------- ------- ------ -------- ---------
Total interest-
bearing liabilities 121,405 5,716 4.71% 103,057 4,797 4.65% 123,792 4.70%
------- ------ ------- ------ ---------
Non-interest bearing
liabilities 5,237 3,693 6,059
-------- ------- --------
Total liabilities 126,642 106,750 129,851
Stockholders' equity 14,897 15,027 15,041
-------- ------- --------
Total liabilities
and stockholders'
equity $141,539 $121,777 $144,892
======== ======= ========
Net interest income $4,983 $4,395
====== ======
Interest rate spread (3) 3.25% 3.30% 3.34%
====== ======= ======
Net Yield on interest-
earning assets (4) 3.71% 3.81% 3.81%
====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 110.69% 112.07% 111.39%
====== ====== ======
</TABLE>
--------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and FHLB
stock.
(3) Interest-rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
9
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
2000 vs 1999
----------------------------
Increase (Decrease)
Due to
----------------------------
Volume Rate Net
----------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest Income:
Loans receivable $1,062 $(15) $1,047
Investment securities 311 15 326
Mortgage-backed securities 134 1 135
----------------------------
Total interest-earning assets 1,507 1 1,508
----------------------------
Interest Expense:
Interest-bearing demand
deposits 26 16 42
Certificates of Deposit 621 (30) 591
Savings Deposits 50 5 55
FHLB borrowings 211 20 231
----------------------------
Total interest-bearing liabilities 908 11 919
----------------------------
Net change in interest income $599 $(10) $589
============================
</TABLE>
Comparison of Financial Condition
The Company's total assets increased approximately $15,338,000, or 11.81%,
to $145,264,000 at June 30, 2000, from $129,927,000 at June 30, 1999. At June
30, 2000, deposits and Federal Home Loan Bank ("FHLB") advances increased
$13,592,000 and $1,500,000, respectively. These increases were used to fund loan
demand and to purchase investment securities.
Total cash and cash equivalents increased by $1,392,000 to $5,752,000 at
June 30, 2000 from $4,360,000 at June 30, 1999. This additional liquidity
enables the Company's management to help manage interest rate risk in the
current interest rate environment by being less dependent on outside funding to
meet loan demand.
Investment securities available for sale increased by $3,753,000 to
$8,235,000 at June 30, 2000 from $4,481,000 at June 30, 1999. This increase
includes approximately $1,470,000 in three FHLB bonds with callable options
ranging from 3 months to 6 months and an effective weighted average interest
rate of 7.11%. The funding for these bonds came from the strong deposit growth.
The increase also includes the purchase of a $2,500,000 15-year FHLB bond in
August 1999 with a callable option of one year and effective interest yield of
8.1%. The funding for this bond came from a FHLB advance that matured in August
2000 and had an effective cost of funds of 5.94%. Currently, management has
elected to replace the short term funding for this bond by using $1,000,000 of
current liquidity and using $1,500,000 from the Company's Line of Credit at the
FHLB. The cost of funding with the Line of Credit ranges from 6.5% to 6.8%,
currently. Management has classified these investments as available for sale for
liquidity purposes while maximizing interest yields in excess of the federal
overnight rates paid on interest-bearing demand deposits.
10
<PAGE>
Net loans receivable increased $9,822,000 to $119,721,000 at June 30, 2000
from $109,900,000 at June 30, 1999. The net increase was spread over the entire
portfolio. Loans secured by 1-4 family residences increased $2,490,000 due to
demand of ARMs and the bank's "no fee" Equity Line of Credit program. The Bank's
"no fee" program ended during November 1999. Multi-family residential loans and
non-residential real estate loans increased by $2,780,000 and $1,328,000,
respectively, due to the strong demand for the Company's competitively priced
ARM products. Construction loans increased $1,169,000 due to the Company's
competitive loan product. Automobile loans increased $2,255,000 of which
$1,944,000 were "dealer loans" written by automobile dealership customers of the
Company. The funding for the loan growth was provided primarily by an increase
in deposits.
Deposits increased by $13,592,000 or 12.90% to $118,931,000 at June 30,
2000 from $105,339,000 at June 30, 1999. Within the deposit line item,
certificates of deposit increased by $12,295,000 to $76,012,000 at June 30, 2000
from $63,716,000 at June 30, 1999. This increase is primarily the result of four
certificate of deposit specials. The first was called "Advantage 2000", this
certificate of deposit offered above market rates on certificates of deposit at
5.25% for 12 months and 5.50% for 18 months. The "advantage" of this product was
that the customers had a 10-day option at the end of 1999 to redeem the
certificate with no penalty. This successful special was offered from June 1999
to September 20, 1999. During the ten day option period of 1999, the Company had
approximately $2,350,000 of the "Advantage 2000" certificates redeemed without
penalty which was approximately 35% of the total amount deposited in the
certificate product. The Company was able to retain all but approximately
$330,000 of the redeemed certificates with customers generally transferring the
funds into another of the certificate products called "Fives are Wild", this
certificate special offered above market interest rates on certificates of
deposit of 5.55% for five months, 5.75% for ten months, 6.0% for 15 or 18
months, and 6.07% for 21 months. The "Fives are Wild" special began in mid
October and ended on March 29, 2000. In mid January of 2000, the Company offered
a third certificate of deposit special that paid above market interest rates of
6% for 6 months, 6.25% for 12 months, 6.35% for 24 months and 6.89% for 36
months. As with previous specials, this special was well received by the area
consumers. This special ended on March 29, 2000, as well. The fourth and final
special offered by the Company offered above market interest rates on
certificates of deposit of 6.1% for seven months, 6.5% for eleven months, 6.85%
for 13 months and 7% for 19 months. This special was well received by area
consumers and more specifically to current customers, as it has helped the
Company in retaining matured deposits from previous specials. This special began
in early April 2000 and is currently still being offered. We believe, though
there is no assurance, that we can retain the growth in our certificate of
deposit accounts.
Savings deposits increased $1,271,000 while demand deposits increased
$25,000 for the one-year period. The demand deposit increase was primarily the
net result of an increase in non-interest bearing deposits of $1,320,000, and a
decrease in NOW and money market deposits of $1,253,000 and $41,000,
respectively.
Advances from the FHLB increased by $1,500,000 to $10,500,000 at June 30,
2000 from $9,000,000 at June 30, 1999. This is a net increase involving multiple
transactions. The first transaction was to add a $2,500,000 advance with a
weighted average rate of 5.94% that has a one-year maturity of August of 2000.
The proceeds of this advance were used to purchase a FHLB bond described above
under investment securities. The second transaction was to increase an existing
$1,000,000 callable advance to $3,000,000 with a weighted average rate of 5.52%
that has an initial call date in October 2001. The additional $2,000,000 in
proceeds from this advance were used to fund a three year adjustable rate
mortgage loan originated in October 1999. The third transaction was to not renew
a $3,000,000 advance that was called in June 2000 due to the Company's liquidity
position.
In addition to the increases and changes to advances from the FHLB
discussed above, during the quarter ended December 31, 1999, the FHLB called all
three outstanding advances at June 30, 1999, amounting to $9,000,000. The
Company elected to renew these advances at the proposed higher rates offered by
the FHLB. The new weighted average rate of the renewed $9,000,000 in advances
increased to 5.63% from 5.37% prior to the calls. In June 2000, one of these
advances for $3,000,000 was called again, and the company elected not to renew
the funds as discussed above.
Stockholders equity increased $75,000 to $15,068,000 at June 30, 2000 from
$14,993,000 at June 30, 1999. Through June 30, 2000, the Company initiated the
payment of dividends of $.40 per share, while maintaining capital ratios well in
excess of regulatory guidelines. The Board of Directors will determine future
dividend policies in light of earnings and financial condition of the Company,
including applicable governmental regulations and policies.
11
<PAGE>
Comparison of the Results of Operations for the Years Ended June 30, 2000 and
1999
Net Interest Income. The Company's net interest income increased $588,000,
or 13.39%, to $4,983,000 for the year ended June 30, 2000 from $4,394,000 for
the same period ended 1999. The increase in net interest income resulted
primarily from an increase in the average volume of the underlying principle
balances in interest earning assets and liabilities. The net interest spread
decreased to 3.25% for the period ended June 30, 2000 from 3.30% for the same
period ended 1999. The average yield on interest earning assets increased 1
basis point to 7.96% at June 30, 2000 from 7.95% for the comparable period ended
1999. The average cost of funds increased 6 basis points to 4.71% for the year
ended June 30, 2000 from 4.65% for the comparable period ended 1999.
Interest and Dividend Income. Total interest and dividend income increased
$1,507,000, or 16.40%, to $10,699,000 for the year ended June 30, 2000 from
$9,192,000 for the comparable 1999 period. The increase was primarily due to an
increase in earnings on loans of $1,047,000 as the average principle balance
increased $13,061,000 to $116,825,000 at June 30, 2000 from $103,764,000 for the
comparable 1999 period. Interest and dividend income on investments and interest
bearing deposits with other financial institutions increased approximately
$460,000 as average principle balances increased $5,836,000 to $17,563,000 at
June 30, 2000 from $11,727,000 for the comparable 1999 period. See Average
Balance Sheet Table included herein for additional detail.
Interest Expense. Total interest expense increased $919,000 or 19.15% to
$5,716,000 for the year ended June 30, 2000 compared to $4,797,000 for the same
period ended 1999. The increase was primarily due to an increase in interest on
deposits of $688,000 as the average balance increased $14,577,000 to
$108,593,000 for the year ended June 30, 2000 from $94,015,000 for the
comparable 1999 period. Interest expense on advances increased $231,000 as the
average balance increased $3,770,000 to $12,812,000 for the year ended June 30,
2000 from $9,042,000 for the comparable 1999 period. See Average Balance Sheet
included herein for additional detail.
Provision for Loan Losses. For the year ended June 30, 2000, the provision
for loan losses was $175,000 as compared to $150,000 for the comparable 1999
period. Net charge-offs for the period ended June 30, 2000 were $75,000 compared
to $45,000 for the comparable 1999 period. Management continually evaluates the
adequacy of the allowance for loan losses, which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses,
the impact of economic conditions on borrowers, and other relevant factors.
While the loan mix has changed slightly over the past two years, management
believes that the underlying collateral supporting such loans provides adequate
coverage. The Company maintains a desirable level in its loan loss provisions
based upon the Company's review of the market, loan portfolio, and overall
assessment of the adequacy of the valuation allowance. There can be no
assurance, however, that additional provisions will not be required in future
periods.
Noninterest Income. Noninterest income decreased $44,000, or 5.88%, to
$705,000 for the year ended June 30, 2000 compared to $749,000 for the same
period ended 1999. For the year ended June 30, 2000, gains on sales of fixed
rate mortgages and related servicing rights decreased by $164,000. These
decreases are due to the lack of demand of fixed rate mortgages as a result of
the changing interest rate environment during the year ended June 30, 2000 in
comparison to the rate environment during the same period ended 1999. Offsetting
these decreases for the year ended June 30, 2000 are increases in service
charges on deposit accounts of $64,000 and ATM and Consumer Card income of
$35,000 and $19,000, respectively. These increases are due primarily to
increased customer activity.
Noninterest Expense. Noninterest expense increased $312,000, or 8.36%, to
$4,040,000 for the year ended June 30, 2000 from $3,728,000 for the same period
ended 1999. Compensation and benefits increased $192,000, or 11.03%, due to the
hiring of additional employees for loan collection, accounting and data
processing, as well as, additional costs of living increases for all full time
employees. Occupancy and equipment increased $89,000, or 15.11%, due primarily
to the incurrence of real estate taxes for the Wintersville branch of $18,000
and an increase in combined equipment depreciation and maintenance of $61,000.
Professional fees decreased by $34,000 primarily due to the preparation of
regulatory reports internally that were previously outsourced. Data processing
charges decreased $41,000 due to the conversion to in-house item processing in
January 2000. The decrease in data processing is offset by similar increases in
"occupancy and equipment" for depreciation and maintenance and in "other
expenses" for supplies and postage, which increased $32,000. Anticipated future
decreases in data processing will be offset by similar increases in similar
expense line items. Other expenses increased $118,000 due primarily to, supplies
and postage as discussed above, additional Ohio franchise tax due to the
Wintersville branch of $41,000, and increases for ATM and Consumer Card expense
of $20,000 and $22,000, respectively.
Income Taxes. Income tax expense increased $96,000 to $578,000 for the year
ended June 30, 2000 compared to $482,000 for the same period ended 1999. The
effective tax rate for income taxes as of the years ended June 30, 2000 and 1999
was 39% and 38%, respectively.
12
<PAGE>
Liquidity and Capital Resources. The Company's primary sources of funds are
deposits, repayment of loans and mortgage-backed securities, maturities of
investments and interest-bearing deposits, funds provided from operations and
advances from the FHLB of Pittsburgh. While scheduled repayments of loans and
mortgage-backed securities and maturities of investment securities are
predicable sources of funds, deposit flows and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions, and
competition. The Company uses its resources primarily to fund existing and
future loan commitments, maturing certificates of deposit and demand deposit
withdraws, investments in other interest-bearing assets, maintenance of
necessary liquidity, and to meet operating expenses.
Net cash provided by operating activities decreased $1,132,000 to
$1,689,000 for the year ended June 30, 2000 compared to $2,821,000 for the same
period ended 1999. This decrease was mainly the result of a decline in the net
fixed rate mortgage loans made and sold as a result of the current interest rate
environment for the period ended June 30, 2000 in comparison to the interest
rate environment for the comparable 1999 period. Net proceeds from the sale of
loans for the period ended June 30, 2000 were $9,000 in comparison to $1,548,000
for the comparable period ended 1999.
Net cash used for investing activities for the year ended June 30, 2000
decreased $7,969,000 to $14,451,000 from $22,420,000 for the year ended June 30,
1999. This decrease was attributable to a decrease in lending and investing
activity of $4,105,000 and $3,890,000, respectively. The decrease in lending
activity is a direct result of the current interest rate environment in
comparison to the interest rate environment for the prior period. The decrease
in investing activity is a result of the Company reducing excess liquidity in
the prior period.
Net cash provided by financing activities for the year ended June 30, 2000
decreased $721,000 to $14,154,000 from $14,875,000 for the same period ended
1999. The decease was primarily a result of a decrease in net deposits of
$3,195,000 offset by an increase in net FHLB advances of $2,500,000.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry and similar matters. Management monitors projected
liquidity needs and determines the level desirable based in part on the
Company's commitments to make loans and management's assessment of the Bank's
ability to generate funds.
13
<PAGE>
SNODGRASS
Certified Public Accountants and Consultants
[LOGO]
Report of Independent Auditors
Board of Directors and Stockholders
Advance Financial Bancorp
We have audited the accompanying consolidated balance sheet of Advance Financial
Bancorp and subsidiary as of June 30, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advance Financial
Bancorp and subsidiary as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/S.R. Snodgrass, A.C.
Steubenville, Ohio
August 3, 2000
14
<TABLE>
<CAPTION>
<S> <C> <C> <C>
S.R. Snodgrass, A.C.
626 North Fourth Street Steubenville, OH 43952-1982 Phone: 740-282-2771 Facsimile: 740-282-1606
</TABLE>
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS Cash and cash equivalents:
Cash and amounts due from banks $ 1,109,746 $ 1,395,704
Interest-bearing deposits with other institutions 4,641,878 2,964,166
------------ ------------
Total cash and cash equivalents 5,751,624 4,359,870
------------ ------------
Investment securities:
Securities held to maturity (fair value of $1,187,625
and $ 970,914) 1,249,672 999,896
Securities available for sale 8,234,637 4,481,475
------------ ------------
Total investment securities 9,484,309 5,481,371
------------ ------------
Mortgage-backed securities:
Securities held to maturity (fair value of $2,027,016
and $2,456,645) 2,089,010 2,472,681
Securities available for sale 1,556,172 1,832,845
------------ ------------
Total mortgage-backed securities 3,645,182 4,305,526
------------ ------------
Loans receivable (net of allowance for loan losses of
$682,103 and $582,280) 119,721,308 109,899,551
Premises and equipment, net 4,070,295 4,084,793
Federal Home Loan Bank stock, at cost 800,000 629,500
Accrued interest receivable 870,955 664,058
Other assets 920,767 501,967
------------ ------------
TOTAL ASSETS $145,264,440 $129,926,636
============ ============
LIABILITIES
Deposits $118,930,939 $105,338,770
Advances from Federal Home Loan Bank 10,500,000 9,000,000
Advance payments by borrowers for taxes and insurance 203,320 196,993
Accrued interest payable and other liabilities 561,907 397,421
------------ ------------
TOTAL LIABILITIES 130,196,166 114,933,184
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized 500,000 shares; none issued - -
Common stock, $.10 par value, 2,000,000 shares authorized;
1,084,450 shares issued at June 30, 2000 and 1999 108,445 108,445
Additional paid in capital 10,329,885 10,316,719
Retained earnings - substantially restricted 8,181,053 7,623,733
Unallocated shares held by Employee Stock Ownership Plan (ESOP) (510,915) (597,767)
Unallocated shares held by Restricted Stock Plan (RSP) (505,849) (682,357)
Treasury stock (152,165 and 103,165 shares at cost) (2,233,265) (1,626,890)
Accumulated other comprehensive loss (301,080) (148,431)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,068,274 14,993,452
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $145,264,440 $129,926,636
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
15
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999
------------ -----------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $ 9,563,641 $8,516,921
Investment securities 652,439 188,158
Interest-bearing deposits with other institutions 175,184 325,233
Mortgage-backed securities 255,555 120,688
Federal Home Loan Bank stock 51,781 40,560
----------- ----------
Total interest and dividend income 10,698,600 9,191,560
----------- ----------
INTEREST EXPENSE
Deposits 4,998,754 4,311,105
Advances from Federal Home Loan Bank 717,212 486,141
----------- ----------
Total interest expense 5,715,966 4,797,246
----------- ----------
NET INTEREST INCOME 4,982,634 4,394,314
Provision for loan losses 174,600 150,000
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,808,034 4,244,314
----------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 438,984 374,831
Gain on sale of loans 8,957 92,909
Gain on sale of investments - 13,745
Other income 257,162 267,703
----------- ----------
Total noninterest income 705,103 749,188
----------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,936,149 1,743,773
Occupancy and equipment 677,675 588,702
Professional fees 108,979 143,285
Advertising 107,770 120,726
Data processing 299,306 340,113
Other operating expenses 909,622 791,151
----------- ----------
Total noninterest expense 4,039,501 3,727,750
----------- ----------
Income before income taxes 1,473,636 1,265,752
Income taxes 577,876 481,925
----------- ----------
NET INCOME $ 895,760 $ 783,827
=========== ==========
EARNINGS PER SHARE:
Basic $ 1.01 $ .83
Diluted $ 1.01 $ .83
</TABLE>
See accompanying notes to the consolidated financial statements.
16
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Accumulated
Additional Earnings Unallocated Unallocated Other Total
Common Paid In Substantially Shares Held Shares Held Treasury Comprehensive Stockholders'
Stock Capital Restricted By ESOP By RSP Stock Loss Equity
-------- ---------- ------------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 30, 1998 $108,445 $10,288,928 $7,130,056 $(715,158) $(869,636) $(1,000,863) $(13,650) $14,928,122
Comprehensive
income:
Net income 783,827 783,827
Net unrealized
loss on
securities,
net of
reclassification
adjustment,
net of tax
benefit of
$64,759 (134,781) (134,781)
-----------
Comprehensive income 649,046
Purchase of treasury
stock (626,027) (626,027)
Accrued compensation
expense for RSP 201,881 201,881
RSP forfeited shares (14,602) (14,602)
Release of earned
ESOP shares 27,791 117,391 145,182
Cash dividends
declared
($.32 per share) (290,150) (290,150)
-------- ----------- ---------- --------- --------- ----------- --------- -----------
Balance,
June 30, 1999 108,445 10,316,719 7,623,733 (597,767) (682,357) (1,626,890) (148,431) 14,993,452
Comprehensive income:
Net income 895,760 895,760
Net unrealized
loss on
securities,
net of tax
benefit of
$78,637 (152,649) (152,649)
-----------
Comprehensive income 743,111
Purchase of treasury
stock (606,375) (606,375)
Accrued compensation
expense for RSP 197,591 197,591
RSP forfeited shares (21,083) (21,083)
Release of earned
ESOP shares 13,166 86,852 100,018
Cash dividends
declared
($.40 per share) (338,440) (338,440)
-------- ----------- ---------- --------- --------- ----------- --------- -----------
Balance,
June 30, 2000 $108,445 $10,329,885 $8,181,053 $(510,915) $(505,849) $(2,233,265) $(301,080) $15,068,274
======== =========== ========== ========= ========= =========== ========= ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
17
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 895,760 $ 783,827
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 560,757 423,127
Provision for loan losses 174,600 150,000
Gain on sale of investments - (13,745)
Gain on sale of loans (8,957) (92,909)
Origination of loans held for sale (2,297,188) (8,658,980)
Proceeds from the sale of loans 2,306,145 10,206,589
Increase in accrued interest receivable (206,897) (46,078)
Increase in accrued interest payable 138,151 3,644
Other, net 126,392 65,687
-------------- -------------
Net cash provided by operating activities 1,688,763 2,821,162
-------------- -------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (249,453) (2,987,051)
Maturities and repayments - 3,737,988
Investment securities available for sale:
Purchases (4,467,656) (4,498,871)
Maturities and repayments 506,330 11,440
Proceeds from sale - 139,995
Mortgage-backed securities held to maturity:
Purchases - (2,516,658)
Maturities and repayments 381,374 380,968
Mortgage-backed securities available for sale:
Purchases - (2,046,363)
Maturities and repayments 253,257 149,274
Purchases of Federal Home Loan Bank Stock (170,500) (7,300)
Net increase in loans (10,353,855) (14,459,354)
Purchases of premises and equipment (350,187) (324,250)
-------------- -------------
Net cash used for investing activities (14,450,690) (22,420,182)
-------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 13,592,169 16,787,227
Proceeds of advances from Federal Home Loan Bank 16,000,000 -
Repayment of advances from Federal Home Loan Bank (17,000,000) (1,000,000)
Net increase in short term advances from Federal Home Loan Bank 2,500,000 -
Net change in advances for taxes and insurance 6,327 3,647
Purchase of treasury stock (606,375) (626,027)
Cash dividends paid (338,440) (290,150)
-------------- -------------
Net cash provided by financing activities 14,153,681 14,874,697
-------------- -------------
Increase (decrease) in cash and cash equivalents 1,391,754 (4,724,323)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,359,870 9,084,193
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,751,624 $ 4,359,870
============== =============
</TABLE>
See accompanying notes to the consolidated financial statements
18
<PAGE>
ADVANCE FINANCIAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
----------------------------------------------
Advance Financial Bancorp (the "Company") is the holding company of Advance
Financial Savings Bank, (the "Bank"). The Bank and its wholly-owned service
corporation subsidiary, Advance Financial Service Corporation of West
Virginia are wholly-owned subsidiaries of the Company. The Company and its
subsidiaries derive substantially all their income from banking and
bank-related services which include interest earnings on residential real
estate, commercial real estate, and consumer loan financing, as well as
interest earnings on investment securities, interest-bearing deposits with
other financial institutions, and charges for deposit services to its
customers. The Bank is a federally chartered stock savings bank located in
Wellsburg, WV. The Company and the Bank are subject to regulation and
supervision by the Office of Thrift Supervision.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank, and its wholly-owned subsidiary,
Advance Financial Service Corporation of West Virginia. All material
intercompany balances and transactions have been eliminated in
consolidation. The Company's fiscal year end for financial reporting is
June 30. For regulatory and income tax reporting purposes, the Company
reports on a December 31 calendar year basis.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates. The major
accounting policies and practices are summarized below.
Investment Securities Including Mortgage-Backed Securities
----------------------------------------------------------
Debt and Equity securities consist of mortgage-backed securities, U.S.
Government and federal agency obligations, money funds and common stock.
Securities are classified , at the time of purchase based upon management's
intention and ability, as available for sale or held to maturity. The
company does not hold any securities as trading. Securities classified as
held to maturity are stated at cost and adjusted for amortization of
premium and accretion of discount, which are computed using a level yield
method and are recognized as adjustments of interest income. Securities
classified as available for sale are carried at estimated fair value with
unrealized holding gains and losses reflected as a separate component of
shareholders' equity. Realized gains and losses on the sale of debt and
equity securities are computed using the specific identification method.
Interest and dividends on investment securities are recognized as income
when earned.
Common stock of the Federal Home Loan Bank (the "FHLB") represents
ownership in an institution, which is wholly-owned by other financial
institutions. This equity security is accounted for at cost and reported
separately on the accompanying balance sheet.
Loans Held for Sale
-------------------
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate
basis. Net unrealized losses are recognized in a valuation allowance
through charges to income. Gains and losses on the sale of loans held for
sale are determined using the specific identification method. At June 30,
2000 and 1999, there were no loans held for sale.
19
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
-----
Loans are stated at unpaid principal balances, less loans in process, net
deferred loan fees, and the allowance for loan losses. Interest on loans is
credited to income as earned on an accrual basis. Loan origination and
commitment fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans using the interest method.
A loan is considered impaired when it is probable that the borrower will
not repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on
one-to-four family properties and all consumer loans represent large groups
of smaller-balance, homogeneous loans that are to be collectively
evaluated. Management considers an insignificant delay, which is defined as
less than 90 days by the Company, will not cause a loan to be classified as
impaired. A loan is not impaired during a period of delay in payment if the
Company expects to collect all amounts due including interest accrued at
the contractual interest rate during the period of delay. All loans
identified as impaired are evaluated independently by management. The
Company estimates credit losses on impaired loans based on the present
value of expected cash flows or the fair value of the underlying collateral
if the loan repayment is expected to come from the sale or operation of
said collateral. Impaired loans or portions thereof, are charged-off when
it is determined that a realized loss has occurred. Until such time, an
allowance for loan losses is maintained for estimated losses. Cash receipts
on impaired loans are applied first to accrued interest receivable, unless
otherwise required by the loan terms, except when an impaired loan is also
a nonaccrual loan, in which case the portion of the receipts related to
interest is recognized as income.
Loans considered to be nonperforming include nonaccrual loans, accruing
loans delinquent more than 90 days and restructured loans. A loan,
including an impaired loan, is classified as nonaccrual when collectability
is in doubt. When a loan is placed on nonaccrual status, unpaid interest is
reversed and an allowance is established by a charge to income equal to all
accrued interest. Income is subsequently recognized only to the extent that
cash payments are received. Loans are returned to accrual status when, in
management's judgement, the borrower has the ability and intent to make
periodic principal and interest payments (this generally requires that the
loan be brought current in accordance with its original terms).
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan
portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision
for loan losses is based on management's periodic evaluation of individual
loans, economic factors, past loan loss experience, changes in the
composition and volume of the portfolio, and other relevant factors. The
estimates used in determining the adequacy of the allowance for loan
losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes in the near term.
Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans are reported at the lower of
cost or fair value at the acquisition date, and subsequently at the lower
of its new cost or fair value minus estimated selling costs. Costs
represents the unpaid loan balance at the acquisition date plus expenses,
when appropriate, incurred to bring the property to a salable condition.
Any subsequent write-downs are charged against operating expenses.
Operating expenses of such properties, net of related income and losses on
their disposition are included in other expenses.
Premises and Equipment
----------------------
Land is carried at cost; buildings and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed
primarily by the straight-line method based upon the estimated useful lives
of the assets, which range from five to forty years. Expenditures for
maintenance and repairs are charged against income as incurred. Costs of
major additions and improvements are capitalized.
20
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. Deferred income tax expenses or
benefits are based on the changes in the deferred tax asset or liability
from period to period. The Company and its subsidiary file a consolidated
income tax return.
Earnings per Share
------------------
The Company provides dual presentation of basic and diluted earnings per
share. Basic earnings per share is calculated by dividing net income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is
calculated by dividing net income available to common stockholders,
adjusted for the effects of any dilutive securities, by the
weighted-average number of common shares outstanding, adjusted for the
effects of any dilutive securities.
Comprehensive Income
--------------------
The Company is required to present comprehensive income in a full set of
general purpose financial statements for all periods presented. Other
comprehensive income (loss) is comprised exclusively of unrealized holding
gains (losses) on the available for sale securities portfolio. The Company
has elected to report the effects of other comprehensive income (loss) as
part of the Statement of Changes in Stockholders' Equity.
Cash Flow Information
---------------------
The Company has defined cash and cash equivalents as cash on hand, amounts
due from depository institutions, and overnight deposits with the Federal
Home Loan Bank and the Federal Reserve Bank.
Cash payments for interest for the fiscal years ended June 30, 2000 and
1999 were $5,577,815 and $4,793,602, respectively. Cash payments for income
taxes for the fiscal years ended June 30, 2000 and 1999 were $501,622 and
$468,000, respectively.
Stock Options
-------------
The Company maintains a stock option plan for the directors, officers, and
employees. The stock options typically have expiration terms of ten years
subject to certain extensions and early terminations. The per share
exercise price of a stock option shall be, at a minimum, equal to the fair
value of a share of common stock on the date the option is granted. Because
the exercise price of the Company's stock options equals the market price
of the underlying stock on the date of the grant, no compensation expense
is recognized in the Company's financial statements. If applicable, pro
forma net income and earnings per share would be presented to reflect the
impact of the stock option plan assuming compensation expense had been
effected based on the fair value of the stock options granted under this
plan.
Recent Accounting Pronouncements
--------------------------------
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral Date of FASB No. 133--and
amendment of FASB No. 133." The statement delays the effective date for one
year of SFAS No. 133, to fiscal years beginning after June 15, 2000. SFAS
No.'s 133 and 137 apply to quarterly and annual financial statements. The
Company does not believe that there will be a material impact on its
financial condition or results of operation upon adoption of SFAS No. 133.
Statement No. 133, precludes a held-to-maturity security from being
designated as a hedged item, however, at the date of initial application of
this statement, an entity is permitted to transfer any held-to-maturity
security into the available-for-sale or trading categories. The unrealized
holding gain or loss on such transferred securities shall be reported
consistent with the requirements of Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Such transfers do not
raise an issue regarding an entity's intent to hold other debt securities
to maturity in the future.
21
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative account balances for the prior period have been
reclassified to conform to the current period classifications. Such
reclassifications did not affect net income.
2. Earnings Per Share
------------------
There were no convertible securities, which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the
numerator. The following table sets forth the composition of the
weighted-average common shares (denominator) used in the basic and diluted
earnings per share computation.
2000 1999
----------- -----------
Weighted-average common shares outstanding 1,084,450 1,084,450
Average treasury stock shares (132,011) (65,310)
Average unearned ESOP and RSP shares (62,054) (72,564)
--------- ---------
Weighted -average common shares and
common stock equivalents used to
calculate basic earnings per share 890,385 946,576
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share - -
--------- ---------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 890,385 946,576
========= =========
22
<PAGE>
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investments are as
follows:
<TABLE>
<CAPTION>
2000
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity
----------------
U.S. Government and Agency Obligations $1,249,672 $ - $ (62,047) $1,187,625
---------- ----------- ---------- ----------
Available-for-sale
------------------
U.S. Government and Agency Obligations 8,469,628 - (341,201) 8,128,427
Common stocks 105,625 - (25,625) 80,000
Money Fund Securities 34,026 - (7,816) 26,210
---------- ----------------------- ----------
Total available for sale 8,609,279 - (374,642) 8,234,637
---------- ----------- ----------- ----------
Total Investment Securities $9,858,951 $ - $(436,689) $9,422,262
========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
========== =========== ========== ==========
</TABLE>
The weighted average interest rate on investment securities was 6.95% and
6.58% at June 30, 2000 and 1999, respectively.
The amortized cost and estimated fair value of debt securities at June 30,
2000, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or repay obligations with or without call or repayment penalties.
Amortized Fair
Cost Value
----------- -----------
One year or less $ - $ -
After one through five years 3,719,540 3,628,450
After five through ten years 1,500,000 1,415,999
After ten years 4,499,760 4,271,603
---------- ----------
Total $9,719,300 $9,316,052
========== ==========
Proceeds received on securities as a result of sales and calls prior to
maturity were $500,000 and $139,995 for the years ended June 30, 2000 and
1999, respectively. Gains on sales were $0 and $13,745 for the years ended
June 30, 2000 and 1999, respectively. No losses on sales were realized
during either year ended June 30, 2000 and 1999.
23
<PAGE>
4. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities
are as follows:
<TABLE>
<CAPTION>
2000
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Held-to-maturity
----------------
Government National Mortgage Association $ 579,864 $ 3,017 $ (5,320) $ 577,561
Federal Home Loan Mortgage Corporation 131,343 7,922 - 139,265
Federal National Mortgage Association 1,377,803 - (67,613) 1,310,190
---------- ---------- --------- -----------
Total held to maturity 2,089,010 10,939 (72,933) 2,027,016
---------- ---------- --------- -----------
Available-for-sale
------------------
Government National Mortgage Association 1,223,787 - (61,487) 1,162,300
Federal National Mortgage Association 413,923 - (20,051) 393,872
----------- ---------- --------- -----------
Total available for sale 1,637,710 - (81,538) 1,556,172
---------- ---------- --------- -----------
Total Mortgage backed securities $3,726,720 $ 10,939 $(154,471) $3,583,188
========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
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
========== ========= ========== ==========
</TABLE>
Mortgage-backed securities provide for periodic, generally monthly payments
of principal and interest and have contractual maturities ranging from ten
to thirty years at June 30, 2000. However, due to expected repayment terms
being significantly less than the underlying mortgage loan pool contractual
maturities, the estimated lives of these securities could be significantly
shorter. As of June 30, 2000, mortgage-backed securities with a book value
of $476,741 and a fair value of $471,421 are one year adjustable types
currently paying 7.125%. The remaining instruments are all fixed rate types
ranging from 6.25% to 10%. Certain instruments have been classified as
available for sale based upon management's' evaluation of liquidity needs
while optimizing return at the time of purchase.
There were no sales of mortgage-backed securities for either period ended
June 30, 2000 or 1999.
24
<PAGE>
5. LOANS RECEIVABLE
Loans receivable are comprised of the following at June 30:
2000 1999
------------ -------------
Mortgage loans:
1 - 4 family $ 62,163,992 $ 59,673,803
Multi-family 5,469,906 2,689,531
Non-residential 24,543,795 23,216,018
Construction 3,241,801 2,073,165
------------ ------------
Total mortgage loans 95,419,494 87,652,517
------------ ------------
Consumer loans:
Home improvement 1,439,387 1,195,518
Automobile 10,903,416 8,647,953
Share loans 1,406,328 1,360,054
Other 2,675,498 2,384,401
------------ ------------
Total consumer loans 16,424,629 13,587,926
------------ ------------
Commercial loans 10,500,256 10,387,570
------------ ------------
Less:
Loans in process 1,812,877 1,006,813
Net deferred loan fees 128,091 139,369
Allowance for loan losses 682,103 582,280
------------ ------------
2,623,071 1,728,462
------------ ------------
Total loans $119,721,308 $109,899,551
============ ============
Single family mortgage loans serviced for Freddie Mac, which are not
included in the Consolidated Balance Sheet, totaled $19,682,946 and
$19,040,615 at June 30, 2000 and 1999, respectively.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the statement of financial
condition. The contract amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. No losses are
anticipated by management as a result of these commitments.
The following represents financial instruments whose contract amounts
represent credit risk at June 30:
2000 1999
------------ ------------
Commitments to originate loans
Fixed rate $ 119,000 $ 637,060
Variable rate $ 163,962 $ 1,467,300
Loans in process $ 1,812,877 $ 1,006,813
Unused lines of credit $ 6,734,552 $ 7,456,372
Letters of credit $ 55,000 $ 22,500
The range of interest rates on fixed rate loan commitments was 8.375% to
8.50% at June 30, 2000.
25
<PAGE>
5. LOANS RECEIVABLE (Continued)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally expire within 30 days or have other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counter party. Collateral held consists primarily of single-family
residences and income-producing commercial properties.
In the normal course of business, loans are extended to directors,
executive officers and their associates. A summary of loan activity for
those directors, executive officers, and their associates with loan
balances in excess of $60,000 for the year ended June 30, 2000 is as
follows:
Balance Amount Balance
1999 Additions Collected 2000
---------- ----------- --------- ----------
$1,704,024 $14,500 $223,236 $1,495,288
The Company's primary business activity is with customers located within
its local trade area. Residential, consumer, and commercial loans are
granted. The Company also selectively funds loans originated outside of its
trade area provided such loans meet its credit policy guidelines. Although
the Company has a diversified loan portfolio, at June 30, 2000 and 1999,
loans outstanding to individuals and businesses are dependent upon the
local economic conditions in its immediate trade area.
6. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended June 30 is
summarized as follows:
2000 1999
-------- --------
Balance, beginning of period $582,280 $477,654
Add:
Provisions charged to operations 174,600 150,000
Loan recoveries 4,273 1,529
-------- --------
Total 761,153 629,183
Less: loans charged off 79,050 46,903
-------- --------
Balance, end of period $682,103 $582,280
======== ========
Nonperforming loans totaled $484,195 and $765,126 at June 30, 2000 and 1999
respectively.
At June 30, 2000, the company had no loans that met the definition of
impaired. At June 30, 1999, the total investment in impaired loans was
$385,922. The entire $385,922 was subject to a specific allowance for loan
losses of $25,468. The average investment in impaired loans during the year
ended June 30, 1999 was $377,753, and interest income recognized during the
year was $12,315. The interest income potential based upon the original
term of the contracts on these impaired loans was $31,313 for the year
ended June 30, 1999.
26
<PAGE>
7. PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized by major classification as follows:
2000 1999
---------- ----------
Land $ 303,857 $ 303,857
Buildings and improvements 3,421,642 3,409,515
Furniture, fixtures, and equipment 2,210,790 1,909,094
---------- ----------
Total 5,936,289 5,622,466
Less accumulated depreciation 1,865,994 1,537,673
---------- ----------
Premises and equipment, net $4,070,295 $4,084,793
========== ==========
Depreciation charged to operations amounted to $364,686 and $322,314 for
the years ended June 30, 2000 and 1999, respectively.
8. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan
Bank of Pittsburgh, at cost, in an amount not less than the greater of 1%
of its outstanding home loans or 5% of its outstanding borrowings to the
Federal Home Loan Bank of Pittsburgh as calculated at December 31 of each
year.
9. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
2000 1999
---------- ----------
Investment securities $160,874 $ 43,509
Mortgage-backed securities 18,991 28,741
Loans receivable 691,090 591,808
-------- --------
Total $870,955 $664,058
======== ========
10. DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------- ---------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Non-interest-bearing $ 5,054,410 4.3% $ 3,734,867 3.6%
------------ ----- ------------ -----
Savings accounts 17,651,027 14.8 16,379,596 15.6
NOW accounts 7,807,308 6.6 9,060,464 8.6
Money market accounts 12,406,664 10.4 12,447,642 11.8
------------ ----- ------------ -----
37,864,999 31.8 37,887,702 36.0
------------ ----- ------------ -----
Time certificates of deposit:
2.00 - 4.00% 2,101,639 1.8 2,260,291 2.1
4.01 - 6.00% 42,621,436 35.8 45,841,219 43.5
6.01 - 8.00% 31,288,455 26.3 15,614,691 14.8
------------ ----- ------------ -----
76,011,530 63.9 63,716,201 60.4
------------ ----- ------------ -----
Total $118,930,939 100.0% $105,338,770 100.0%
============ ===== ============ =====
</TABLE>
27
<PAGE>
10. DEPOSITS (CONTINUED)
The scheduled maturities of time certificates of deposit at June 30, 2000
are as follows:
Amount
-------------
Within one year $49,095,230
Beyond one year but within two years 15,681,607
Beyond two years but within three years 8,277,541
Beyond three years but within five years 2,382,553
Beyond five years 574,599
-----------
Total $76,011,530
===========
The Company had time certificates with a minimum denomination of $100,000
in the amount of approximately $6,685,503 and $7,258,263 at June 30, 2000
and 1999, respectively. Deposits in excess of $100,000 are not federally
insured. The Company does not have any brokered deposits.
Interest expense by deposit category for the years ended June 30 is as
follows:
2000 1999
------------ -----------
Passbooks $ 458,723 $ 404,099
NOW and Money Market Deposit accounts 690,941 649,652
Time certificates 3,849,090 3,257,354
---------- ---------
$4,998,754 $4,311,105
========== ==========
11. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consists of the following:
Principal Interest Interest
Due Due Rate 2000 1999
----------- -------- -------- ------------ ----------
Advance 08-03-2000 Annually 5.94% $ 2,500,000 $ -
Advance 06-30-2005 Monthly 6.36% 5,000,000 -
Advance 10-22-2009 Monthly 5.52% 3,000,000 -
Advance 03-25-2002 Monthly 5.51% - 3,000,000
Advance 11-04-2002 Monthly 5.37% - 5,000,000
Advance 01-23-2008 Monthly 4.94% - 1,000,000
------------ ----------
$10,500,000 $9,000,000
=========== ==========
These borrowings are subject to the terms and conditions of the Advances,
Collateral Pledge and Security Agreement between the Federal Home Loan Bank
of Pittsburgh and the Bank. All advances have fixed rates with putable
options with the exception of the advance due August 3, 2000, that has no
putable option.
In addition, the Bank entered into a "RepoPlus" Advance credit arrangement,
which is renewable annually and incurs no service charges. During 2000, the
Bank had a borrowing limit of approximately $62 million with a variable
rate of interest, based upon the FHLB's cost of funds. All borrowings from
the FHLB are secured by a blanket lien on qualified collateral, defined
principally as investment securities and mortgage loans which are owned by
the Bank free and clear of any liens or encumbrances.
28
<PAGE>
12. INCOME TAXES
The components of income tax expense for the years ended June 30 are
summarized as follows:
2000 1999
---------- ---------
Currently payable:
Federal $531,869 $410,461
State 85,531 59,453
-------- --------
617,400 469,914
Deferred (39,524) 12,011
---------- ---------
Total $577,876 $481,925
======== ========
The following temporary differences gave rise to deferred tax asset and
liabilities:
2000 1999
---------- ----------
Deferred tax assets
Allowance for loan losses $ 231,915 $ 197,975
Loan origination fees, net 16,773 21,520
Net unrealized loss on securities 155,101 76,464
Other, net 10,241 10,241
---------- ----------
Deferred tax assets 414,030 306,200
---------- ----------
Deferred tax liabilities
Premise and equipment depreciation 253,176 235,712
Tax reserve for loan losses 64,261 91,802
Other, net 54,613 54,867
---------- ----------
Deferred tax liabilities 372,050 382,381
---------- ----------
Net deferred tax asset (liability) $ 41,980 $ (76,181)
---------- -----------
On August 20, 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act eliminated the percentage of taxable income bad
debt deduction for thrift institutions for tax years beginning after
December 31, 1995. The Act provides that bad debt reserves accumulated
prior to 1988 be exempt from recapture. Bad debt reserves accumulated after
1987 are subject to recapture. The recapture tax will be paid in six equal
installments beginning with the 1998 tax year. At December 31, 1995, the
Bank had $324,005 in bad debt reserves in excess of the base year. Subject
to prevailing corporate tax rates, the Bank owes $64,261 in federal income
taxes, which is reflected as a deferred tax liability.
The reconciliation between the actual provision for income taxes and the
amount of income taxes which would have been provided at statutory rates
for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Provision at statutory rate $501,036 34.0% $430,356 34.0%
State income tax expense, net of federal
tax benefit 56,450 3.8 40,504 3.2
Tax exempt interest (12,693) (.9) (8,441) (.7)
Other, net 33,083 2.3 19,506 1.5
-------- ---- -------- ----
Actual expense and effective rate $577,876 39.2% $481,925 38.0%
======== ==== ======== ====
</TABLE>
13. RETIREMENT PLAN
The Company has a profit-sharing plan with a 401(k) feature. The 401(k)
allows employees to make contributions to the plan up to 10% of their
annual compensation. The Company will match 50% of the employees' voluntary
contributions up to 3% of the employee's compensation. Additional employer
contributions are made at the discretion of the Board of Directors. The
plan covers substantially all employees with more than one year's service.
The Company's contributions for the benefit of covered employees amounted
to $32,988 and $25,579 for the years ended June 30, 2000 and 1999,
respectively.
29
<PAGE>
14. RESTRICTED STOCK PLAN (RSP)
In 1998, the Board of Directors adopted a RSP for directors, certain
officers and employees, which was approved by stockholders at a special
meeting held on January 20, 1998. The objective of this Plan is to enable
the Company and the Bank to retain its corporate officers, key employees,
and directors who have the experience and ability necessary to manage these
entities. Directors, officers, and key employees who are selected by
members of a Board appointed committee are eligible to receive benefits
under the RSP. The non-employee directors of the Company and the Bank serve
as trustees for the RSP, which has the responsibility to invest all funds
contributed by the Bank to the Trust created for the RSP.
On February 23, 1998, the Trust purchased with funds contributed by the
Bank, 43,378 shares of the common stock of the Company. At June 30, 2000,
15,180 shares have been issued to non-employee directors, 26,844 shares
have been issued to officers, and 1,354 shares remained unissued.
Directors, officers, and key employees who terminate their association with
the Company shall forfeit the right to any shares which were awarded but
not earned. Shares are vested over a four-year period from their grant
date. A total of 24,614 shares were vested as of June 30, 2000. Total
operating expense attributed to the RSP amounted to $197,591 and $201,881
for the years ended June 30, 2000 and 1999.
15. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In conjunction with the Bank's conversion from mutual to stock, the Bank
adopted an ESOP for the benefit of officers and employees who have met
certain eligibility requirements related to age and length of service. An
ESOP trust was created, and acquired 86,756 shares of common stock in the
Company's initial public offering, using proceeds of a loan obtained from
the Company, which bears interest at the Wall Street Journal prime rate,
adjusted quarterly. The loan, which is secured by the shares of stock
purchased, calls for quarterly interest over a ten year period and annual
principal payments of $86,756.
The Bank makes quarterly contributions to the trust to allow the trust to
make the required loan payments to the Company. Shares are released from
collateral based upon the proportion of annual principle payments made on
the loan each year and allocated to qualified employees. As shares are
released from collateral, the Bank reports compensation expense based upon
the amounts contributed or committed to be contributed each year and the
shares become outstanding for earnings per share computations. Dividends
paid on allocated ESOP shares are recorded as a reduction in retained
earnings. Dividends paid on unallocated shares were added to participant
accounts and reported as compensation for the year ended June 30, 1999,
however, for the year ended June 30, 2000, dividends paid on unallocated
shares were used to reduce the company's contribution to the ESOP plan.
Compensation expense for the ESOP was $100,018 and $145,182 for the years
ended June 30, 2000 and 1999, respectively.
The following table represents the components of the ESOP shares:
2000 1999
-------- --------
Allocated shares 30,252 22,632
Shares released for allocation 4,338 4,338
Shares distributed (1,056) (1,056)
Unreleased shares 52,166 59,786
-------- --------
Total ESOP share 85,700 85,700
======== ========
Fair value of unreleased shares $554,264 $717,432
======== ========
30
<PAGE>
16. STOCK OPTION PLAN
In December 1997, the Board of Directors adopted a Stock Option Plan for
the directors, officers, and employees, which was approved by stockholders
at a special meeting held on January 20, 1998. An aggregate of 108,445
shares of authorized but unissued common stock of the Company were reserved
for future issuance under the plan. The stock options typically have
expiration terms of ten years subject to certain extensions and early
terminations. The per share exercise price of a stock option shall be, at a
minimum, equal to the fair value of a share of common stock on the date the
option is granted. Proceeds from the exercise of the stock options are
credited to common stock for the aggregate par value and the excess is
credited to additional paid-in capital.
On January 20, 1998, qualified stock options were granted for the purchase
of 65,061 shares exercisable at the market price of $18.75 per share at a
rate of one fourth per year beginning January 20, 1998. All options expire
ten years from the date of grant. At June 30, 2000, the initial stock
options granted remain outstanding with none being exercised.
The Company accounts for its stock option plan under provisions of APB
Opinion No. 25, " Accounting for Stock Issued to Employees," and related
interpretations. Under this opinion, no compensation expense has been
recognized with respect to the plan because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the grant date.
Had compensation expense for the stock option plan been recognized in
accordance with the fair value accounting provisions of Statement of
Financial Accounting Standards No. 123, " Accounting for Stock-based
Compensation," net income applicable to common stock, basic and dilutive
net income per common share, for the years ended June 30 would have been as
follows:
2000 1999
------------ --------------
Net Income:
As reported $ 895,760 $ 783,827
============ ==============
Pro forma $ 895,357 $ 767,939
============ ==============
Basic Earnings Per Share:
As reported $ 1.01 $ .83
============ ==============
Pro forma $ 1.01 $ .81
============ ==============
Diluted Earnings Per Share:
As reported $ 1.01 $ .83
============ ==============
Pro forma $ 1.01 $ .81
============ ==============
The following table presents share data related to the stock option plans:
2000 1999
-------- --------
Outstanding, beginning 65,061 65,061
Granted - -
Exercised - -
Forfeited - -
-------- --------
Outstanding, ending (at $18.75 per share) 65,061 65,061
======== ========
31
<PAGE>
16. STOCK OPTION PLAN (CONTINUED)
The fair value of the option grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used
for the grant in 2000 and 1999, respectively: expected dividend yield of
4.0% and 2.67%; expected volatility of 6.7% and 8.9%; risk-free interest
rate of 6.13% and 6.02%; and expected lives of 7 and 8 years.
Dividend Equivalent Rights may be granted concurrently with any option
granted. These rights provide that upon the payment of a dividend on the
Common Stock, the holder of such Options shall receive payment of
compensation in an amount equivalent to the dividend payable as if such
Options had been exercised and such Common Stock held as of the dividend
date. Dividend Equivalent Rights were granted concurrently with respect to
the stock options granted in 1998.
Compensation expense resulting from Dividend Equivalent Rights was $26,024
and $20,820 for the year ended June 30, 2000 and 1999, respectively.
17. PREFERRED SHARE PURCHASE RIGHTS PLAN
In July 1997, the Board of Directors adopted a Preferred Share Purchase
Rights Plan and correspondingly issued one Preferred Share Purchase Right
("a Right") for each share of common stock of the Company. Each Right
entitles the registered holder to purchase from the Company one
one-hundredth of a share of the Company's junior Participating Preferred
Stock, Series A ("Preferred Shares"), at a price of $37.00 per
one-hundredth of a Preferred Share. The Rights will not be exercisable or
separable from the common shares until ten business days after a person or
group acquire 15% or more or tenders for 50% or more of the Company's
outstanding common shares. The Plan also provides that if any person or
group becomes an "Acquiring Person," each Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void),
will entitle its holder to receive upon exercise that number of common
shares having a market value of two times the exercise price of the Right.
In the event the Company is acquired in a merger or other business
combination transaction, each Right will entitle its holder to receive upon
exercise of the Right, at the Right's then current exercise price, that
number of the acquiring company's common shares having a market value of
two times the exercise price of the Right. The company is entitled to
redeem the Rights at a price of one cent per Right at any time prior to
them becoming exercisable, and the Rights expire on July 17, 2007. The Plan
was designed to protect the interest of the Company's shareholders against
certain coercive tactics sometimes employed in takeover attempts.
18. COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments
-----------------
The future lease commitments as of June 30, 2000 for all noncancellable
equipment and land leases follows:
Fiscal Year
Ending June 30, Amount
--------------- ------
2001 $ 73,617
2002 76,417
2003 78,417
2004 77,669
2005 75,420
2006 and thereafter 2,140,900
-----------
$ 2,522,440
===========
Litigation
----------
The Company is involved in litigation arising in the normal course of
business. Management believes that liabilities, if any, arising from these
proceedings will not have a material adverse effect on the consolidated
financial position, operating results, or liquidity.
32
<PAGE>
19. OTHER COMPREHENSIVE INCOME
Other Comprehensive income in the Consolidated Statement of Stockholders'
Equity consists solely of unrealized gains and losses on available for sale
securities. The change in net unrealized loss on securities available for
sale securities includes reclassification adjustments to reclassify gains,
net of tax for sales of the related security of $0 and $4,673 for the years
ended June 30, 2000 and 1999.
20. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The estimated carrying amounts and fair values are as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,751,624 $ 5,751,624 $ 4,359,870 $ 4,359,870
Investment securities
Held to maturity 1,249,672 1,187,625 999,896 970,914
Available-for-sale 8,234,637 8,234,637 4,481,475 4,481,475
Mortgage-backed securities:
Held to maturity 2,089,010 2,027,016 2,472,681 2,456,645
Available for sale 1,556,172 1,556,172 1,832,845 1,832,845
Loans receivable 119,721,308 119,150,000 109,899,551 110,308,000
Federal Home Loan Bank Stock 800,000 800,000 629,500 629,500
Accrued interest receivable 870,955 870,955 664,058 664,058
------------- ------------- ------------ ------------
Total $ 140,273,378 $ 139,578,029 $125,339,876 $125,703,307
============= ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
2000 1999
-------------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits $ 118,930,939 $ 118,299,000 $105,338,770 $105,243,000
Advances from Federal
Home Loan Bank 10,500,000 10,418,000 9,000,000 9,000,000
Advance payment by borrowers
for taxes and insurance 203,320 203,320 196,993 196,993
Accrued interest payable 189,508 189,508 50,357 50,357
------------- ------------- ------------ ------------
Total $ 129,823,767 $ 129,109,828 $114,586,120 $114,490,350
============= ============= ============ ============
</TABLE>
33
<PAGE>
20. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)
Financial instruments are defined as cash, evidence of ownership interest
in an entity, or a contract which creates an obligation or right to receive
or deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties other than in
a forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments should be based upon management's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses, and other factors as determined through various
option pricing formulas or simulation modeling. As many of these
assumptions result from judgments made by management based upon estimates
which are inherently uncertain, the resulting estimated fair values may not
be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in assumptions on which the
estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment
are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest
---------------------------------------------------------------------------
Receivable, Accrued Interest Payable, and Advance Payment by Borrowers for
---------------------------------------------------------------------------
Taxes and Insurance
-------------------
The fair value is equal to the current carrying value.
Investment Securities, Mortgage-backed Securities, and Loans Held for Sale
--------------------------------------------------------------------------
The fair value of investment securities, mortgage-backed securities and
loans held for sale is equal to the available quoted market price. If no
quoted market price is available, fair value is estimated using the quoted
market price for similar securities.
Loans, Deposits, and Advances from Federal Home Loan Bank
---------------------------------------------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and employs
discount rates that consider reinvestment opportunities, operating
expenses, non-interest income, credit quality, and prepayment risk. Demand,
savings, and money market deposit accounts are valued at the amount payable
on demand as of year-end. Fair values for time deposits and advances from
Federal Home Loan Bank are estimated using a discounted cash flow
calculation and applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits and
notes of similar remaining maturities.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale and estimated
fair values are not readily available. The carrying value, represented by
the net deferred fee arising from the unrecognized commitment, and the fair
value, determined by discounting the remaining contractual fee over the
term of the commitment using fees currently charged to enter into similar
agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments are presented
in Note 5.
34
<PAGE>
21. CAPITAL REQUIREMENTS
The Company, on a consolidated basis and the Bank are subject to various
regulatory capital requirements administered by the federal regulatory
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by the regulators
that, if undertaken, could have a direct material effect on the entity's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of the
entities' assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weighting, and other
factors.
Quantitative measures established by the regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of tangible and core capital (as defined in the
regulations) to adjusted assets (as defined). Management believes that as
of June 30, 2000 the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of June 30, 2000, the most recent notification from the Company's and
Bank's primary regulatory authorities have categorized the entity as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Company must maintain minimum
tangible, core, and risk-based ratios. There have been no conditions or
events since that notification that management believes have changed the
Company's or the Bank's category.
The following table reconciles the Company's and Bank's capital under
generally accepted accounting principles to regulatory capital:
<TABLE>
<CAPTION>
Company Bank
------------------------------- -------------------------------
June 30, June 30,
2000 1999 2000 1999
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Total equity $ 15,068,274 $14,993,452 $ 14,241,112 $13,481,216
Unrealized loss on securities (301,080) (148,431) (284,163) (137,293)
-------------- ------------ -------------- -----------
Tier I, core, and tangible capital 15,369,354 15,141,883 14,525,275 13,618,509
Allowance for loan losses 682,103 582,280 682,103 582,280
-------------- ------------ -------------- -----------
Risk-based capital $ 16,051,457 $15,724,163 $ 15,207,378 $14,200,789
============= =========== ============= ===========
</TABLE>
35
<PAGE>
21. CAPITAL REQUIREMENTS (CONTINUED)
The actual capital amounts and ratios were as follows:
<TABLE>
<CAPTION>
Company at June 30,
--------------------------------------------------------
2000 1999
---------------------------- -------------------------
Amount Ratio Amount Ratio
-------------- --------- ------------- --------
<S> <C> <C> <C> <C>
Total Capital to Risk-Weighted Assets
-------------------------------------
Actual $ 16,051,457 16.06% $15,724,163 17.03%
For Capital Adequacy Purposes 7,994,160 8.00 7,385,779 8.00
To be "Well Capitalized" 9,992,700 10.00 9,232,224 10.00
Tier I Capital to Risk-Weighted Assets
--------------------------------------
Actual $ 15,369,354 15.38% $15,141,883 16.40%
For Capital Adequacy Purposes 3,997,080 4.00 3,692,890 4.00
To be "Well Capitalized" 5,995,620 6.00 5,539,334 6.00
Core Capital to Adjusted Assets
-------------------------------
Actual $ 15,369,354 10.56% $15,141,883 11.59%
For Capital Adequacy Purposes 5,822,620 4.00 5,227,400 4.00
To be "Well Capitalized" 7,278,280 5.00 6,534,250 5.00
Tangible Capital to Adjusted Assets
-----------------------------------
Actual $ 15,369,354 10.56% $15,141,883 11.59%
For Capital Adequacy Purposes 2,183,480 1.50 1,960,530 1.50
To be "Well Capitalized" N/A N/A N/A N/A
Bank at June 30,
-----------------------------------------------------------
2000 1999
----------------------------- -------------------------
Amount Ratio Amount Ratio
--------------- --------- ------------- -------
<S> <C> <C> <C> <C>
Total Capital to Risk-Weighted Assets
-------------------------------------
Actual $ 15,207,378 15.23% $ 14,200,789 15.79%
For Capital Adequacy Purposes 7,987,760 8.00 7,193,840 8.00
To be "Well Capitalized" 9,984,700 10.00 8,992,300 10.00
Tier I Capital to Risk-Weighted Assets
--------------------------------------
Actual $ 14,525,275 14.55% $ 13,618,509 15.14%
For Capital Adequacy Purposes 3,993,880 4.00 3,596,920 4.00
To be "Well Capitalized" 5,990,820 6.00 5,395,380 6.00
Core Capital to Adjusted Assets
-------------------------------
Actual $ 14,525,275 9.94% $ 13,618,509 10.42%
For Capital Adequacy Purposes 5,846,400 4.00 5,227,400 4.00
To be "Well Capitalized" 7,308,000 5.00 6,534,250 5.00
Tangible Capital to Adjusted Assets
-----------------------------------
Actual $ 14,525,275 9.94% $ 13,618,509 10.42%
For Capital Adequacy Purposes 2,192,400 1.50 1,960,275 1.50
To be "Well Capitalized" N/A N/A N/A N/A
</TABLE>
36
