SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934 (No Fee required)
For the fiscal year ended June 30, 1997
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee required)
For the transition period from to .
------------ ------------
Commission File No. 0-21885
Advance Financial Bancorp
----------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 55-0753533
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
1015 Commerce Street, Wellsburg, West Virginia 26070
- ---------------------------------------------- ------------
(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (304) 737-3531
---------------
Securities registered under to Section 12(b) of the Exchange Act: None
------
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO .
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $7,900,000
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average bid and asked price of the registrant's
Common Stock on September 15, 1997 was $14.5 million.
As of September 30, 1997, there were issued and outstanding 1,084,450
shares of the registrant's Common Stock.
Transition Small Business Disclosure Format (check one):
YES NO X
--- ----
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
June 30, 1997. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended June 30, 1997. (Part III)
1
<PAGE>
PART I
Item 1. Business
- -----------------
General
Advance Financial Bancorp (the "Company") is a Delaware corporation
organized in September 1996 at the direction of Advance Financial Savings Bank
(the "Bank" or "Advance") to acquire all of the capital stock that the Bank
issued in its conversion from the mutual to stock form of ownership (the
"Conversion"). On December 31, 1996, the Bank completed the Conversion and
became a wholly owned subsidiary of the Company. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage provided
that the Bank retains a specified amount of its assets in housing-related
investments. The Company conducts no significant business or operations of its
own other than holding all of the outstanding stock of the Bank and investing
the Company's portion of the net proceeds obtained in the conversion.
The Bank, chartered in 1935 under the name Advance Federal Savings and
Loan of West Virginia, is a federally chartered stock savings bank headquartered
in Wellsburg, West Virginia. The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). The Bank is a member of and owns capital stock in the FHLB of
Pittsburgh, which is one of the 12 regional banks in the FHLB System. The Bank
has an investment in one service corporation.
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 single-family
residential real estate.
Competition
The Bank is one of many financial institutions serving its market area
which consists of Brooke and Hancock counties of West Virginia and portions of
Jefferson County Ohio and Washington County, Pennsylvania. The competition for
deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, and multi-state regional
banks in the Bank's market area. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
Lending Activities
General. The Bank's loan portfolio predominantly consists of
adjustable-rate mortgage loans secured by one- to four-family residences and to
a lesser extent, the Bank originates commercial loans secured by real estate,
construction loans, land lot loans and savings account loans. It is the current
policy of the Bank to remain primarily a portfolio lender. From time to time,
the Bank sells one- to four family fixed rate loans in the secondary market.
2
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan and type of
security on the dates indicated:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1997 1996
-------------------- --------------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real Estate Loans:
Construction...................... $ 2,455 2.78% $ 1,901 2.35%
One- to four-Family(1) ........... 57,746 65.32 55,975 69.05
Multi-family ..................... 1,595 1.80 1,697 2.09
Non-residential................... 11,482 12.99 8,327 10.27
Consumer Loans:
Home improvement.................. 906 1.02 1,119 1.38
Automobile........................ 7,419 8.39 6,178 7.62
Share............................. 1,270 1.44 1,125 1.39
Education......................... 89 .10 128 .16
Other............................. 1,973 2.23 1,512 1.87
Commercial loans.................... 3,478 3.93 3,100 3.82
----- ------ ------- ------
Total loans.................... 88,413 100.00% 81,062 100.00%
====== ======
Less:
Loans in process.................. (1,761) (1,549)
Deferred loan origination fees
and costs...................... (216) (247)
Allowance for loan losses......... (368) (325)
----- ------
Total loans, net............... $86,068 $78,941
====== ======
</TABLE>
- -----------------
(1) At June 30, 1996, includes $1,375,000 in loans held for sale.
3
<PAGE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's loan
portfolio, including loans held for sale, at June 30, 1997. The table does not
include prepayments or scheduled principal repayments. All mortgage loans are
shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
One- to four-family real estate mortgage...... $ 4,378 $ 1,745 $51,623 $57,746
Multi-family real estate ..................... 42 51 1,502 1,595
Non-residential real estate .................. 314 608 10,560 11,482
Construction ................................. 1,033 372 1,050 2,455
Consumer ..................................... 685 9,712 1,260 11,657
Commercial ................................... 1,299 1,290 889 3,478
------- ------- ------- -------
Total Amount Due ............................. $ 7,751 $13,778 $66,884 $88,413
------- ------- ------- -------
Less:
Allowance for loan losses .................... (368)
Loans in process ............................. (1,761)
Deferred loan origination fees and costs...... (216)
-------
$86,068
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 1998, which have pre-determined interest rates and which have floating
or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- ---------
(In Thousands)
<S> <C> <C> <C>
One- to four-family real estate
mortgage ...................... $16,827 $36,541 $53,368
Multi-family .................. 652 901 1,553
Non-residential real estate ... 5,460 5,708 11,168
Construction .................. 372 1,050 1,422
Consumer ...................... 10,972 -- 10,972
Commercial .................... 1,525 654 2,179
------- ------- -------
Total ..................... $35,808 $44,854 $80,662
======= ======= =======
</TABLE>
One- to Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in the Bank's primary market areas. The Bank's one-
to four-family residential loan portfolio also includes second mortgage loans
and home equity loans secured by second mortgages. The Bank generally originates
owner-occupied one- to four-family residential mortgage loans in amounts up to
80% of the lesser of the appraised value or selling price of the mortgaged
property without requiring mortgage insurance. The Bank will originate a
mortgage loan in an amount up to 95% of the lesser of the appraised value or
selling price of a mortgaged property, however, mortgage insurance is required
for the amount in excess of 80% of such value. Non-owner-occupied residential
mortgage loans are originated up to 80% of the lesser of the appraised value or
selling price of the property. The Bank also originates construction permanent
loans on one- to four-family residences. The Bank retains most of the mortgage
loans that it originates. Adjustable-rate mortgage loans, which can adjust
annually or every three or five years over
4
<PAGE>
the life of the loan depending on the type of the loan, can have maturities of
up to 30 years. Fixed-rate loans can have maturities of up to 30 years depending
on the type of the loan.
For all adjustable-rate mortgage loans, the Bank requires the borrower to
qualify at the initial rate. The Bank's adjustable-rate mortgage loans provide
for periodic interest rate adjustments of plus or minus 1% to 2% with a maximum
adjustment over the term of the loan as set forth in the loan agreement and
usually ranges from 6% to 7% above the initial interest rate depending on the
terms of the loan. Adjustable-rate mortgage loans reprice every year, every
three years or every five years, and provide for terms of up to 30 years with
most loans having terms of between 15 and 30 years. The Bank offers
adjustable-rate loans with initial interest rates set below the fully indexed
rate.
The Bank offers adjustable-rate mortgage loans indexed to the weekly
average of the one year U.S. Treasury bill. Interest rates charged on mortgage
loans are competitively priced based on market conditions and the Bank's cost of
funds. Generally, the Bank's standard underwriting guidelines for mortgage loans
conform to the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines and
most of the Bank's loans are salable in the secondary market. It is the current
policy of the Bank to remain a portfolio lender for its adjustable rate loans.
Adjustable-rate mortgage loans decrease the risks associated with changes
in interest rates by more closely reflecting these changes, but involve other
risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the adjustable-rate mortgage loan documents, thereby potentially
limiting their effectiveness during periods of rising interest rates. These
risks have not had an adverse effect on the Bank.
Non-residential Real Estate Loans. Non-residential real estate loans
consist of loans made for the purpose of purchasing or refinancing the
non-residential real estate used as collateral and includes loans secured by
mixed residential and commercial use property, professional office buildings,
churches and restaurants. Loans secured by non-residential property may be
originated in amounts up to 80% of the appraised value for a maximum term of 20
years. Non-residential lending entails significant additional risks when
compared with one- to four-family residential lending. For example,
non-residential loans typically involve larger loan balances to single borrowers
or groups of related borrowers, the payment experience on such loans typically
is dependent on the successful operation of the project and these risks can be
significantly impacted by the cash flow of the borrowers and supply and demand
conditions in the market for commercial office, retail and warehouse space.
Consumer Loans. The Bank offers consumer loans in order to provide a wider
range of financial services to its customers. Federal savings associations are
permitted to make secured and unsecured consumer loans up to 35% of their
assets. In addition, savings associations have lending authority above the 35%
limitation for certain consumer loans, such as home improvement, credit card,
education, savings account or passbook loans. Consumer or other loans totalled
$11.7 million, or 13.2% of the Bank's total loans, of which loans secured by
automobiles totalled $7.4 million, or 8.4% of the Bank's total loans at June 30,
1997. The Bank originates automobile loans with terms of up to 6 years for new
automobiles and up to 5 years for used automobiles. Most of these automobile
loans are originated directly by the Bank. During the past two years, the Bank
has begun to originate automobile loans indirectly by purchasing such loans from
automobile dealers with whom the Bank provides floor plan financing. Indirect
automobile loans are underwritten by the Bank and a fee is remitted to the
automobile dealer upon the successful underwriting and closing of the loan. The
fee is rebated to the Bank, on a pro rata basis, if the loan is repaid within
the first six months. The Bank does not have recourse against the
5
<PAGE>
automobile dealer in the event of a default by the borrower. The Bank originates
each indirect auto loan in accordance with its underwriting standards and
procedures, which are intended to assess the applicant's ability to repay the
amounts due on the loan and the adequacy of the financed vehicle as collateral.
Commercial Loans. Commercial loans, other than commercial real estate
loans, consist of, among other things, commercial lines of credit (which include
automobile floor plan lines of credit), commercial vehicle loans, and working
capital loans and are typically secured by residential or commercial property,
receivables or inventory, vehicles comprising the automobile floor plan, or some
other form of collateral. Floor plan financing involves continuing financing for
an automobile dealer that is secured by automobiles physically located on the
dealer's lot. The Bank holds the title to the automobiles during the pendency of
the sale. Floor plan financing typically involves high loan origination volume
and repayment within 90 days of origination.
Construction Loans. The Bank makes construction loans primarily for the
construction of single-family dwellings. Approximately 90% of these loans were
made to persons who are constructing properties for the purpose of occupying
them. Such loans may also be made to builders to construct properties for sale.
Loans made to builders are generally "pure construction" loans which require the
payment of interest at fixed rates during the construction period and the
payment of the principal in full at the end of the construction period. Loans
made to individual property owners are either pure construction loans or
"construction-permanent" loans which generally provide for the payment of
interest only during a construction period, after which the loans convert to a
permanent loan at fixed or adjustable interest rates having terms similar to
other one- to four-family residential loans.
Construction loans made to builders who are building to resell have a
maximum loan-to-value ratio of 80% of the appraised value of the property.
Construction loans to individuals who intend to occupy the finished premises
generally have a maximum loan-to-value ratio of 80%.
Loan Approval Authority and Underwriting. The Bank has established various
lending limits for its officers and maintains a Loan Committee. A report of all
mortgage loans originated is presented to the Board of Directors monthly. The
President and Senior Vice President of the Bank each have the authority to
approve applications for mortgage loans up to $100,000, consumer loans up to
$40,000 for secured loans and up to $10,000 for unsecured loans. Six other
officers have authority to approve secured credit applications in varying
amounts up to $35,000.
The Loan Committee considers all applications for commercial loans up to
$250,000, whether secured or unsecured, and all consumer loans in amounts above
the lending limit established above. All loans in excess of those limits set for
the Loan Committee require the consideration and approval of the entire Board of
Directors.
Upon receipt of a completed loan application from a prospective borrower,
a credit report is generally ordered, income and certain other information is
verified and, if necessary, additional financial information is requested. An
appraisal from a licensed fee appraiser of the real estate intended to be used
as security for the proposed loan is obtained. For construction/permanent loans,
funds advanced during the construction phase are held in a loan-in-process
account and disbursed based upon various stages of completion in accordance with
the results of inspection reports that are based upon physical inspection of the
construction by a loan officer. For real estate loans, each title is reviewed by
the attorney for the Bank to determine that title is clear. Historically, the
Bank has not required title insurance except in those instances where the
attorney has seen a need for title insurance. Borrowers must also obtain fire
and casualty insurance (for loans on property located in a flood zone, flood
insurance is required) prior to the closing of the loan. The Bank is named as
mortgagee/loss payee of this insurance.
6
<PAGE>
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved mortgage loans which generally expire within 30 days
of the date of issuance. The Bank charges no commitment fees or points to secure
commitments. A customer may lock in a fixed rate for 30 days by depositing a
nonrefundable fee with the Bank. In some instances, after a review of the rate,
terms, and circumstances, commitments may be renewed or extended beyond the 30
day limit. At June 30, 1997, the Bank had $866,000 of outstanding commitments to
originate loans and $1.5 million in undisbursed funds related to construction
loans.
Loans to One Borrower. SAIF-insured savings bank are subject to certain
lending limitations to a single borrower or group of borrowers. Under current
law, the Bank's lending limits equals an amount equal to 15% of unimpaired
capital and unimpaired surplus on an unsecured basis and an additional amount
equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured
by readily marketable collateral. Savings associations are authorized to make
loans to one borrower, for any purpose, in an amount up to $500,000. The Bank's
maximum loan-to-one borrower limit was approximately $1.8 million at June 30,
1997. At June 30, 1997, the aggregate loans outstanding of the Bank's three
largest borrowers have outstanding balances of between $500,000 and $899,000,
and were secured by property in the Bank's market area. These loans were
performing in accordance with their contractual terms and were within the Bank's
lending limit.
Non-Performing and Problem Assets
Loan Delinquencies. The Bank's collection procedures provide that when a
mortgage loan is 30 days past due, a delinquent notice is sent to the borrower
and a late charge is imposed in accordance with the mortgage or Deed of Trust
agreement. If payment is still delinquent after 90 days, the borrower will
receive a notice of default establishing a date by which the borrower must bring
the account current or foreclosure proceedings will be instituted. Late charges
are also imposed in accordance with the mortgage or Deed of Trust agreement. If
the delinquency continues, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, the account is turned over to an attorney
for foreclosure. Management meets regularly to determine when foreclosure
proceedings should be initiated and the borrower is notified when foreclosure
has been commenced.
Loans are reviewed on a monthly basis and are placed on non-accrual status
when considered doubtful of collection by management. Generally, loans past due
90 days or more as to principal or interest and, in the opinion of management,
are not adequately secured to insure the collection of the entire outstanding
balance of the loan including accrued interest are placed on non-accrual status.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent cash payments are generally
applied to interest income unless, in the opinion of management, the collection
of principal and interest is doubtful. In those cases, subsequent cash payments
would be applied to principal.
7
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
----------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family ................................ $ 76 $ 82
Multi-family ....................................... -- 55
Non-residential .................................... 77 --
Construction ....................................... -- --
Consumer ............................................. 2 2
Commercial ........................................... -- --
---- ----
Total non-accrual loans .......................... 155 139
---- ----
Accruing loans greater than 90 days past due:
Mortgage loans:
One- to four-family .............................. 26 132
Multi-family ..................................... -- --
Commercial ....................................... -- 77
Construction ..................................... -- --
Consumer ............................................. 268 85
Commercial ........................................... 159 9
---- ----
Total accruing loans greater than 90 days past due 453 303
---- ----
Total non-performing loans ........................... 608 442
Real estate acquired in settlement of loans .......... -- --
---- ----
Other non-performing assets .......................... -- --
---- ----
Total non-performing assets .......................... $608 $442
==== ====
Total non-performing loans to total loans ............ 0.70% 0.55%
==== ====
Total non-performing loans to total assets ........... 0.58% 0.48%
==== ====
Total non-performing assets to total assets .......... 0.58% 0.48%
==== ====
</TABLE>
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was $18,000 for the
year ended June 30, 1997 and $11,000 was collected and included in the Bank's
interest income from non-accrual loans for the year ended June 30, 1997.
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a
8
<PAGE>
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that does not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at June 30, 1997, the Bank had classified
$485,000 of assets as substandard, $31,000 of assets as doubtful, and $771,000
of assets as special mention.
Real Estate Acquired in Settlement of Loans. Real estate acquired by the
Bank as a result of foreclosure or by deed in lieu of foreclosure is classified
as real estate owned until it is sold. When property is acquired, it is recorded
at the fair value at the date of foreclosure less estimated costs of
disposition.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the losses that may
be incurred in the Bank's loan portfolio. Such evaluation, which includes a
review of all loans of which full collectibility of interest and principal may
not be reasonably assured, considers the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, any
existing guarantees, past performance of the loan, available documentation for
the loan, legal impediments to collection, financial condition of the borrower,
and current economic conditions.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
9
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding(1) ............................................ $ 88,413 $ 81,062
======== ========
Average loans outstanding ............................................. $ 83,694 $ 76,096
======== ========
Allowance balance (at beginning of period) ............................ $ 325 $ 198
Provision:
Mortgages ........................................................... 31 --
Consumer ............................................................ 10 33
Commercial .......................................................... 10 230
Charge-offs:
Mortgages ........................................................... (1) --
Consumer(2) ......................................................... (18) (4)
Commercial(2) ....................................................... -- (141)
Recoveries:
Mortgages ........................................................... 3 --
Consumer ............................................................ 5 9
Commercial .......................................................... 3 --
-------- --------
Allowance balance (at end of period) .................................. $ 368 $ 325
======== ========
Allowance for loan losses as a percent of total loans outstanding...... 0.42% 0.40%
Net loans charged off as a percent of average loans outstanding........ 0.02% 0.19%
</TABLE>
- ----------------
(1) At June 30, 1996 includes $1,375,000 in loans held for sale.
(2) At June 30, 1996, the charge-offs constitute two secured loans aggregating
$145,000 from one borrower who declared bankruptcy in 1996.
10
<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1997 1996
-------------------- -------------------
Percent of Percent of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ --------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgages:
One- to four-family..... $ 83 65.32% $ 75 69.05%
Multi-family............ 8 1.80 8 2.09
Non-residential ........ 65 12.99 41 10.27
Construction............ -- 2.78 -- 2.35
Consumer................ 82 13.18 85 12.42
Commercial.............. 130 3.93 116 3.82
--- ------ --- ------
Total................ $ 368 100.00% $325 100.00%
=== ====== === ======
</TABLE>
Investment Activities and Mortgage-Backed Securities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short term
securities and certain other investments. The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities. The Bank classifies
its investments as securities available for sale or investments securities held
to maturity in accordance with SFAS No. 115. At June 30, 1997, the Bank's
investment portfolio policy allowed investments in instruments such as U.S.
Treasury obligations, U.S. federal agency or federally sponsored agency
obligations, municipal obligations, mortgage-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits (up to six months), as well as investment grade corporate
bonds, commercial paper and the mortgage derivative products described below.
The Board of Directors may authorize additional investments.
The Bank's securities available for sale and investment securities held to
maturity portfolios at June 30, 1997 did not contain securities of any issuer
with an aggregate book value in excess of 10% of the Bank's equity, excluding
those issued by the United States Government or its agencies.
11
<PAGE>
Mortgage-Backed Securities. To supplement lending activities, the Bank has
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages, the principal and interest
payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.
The Bank's mortgage-backed securities were classified as held to maturity
at June 30, 1997 and were all issued by GNMA or FHLMC, representing
participating interests in direct pass-through pools of long-term mortgage loans
originated and serviced by the issuers of the securities. Expected maturities
will differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC and GNMA make up a majority of the pass-through
certificates market.
Investment Activities
Investment Portfolio. The following table sets forth the carrying value of
the Bank's securities at the dates indicated. At June 30, 1997, the approximate
fair value of the Bank's securities available for sale was $55,000 resulting in
a net unrealized loss of $10,000.
<TABLE>
<CAPTION>
At June 30,
----------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
U.S. Government and agency securities ......................... $ 7,844 $ 4,800
Securities available for sale ................................. 55 68
Mortgage-backed securities .................................... 367 537
Interest-bearing deposits in other financial institutions...... 5,888 3,068
FHLB Stock .................................................... 577 560
------- -------
Total ....................................................... $14,731 $ 9,033
======= =======
</TABLE>
12
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, market value and weighted average yields for the
Bank's investment securities portfolio at June 30, 1997. The following table
does not take into consideration the effects of scheduled repayments or the
effects of possible prepayments.
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------------------------------------------------------------
Less than 1 to Over 5 to Over 10 Total
1 year 5 years 10 years years Securities
------------------- ------------------ ------------------ ------------------ ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agencies securities ... $ 1,750 5.84% $ 5,594 6.85% $ -- --% $ 500 7.40% $ 7,844 6.66% $ 7,831
Securities available for
sale .................. 37 11.78 -- -- 18 11.16 -- -- 55 11.59 55
Mortgage-backed
securities ............ -- -- -- -- 106 8.00 261 10.00 367 9.42 395
Interest-bearing deposits
in other financial
institutions .......... 5,888 6.26 -- -- -- -- -- -- 5,888 6.26 5,888
FHLB stock (1) .......... 577 6.38 -- -- -- -- -- -- 577 6.38 577
------- ---- ------- ---- ------ ---- ------- ---- ------- ---- -------
Total ................. $ 8,252 6.20% $ 5,594 6.85% $ 124 8.46% $ 761 8.29% $14,731 6.58% $14,746
======= ==== ======= ==== ====== ==== ======= ==== ======= ==== =======
</TABLE>
- ----------------------------
(1) Recorded at cost.
13
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. Deposit account terms vary according to the
minimum balance required, the time period the funds must remain on deposit, and
the interest rate, among other factors. At June 30, 1997, the Bank had no
brokered accounts.
Time Deposits. The following table indicates the amount of the Bank's time
deposits of $100,000 or more by time remaining until maturity as of June 30,
1997.
Maturity Period Time Deposits
--------------- -------------
(Dollar in Thousands)
Within three months...................... $1,286
More than three through six months....... 1,892
More than six through nine months........ 1,289
Over nine months......................... 3,257
-----
Total.............................. $7,724
=====
Borrowings
The Bank may obtain advances from the FHLB of Pittsburgh to supplement its
supply of lendable funds. Advances from the FHLB of Pittsburgh are typically
secured by a pledge of the Bank's stock in the FHLB of Pittsburgh and a portion
of the Bank's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements.
14
<PAGE>
The following table sets forth information concerning borrowings during
the periods indicated.
Year Ended June 30,
-----------------------
1997 1996
-------- --------
(Dollars In Thousands)
FHLB advances:
Ending Balance................................ $7,747 $4,376
Average Balance during year .................. 7,329 3,105
Maximum month-end balance during the year..... 8,267 3,712
Average interest rate during the year......... 5.43% 5.57%
Weighted average rate at year end............. 5.73% 5.49%
Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community deveopment purposes. At June 30, 1997, the Bank
had one wholly-owned subsidiary, Advance Financial Service Corporation of West
Virginia ("Service Corporation"). The Service Corporation was formed in 1989 to
hold stock in the Bank's outside data processing servicer. The Bank's investment
in its subsidiary totalled $15,000 at June 30, 1997. As of June 30, 1997, the
Service Corporation had not conducted any operations other than to hold the
stock of that servicer.
Employees
At June 30, 1997 the Bank had 35 full-time and 2 part-time employees. None
of the Bank's employees are represented by a collective bargaining group. The
Bank believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.
15
<PAGE>
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes.
Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, the Bank might have to convert to a different financial
institution charter and be regulated under federal law as a bank, including
being subject to the more restrictive activity limitations imposed on national
banks. The Bank cannot predict the impact of its conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator. The FDIC may also prohibit an insured depository institution
from engaging in any activity the FDIC determines poses a serious threat to the
SAIF.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup
16
<PAGE>
assignment. In addition, the FDIC is authorized to increase deposit insurance
rates on a semi-annual basis if it determines that such action is necessary to
cause the balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"),
predominantly commercial banks, were required to pay substantially lower, or
virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $470,000 pre-tax
expense for this assessment at September 30, 1996. Beginning January 1, 1997,
deposit insurance assessments for SAIF members were reduced to approximately
.064% of deposits on an annual basis; this rate may continue through the end of
1999. During this same period, BIF members are expected to be annually assessed
approximately .013% of deposits. Thereafter, assessments for BIF and SAIF
members should be the same and the SAIF and BIF may be merged. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank substantially declined.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
June 30, 1997, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
17
<PAGE>
Qualified Thrift Lender Test. Savings institutions must meet a QTL test.
If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be in compliance with the QTL test on a
monthly basis in nine out of every 12 months. As of June 30, 1997, the Bank was
in compliance with its QTL requirement with 81.9% of its assets invested in
QTIs.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations or 5%
of its outstanding borrowings to the FHLB of Pittsburgh, at the beginning of
each year.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At June 30, 1997, the Bank's required liquid
asset ratio was 17.5%.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At June 30,
1997, the Bank was in compliance with these Federal Reserve Board requirements.
18
<PAGE>
Item 2. Description of Property
- -------------------------------
(a) Properties.
The Bank operates from its main office and one branch office.
<TABLE>
<CAPTION>
Year Leased
Location Leased or Owned or Acquired
- -------- --------------- -----------
<S> <C> <C>
MAIN OFFICE:
1015 Commerce Street Owned 1984
Wellsburg, West Virginia 27060
BRANCH OFFICE:
1409 Main Street Leased (1) 1996
Follansbee, West Virginia 26037
</TABLE>
- -----------------------
(1) The Bank holds a 40 year lease on the land upon which its branch office is
located. The Bank owns the branch building.
The Bank leases property in Wintersville, Ohio upon which it expects to
construct and open a branch office during the Spring of 1998. In addition, the
Bank owns property at 901 Main Street, Follansbee, West Virginia, which was
formerly a branch office.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities and - Regulation of the Bank," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
19
<PAGE>
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to the
Bank's business. In the opinion of management, no material loss is expected from
any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The 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 The
Wall Street Journal. 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>
January 1, 1997 - March 31, 1997 $14.50 $12.25 $.08
April 1, 1997 to June 30, 1997 $15.13 $13.50 $.08
</TABLE>
The number of shareholders of record of common stock as of the record date
of September 15, 1997, was approximately 489. This does not reflect the number
of persons or entities who held stock in nominee or "street" name through
various brokerage firms. At September 15, 1997, there were 1,084,450 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.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
20
<PAGE>
Item 8. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- --------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- --------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the "Proxy
Statement" is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and Executive
Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation
of which may at a subsequent date result in a change in control of
the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
21
<PAGE>
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of the Registrant included in the Registrant's Annual Report to
Stockholders for the fiscal year ending June 30, 1997 are incorporated herein by
reference and also in Item 7 hereof.
Report of Independent Auditors
Consolidated Balance Sheet as of June 30, 1997 and 1996.
Consolidated Statement of Income for the Years Ended June 30, 1997 and
1996.
Consolidated Statement of Changes In Shareholders' Equity for the Years
Ended June 30, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997
and 1996.
Notes to Consolidated Financial Statements.
2. Other than as set forth below, Financial Statement Schedules for
which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission ("SEC") are not required under the related
instructions or are inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Certificate of Incorporation of Advance Financial Bancorp *
3(ii)Bylaws of Advance Financial Bancorp
4(i) Specimen Stock Certificate *
4(ii)Shareholder Rights Plan **
10 Employment Agreement between the Bank and Stephen M. Gagliardi
11 Statement re Computation of Per Share Earnings
13 Portions of the 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1- Description of
Business and -- Subsidiary Activities.")
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 333-13021) declared effective by the SEC on November 12, 1996.
** Incorporated by reference to the Form 8-K (File No.0-21885) filed July 17,
1997.
(b) Filed 8-K on July 17, 1997 (Items 5 and 7) reporting the
adoption of the Shareholder Rights Plan.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of
September 23, 1997.
ADVANCE FINANCIAL BANCORP
By: /s/ Stephen M. Gagliardi
---------------------------------------
Stephen M. Gagliardi
President, Chief Executive Officer and
Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of September 23, 1997.
/s/ Stephen M. Gagliardi /s/ George H. Johnson
- ---------------------------------- -----------------------------
Stephen M. Gagliardi George H. Johnson
President, Chief Executive Officer Director
and Director
(Principal Executive Officer)
/s/ Noreen Mechling /s/ John R. Sperlazza
- ---------------------------------- -----------------------------
Noreen Mechling John R. Sperlazza
Treasurer, Chief Financial Officer Director
and Director
(Principal Accounting Officer)
/s/ Steven D. Martino /s/ William E. Watson
- ---------------------------------- -----------------------------
Steven D. Martino William E. Watson
Vice President Director
/s/ Gary Young /s/ James R. Murphy
- ---------------------------------- -----------------------------
Gary Young James R. Murphy
Director Director
- ----------------------------------
William B. Chesson
Director
EXHIBIT 3(ii)
<PAGE>
BYLAWS
OF
ADVANCE FINANCIAL BANCORP
ARTICLE I
Principal Office
The home office of Advance Financial Bancorp (the "Company") shall be at
1015 Commerce Street in the City of Wellsburg, County of Brooke, in the State of
West Virginia or at such other place within or without the State of West
Virginia as the board of directors shall from time to time determine. The
Company may also have offices at such other places within or without the State
of West Virginia as the board of directors shall from time to time determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the principal office of the Company or at such
other place within or without the State of West Virginia as the board of
directors may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the Company
for the election of directors and for the transaction of any other business of
the Company shall be held annually at such date and time as the board of
directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the president or by a majority
of the board of directors or by a committee of the board of directors, whose
members will be designated from time to time by the board of directors, and
which committee will have been delegated the power and authority to call such
meetings.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, any director
or the president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, day, and
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing such duties, not less
than ten days nor more than sixty days before the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the stockholder
at the address as it appears on the stock transfer books or records of the
Company as of the record date prescribed in Section 6 of this Article II, with
postage thereon prepaid. If a stockholder is present at a meeting, or in writing
waives notice thereof before or after the meeting, notice of the meeting to such
stockholder shall be unnecessary. When any stockholders' meeting, either annual
or special, is adjourned for more than thirty days, or if after the adjournment
a new record date is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
thirty days or less or of the business to be transacted at such adjourned
meeting, other than an announcement at the meeting at which such adjournment is
taken.
<PAGE>
SECTION 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than sixty days, and in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
SECTION 7. Voting Lists. The officer or agent having charge of the stock
transfer books for shares of the Company shall make, at least ten days before
each meeting of stockholders, a complete record of the stockholders entitled to
vote at such meeting or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each. The record, for a
period of ten days before such meeting, shall be kept on file at the principal
office of the Company, and shall be subject to inspection by any stockholder for
any purpose germane to the meeting at any time during usual business hours. Such
record shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any stockholder for any purpose
germane to the meeting during the whole time of the meeting. The original stock
transfer books shall be the only evidence as to who are the stockholders
entitled to examine such record or transfer books or to vote at any meeting of
stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the Company
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time, subject to the notice requirements of
Section 5 of this Article II. At such adjourned meeting at which a quorum shall
be present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed by the stockholder in the manner provided by the
Certificate of Incorporation. Proxies solicited on behalf of the management
shall be voted as directed by the stockholder or, in the absence of such
direction, as determined by a majority of the board of directors or by a
majority of a committee of the board of directors, whose members will be
designated from time to time by the board of directors, and which committee will
have been delegated the power and authority to act on behalf of the board of
directors. No proxy shall be valid after eleven months from the date of its
execution unless otherwise provided in the proxy.
SECTION 10. Voting. At each election for directors every stockholder
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Directors shall be elected by a plurality of votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Unless otherwise provided in the Certificate
of Incorporation, by statute, or by these Bylaws, in matters other than the
election of directors, a majority of the shares present in person or represented
by proxy at a lawful meeting and entitled to vote on the subject matter, shall
be sufficient to pass on a transaction or matter.
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SECTION 11. Voting of Shares in the Name of Two or More Persons. When
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Company to the contrary, at any meeting of the
stockholders of the Company, any one or more of such stockholders may cast, in
person or by proxy, all votes to which such ownership is entitled. In the event
an attempt is made to cast conflicting votes, in person or by proxy, by the
several persons in whose names shares of stock stand, the vote or votes to which
these persons are entitled shall be cast as directed by a majority of those
holding such stock and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, trustee, or conservator may be voted by such
person, either in person or by proxy, without a transfer of such shares into
such person's name. Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into such receiver's name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter, the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Company, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the Company,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board of directors or the president may
make such appointment at the meeting. In case any person appointed as inspector
fails to appear or fails or refuses to act, the vacancy may be filled by
appointment by the board of directors in advance of the meeting or at the
meeting by the chairman of the meeting or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors, or a committee
of the board of directors delegated such power and authority by the board of
directors, shall act as a nominating committee for selecting the management
nominees for election as directors. Except in the case of a nominee substituted
as a result of the death or other incapacity of a management nominee, the
nominating committee shall deliver written nominations to the secretary at least
twenty days prior to the date of the annual meeting. Provided such committee
makes such nominations, no nominations for directors except
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those made by the nominating committee shall be voted upon at the annual meeting
unless other nominations by stockholders are made in writing and delivered to
the secretary of the Company in accordance with the provisions of Article II,
Section 15 of these Bylaws.
SECTION 15. Notice for Nominations and Proposals. Nominations of
candidates for election as directors at any annual meeting of stockholders may
be made (a) by, or at the direction of, a majority of the board of directors or
a committee thereof in accordance with Section 14 of these Bylaws or (b) by any
stockholder entitled to vote at such annual meeting. Only persons nominated in
accordance with the procedures set forth in this Section 15 shall be eligible
for election as directors at an annual meeting. Ballots bearing the names of all
the persons who have been nominated for election as directors at an annual
meeting in accordance with the procedures set forth in this Section 15 shall be
provided for use at the annual meeting.
Nominations, other than those made in accordance with Section 14 of these
Bylaws, shall be made pursuant to timely notice in writing to the Secretary of
the Company as set forth in this Section 15. To be timely, a stockholder's
notice shall be delivered to, or mailed and received at, the principal office of
the Company not less than 60 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company; provided,
however, that with respect to the first scheduled annual meeting, notice by the
stockholder must be so delivered or received no later than the close of business
on the tenth day following the day on which notice of the date of the scheduled
meeting must be delivered or received no later than the close of business on the
fifth day preceding the date of the meeting. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director and as to the stockholder giving the
notice (i) the name, age, business address and residence address of such person,
(ii) the principal occupation or employment of such person, (iii) the class and
number of shares of Company stock which are Beneficially Owned (as defined in
Article XIII of the Certificate of Incorporation) by such person on the date of
such stockholder notice, and (iv) any other information relating to such person
that is required to be disclosed in solicitations of proxies with respect to
nominees for election as directors, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, but
not limited to, information required to be disclosed by Items 4, 5, 6 and 7 of
Schedule 14A to be filed with the Securities and Exchange Commission (or any
successors of such items or schedule or, if no successor to such items exists,
then in accordance with these items as they existed upon the date of the
adoption of these Bylaws); and (b) as to the stockholder giving the notice (i)
the name and address, as they appear on the Company's books, of such stockholder
and any other stockholders known by such stockholder to be supporting such
nominees and (ii) the class and number of shares of Company stock which are
Beneficially Owned by such stockholder on the date of such stockholder notice
and, to the extent known, by any other stockholders known by such stockholder to
be supporting such nominees on the date of such stockholder notice. At the
request of the board of directors, any person nominated by, or at the direction
of, the Board for election as a director at an annual meeting shall furnish to
the Secretary of the Company that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee.
Proposals, other than those made by or at the direction of the board of
directors, shall be made pursuant to timely notice in writing to the Secretary
of the Company as set forth in this Section 15. For stockholder proposals to be
included in the Company's proxy materials, the stockholder must comply with all
the timing and informational requirements of Rule 14a-8 of the Exchange Act (or
any successor regulation or, if no successor regulation exists, then in
accordance with the regulation as it existed upon the date of the adoption of
these Bylaws). With respect to stockholder proposals to be considered at the
annual meeting of stockholders but not included in the Company's proxy
materials, the stockholder's notice shall be delivered to, or mailed and
received at, the principal office of the Company not less than
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60 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders of the Company. Such stockholder's notice shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the proposal desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Company's books, of the
stockholder proposing such business and, to the extent known, any other
stockholders known by such stockholder to be supporting such proposal, (c) the
class and number of shares of the Company stock which are Beneficially Owned by
the stockholder on the date of such stockholder notice and, to the extent known,
by any other stockholders known by such stockholder to be supporting such
proposal on the date of such stockholder notice, and (d) any financial interest
of the stockholder in such proposal (other than interests which all stockholders
would have).
The board of directors may reject any nomination by a stockholder or
stockholder proposal not timely made in accordance with the requirements of this
Section 15. If the board of directors, or a designated committee thereof,
determines that the information provided in a stockholder's notice does not
satisfy the informational requirements of this Section 15 in any respect, the
Secretary of the Company shall notify such stockholder of the deficiency in the
notice. The stockholder shall have an opportunity to cure the deficiency by
providing additional information to the Secretary within such period of time,
not to exceed five days from the date such deficiency notice is given to the
stockholder, as the board of directors or such committee shall reasonably
determine. If the deficiency is not cured within such period, or if the board of
directors or such committee reasonably determines that the additional
information provided by the stockholder, together with information previously
provided, does not satisfy the requirements of this Section 15 in any respect,
then the board of directors may reject such stockholder's nomination or
proposal. The Secretary of the Company shall notify a stockholder in writing
whether such stockholder's nomination or proposal has been made in accordance
with the time and informational requirements of this Section 15. Notwithstanding
the procedures set forth in this paragraph, if neither the board of directors
nor such committee makes a determination as to the validity of any nominations
or proposals by a stockholder, the presiding officer of the annual meeting shall
determine and declare at the annual meeting whether the nomination or proposal
was made in accordance with the terms of this Section 15. If the presiding
officer determines that a nomination or proposal was made in accordance with the
terms of this Section 15, the presiding officer shall so declare at the annual
meeting and ballots shall be provided for use at the meeting with respect to
such nominee or proposal. If the presiding officer determines that a nomination
or proposal was not made in accordance with the terms of this Section 15, the
presiding shall so declare at the annual meeting and the defective nomination or
proposal shall be disregarded.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Company shall
be under the direction of its board of directors. The board of directors shall
annually elect a president from among its members and may also elect a chairman
of the board from among its members. The board of directors shall designate,
when present, any director or the president to preside at its meetings.
SECTION 2. Number, Term, and Election. The board of directors shall
consist of eight (8) members and shall be divided into three classes as nearly
equal in number as possible. The members of each class shall be elected for a
term of three years and until their successors are elected or qualified. The
board of directors shall be classified in accordance with the provisions of the
Company's Certificate of Incorporation. The board of directors may increase the
number of members of the board of directors but in no event shall the number of
directors be increased in excess of fifteen.
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SECTION 3. Place of Meetings. All annual and special meetings of the board
of directors shall be held at the principal office of the Company or at such
other place within or without the State of West Virginia as the board of
directors may determine and as designated in the notice of such meeting, if
necessary.
SECTION 4. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this Bylaw at such time and date as the
board of directors may determine.
SECTION 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the president, the chairman of the board
of directors, or by one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place within or without
the State of West Virginia as the place for holding any special meeting of the
board of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other.
SECTION 6. Notice. Written notice of any special meeting shall be given to
each director at least two days previous thereto delivered personally or by
telegram or at least five days previous thereto delivered by mail at the address
at which the director is most likely to be reached. Such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph company if
sent by telegram. Any director may waive notice of any meeting by a writing
filed with the secretary before, during, or after the meeting. The attendance of
a director at a meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by Section
2 of Article III shall constitute a quorum for the transaction of business at
any meeting of the board of directors, but if less than such majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time. Notice of any adjourned meeting shall be given in the same manner
as prescribed by Section 6 of Article III.
SECTION 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the entire
board of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the laws of Delaware.
SECTION 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the principal office of the Company
addressed to the president. Unless otherwise specified herein such resignation
shall take effect upon receipt thereof by the president.
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SECTION 11. Vacancies. Any vacancy occurring in the board of directors
shall be filled in accordance with the provisions of the Company's Certificate
of Incorporation. Any directorship to be filled by reason of an increase in the
number of directors may be filled by the affirmative vote of two-thirds of the
directors then in office. The term of such director shall be in accordance with
the provisions of the Company's Certificate of Incorporation.
SECTION 12. Removal of Directors. Any director or the entire board of
directors may be removed for cause and then only in accordance with the
provisions of the Company's Certificate of Incorporation.
SECTION 13. Compensation. Directors, as such, may receive a stated fee for
their services. By resolution of the board of directors, a reasonable fixed sum,
and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the board of directors may determine.
Nothing herein shall be construed to preclude any director from serving the
Company in any other capacity and receiving remuneration therefor.
SECTION 14. Presumption of Assent. A director of the Company who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
the director's dissent or abstention shall be entered in the minutes of the
meeting or unless the director shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the Company
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who votes in favor of such action.
ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a simple majority of a
quorum, designate one or more committees, as they may determine to be necessary
or appropriate for the conduct of the business of the Company, and may prescribe
the duties, constitution, and procedures thereof. Each committee shall consist
of one or more directors of the Company. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Company provided, however, that notice to the board of directors, the chief
executive officer, the chairman of such committee, or the secretary shall be
deemed to constitute notice to the Company. Such resignation shall take effect
upon receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective. Any member of any such committee may be removed
at any time, either with or without cause, by the affirmative vote of a majority
of the authorized number of directors at any meeting of the board called for
that purpose.
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ARTICLE V
Officers
SECTION 1. Positions. The officers of the Company shall include a chief
executive officer, president, one or more vice presidents, a secretary, and a
treasurer, each of whom shall be elected by the board of directors. The offices
of the secretary and treasurer may be held by the same person and a vice
president may also be either the secretary or the treasurer. The board of
directors may designate one or more vice presidents as executive vice president
or senior vice president. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Company may require.
The officers shall have such authority and perform such duties as the board of
directors may from time to time authorize or determine. In the absence of action
by the board of directors, the officers shall have such powers and duties as
generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Company shall
be elected annually by the board of directors at the first meeting of the board
of directors held after each annual meeting of the stockholders. If the election
of officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until a successor shall
have been duly elected and qualified, until death or resignation, or until
removal in the manner hereinafter provided. Election or appointment of an
officer, employee, or agent shall not of itself create contract rights. The
board of directors may authorize the Company to enter into an employment
contract with any officer in accordance with state law; but no such contract
shall impair the right of the board of directors to remove any officer at any
time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by the vote of the majority
of the board of directors whenever, in its judgment, the best interests of the
Company will be served thereby, but such removal, other than for cause, shall be
without prejudice to the contract rights, if any, of the person so removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors and no officer shall be prevented
from receiving such salary by reason of the fact that the officer is also a
director of the Company.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Company's Certificate of Incorporation or
these Bylaws with respect to certificates for shares, the board of directors may
authorize any officer, employee, or agent of the Company to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Company. Such authority may be general or confined to specific instances.
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SECTION 2. Loans. No loans shall be contracted on behalf of the Company
and no evidence of indebtedness shall be issued in its name unless authorized by
the board of directors. Such authority may be general or confined to specific
instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes, or other evidences of indebtedness issued in the name
of the Company shall be signed by one or more officers, employees, or agents of
the Company in such manner as shall from time to time be determined by
resolution of the board of directors.
SECTION 4. Deposits. All funds of the Company not otherwise employed shall
be deposited from time to time to the credit of the Company in any of its duly
authorized depositories as the board of directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Company shall be
represented by certificates signed by the president or a vice president and by
the treasurer or by the secretary of the Company, and may be sealed with the
seal of the Company or a facsimile thereof. Any or all of the signatures upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the Company itself or an
employee of the Company. If any officer who has signed or whose facsimile
signature has been placed upon such certificate shall have ceased to be such
officer before the certificate is issued, it may be issued by the Company with
the same effect as if the person were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Company shall set forth upon the face or back that the
Company will furnish to any stockholder upon request and without charge a full
statement of the designations, preferences, limitations, and relative rights of
the shares of each class authorized to be issued, the variations in the relative
rights and preferences between the shares of each such series so far as the same
have been fixed and determined, and the authority of the board of directors to
fix and determine the relative rights and preferences of subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Company is organized under the laws of the State of Delaware; the name
of the person to whom issued; the number and class of shares; the date of issue;
the designation of the series, if any, which such certificate represents; and
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
share until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the issuance
of shares shall be paid in accordance with the provisions of Delaware law.
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SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the
Company shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by such person's
legal representative, who shall furnish proper evidence of such authority, or by
the person's attorney thereunto authorized by power of attorney duly executed
and filed with the Company. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name shares
of capital stock stand on the books of the Company shall be deemed by the
Company to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Company shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list required by Section 7 of Article II, or the books of the Company, or to
vote in person or by proxy at any meeting of stockholders.
SECTION 7. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Company alleged to have been lost, stolen, or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or the owner's legal representative, to give the Company a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Company with respect to the certificate alleged to have been lost,
stolen, or destroyed.
SECTION 8. Beneficial Owners. The Company shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not the Company shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Company shall end on the last day of June of each
year. The Company shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Certificate of Incorporation and
applicable law, the board of directors may, at any regular or special meeting,
declare dividends on the Company's outstanding capital stock. Dividends may be
paid in cash, in property, or in the Company's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Company shall be in such form as the board of
directors shall prescribe.
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ARTICLE XI
Amendments
The Bylaws may be altered, amended, or repealed or new Bylaws may be
adopted in the manner set forth in the Certificate of Incorporation.
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EXHIBIT 10
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 15th day of July, 1997 ("Effective
Date"), by and between Advance Financial Savings Bank (the "Savings Bank") and
Stephen M. Gagliardi (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Savings Bank as
President and Chief Executive Officer and is experienced in all phases of the
business of the Savings Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Savings Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the President
and Chief Executive Officer of the Savings Bank. The Employee shall render such
administrative and management services to the Savings Bank and Advance Financial
Bancorp ("Parent") as are currently rendered and as are customarily performed by
persons situated in a similar executive capacity. The Employee shall promote the
business of the Savings Bank and Parent. The Employee's other duties shall be
such as the Board of Directors for the Savings Bank (the "Board of Directors" or
"Board") may from time to time reasonably direct, including normal duties as an
officer of the Savings Bank.
2. Base Compensation. The Savings Bank agrees to pay the Employee during
the Term of this Agreement (as hereinafter defined at Section 5) a salary at the
rate of at least $98,991.96 per annum, payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and Employee shall be entitled to
receive annually an increase at such percentage or in such an amount as the
Board of Directors in its sole discretion may decide at such time.
3. Discretionary Bonus. The Employee shall be entitled to participate in
an equitable manner with all other senior management employees of the Savings
Bank in discretionary bonuses that may be authorized and declared by the Board
of Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
4. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Savings Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Savings Bank may adopt for the benefit of its
employees. Additionally, Employee's dependent family shall be eligible to
<PAGE>
participate in medical and dental insurance plans sponsored by the Savings Bank
or Parent with the cost of such premiums paid by the Savings Bank.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Savings Bank's senior management employees, including by example, participation
in any stock option or incentive plans adopted by the Board of Directors of
Savings Bank or Parent, reimbursement for club memberships, a reasonable expense
account, receipt of an appropriate automobile reimbursement allowance and any
other benefits which are commensurate with the responsibilities and functions to
be performed by the Employee under this Agreement. The Savings Bank shall
reimburse Employee for all reasonable out-of-pocket expenses which Employee
shall incur in connection with his service for the Savings Bank.
5. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending July 15, 2000
thereafter ("Term"). Additionally, on, or before, each annual anniversary date
from the Effective Date, the Term of employment under this Agreement shall be
extended for up to an additional one year period beyond the then effective
expiration date upon a determination and resolution of the Board of Directors
that the performance of the Employee has met the requirements and standards of
the Board, and that the Term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the
Savings Bank or Parent.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Savings Bank or Parent, or, solely
as a passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this
2
<PAGE>
Agreement, with all such voluntary absences to count as vacation time; provided
that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Savings Bank.
(b) The Employee shall be entitled to receive any additional compensation
from the Savings Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Savings Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Savings Bank for such additional periods of time and
for such valid and legitimate reasons as the Board of Directors in its
discretion may determine. Further, the Board of Directors shall be entitled to
grant to the Employee a leave or leaves of absence with or without pay at such
time or times and upon such terms and conditions as the Board of Directors in
its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Savings Bank. In the event that any sick leave benefit shall not have
been used during any year, such leave shall accrue to subsequent years to the
extent authorized by the Board of Directors for employees of the Savings Bank.
9. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the third calendar month in which
Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee's
personal dishonesty, incompetence,
3
<PAGE>
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the Term (including any renewal term) of this Agreement and the
cost of Employee obtaining all health, life, disability, and other benefits
which the Employee would be eligible to participate in through such date based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment. Notwithstanding the foregoing, in no
event shall the Employee receive payment of his salary in accordance with
Section 2 herein and the cost of applicable benefits for a period of less than
twelve months from the date of termination of employment without Just Cause.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(e) If the Savings Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Savings Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Savings Bank under the authority contained in Section 13(c) of FDIA; or (ii)
by the Director of the OTS, or his designee, at the time that the Director of
the OTS, or his designee approves a supervisory merger to resolve problems
related to operation of the Savings Bank or when the Savings Bank is determined
by the Director of the OTS to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
4
<PAGE>
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Savings Bank's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12
U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank may in its discretion (i) pay the Employee all or part of the compensation
withheld while its contract obligations were suspended and (ii) reinstate any of
its obligations which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
in accordance with the Savings Bank's disability policy as in effect on the date
he becomes disabled. Such benefits noted herein shall be reduced by any benefits
otherwise provided to the Employee during such period under the provisions of
disability insurance coverage in effect for Savings Bank employees. Thereafter,
Employee shall be eligible to receive benefits provided by the Savings Bank
under the provisions of disability insurance coverage in effect for Savings Bank
employees. Upon returning to active full-time employment, the Employee's full
compensation as set forth in this Agreement shall be reinstated as of the date
of commencement of such activities. In the event that the Employee returns to
active employment on other than a full-time basis, then his compensation (as set
forth in Section 2 of this Agreement) shall be reduced in proportion to the time
spent in said employment, or as shall otherwise be agreed to by the parties.
12. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment during the Term of this
Agreement following any change in control of the Savings Bank or Parent, absent
Just Cause, Employee shall
5
<PAGE>
be paid an amount equal to the product of 2.99 times the Employee's "base
amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986,
as amended (the "Code") and regulations promulgated thereunder. Said sum shall
be paid, at the option of Employee, either in one (1) lump sum within thirty
(30) days of such termination discounted to the present value of such payment
using as the discount rate the "prime rate" as published in the Wall Street
Journal Eastern Edition as of the date of such payment minus 100 basis points,
or in periodic payments over the next 36 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall
be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Savings Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "control" shall refer to the
ownership, holding or power to vote more than 25% of the Parent's or Savings
Bank's voting stock, the control of the election of a majority of the Parent's
or Savings Bank's directors, or the exercise of a controlling influence over the
management or policies of the Parent or Savings Bank by any person or by persons
acting as a group within the meaning of Section 13(d) of the Securities Exchange
Act of 1934. The term "person" means an individual other than the Employee, or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntarily terminate his employment during the Term of this
Agreement following a change in control of the Savings Bank or Parent, and
Employee shall thereupon be entitled to receive the payment described in Section
12(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Savings Bank or
Parent, Employee would be required to report to a person or persons other than
the Board of the Savings Bank or Parent; (iii) if the Savings Bank or Parent
should fail to maintain Employee's base compensation in effect as of the date of
the Change in Control and the existing employee benefits plans, including
material fringe benefit, stock option and retirement plans, except to the extent
that such reduction in benefit programs is part of an overall adjustment in
benefits for all employees of the Savings Bank or Parent and does not
disproportionately adversely impact the
6
<PAGE>
Employee; (iv) if Employee would be assigned duties and responsibilities other
than those normally associated with his position as referenced at Section 1,
herein; (v) if Employee would not be elected or reelected to the Board of
Directors of the Savings Bank; or (vi) if Employee's responsibilities or
authority have in any way been diminished or reduced.
13. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Savings Bank or Parent.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of West Virginia, except to the extent that Federal law shall
be deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Savings Bank,
and judgment upon the award rendered may be entered in any court having
jurisdiction thereof, except to the extend that the parties may otherwise reach
a mutual settlement of such issue. The Savings Bank shall reimburse Employee for
all reasonable costs and expenses, including reasonable attorneys' fees, arising
from such dispute, proceedings or actions, following the delivery of the
decision of the arbitrator finding in favor of the Employee. Further, the
settlement of the dispute to be approved by the Board of the Savings Bank or the
Parent may include a provision for the reimbursement by the Savings Bank or
Parent to the Employee for all reasonable costs and expenses, including
reasonable attorneys' fees, arising from such dispute, proceedings or actions,
or the
7
<PAGE>
Board of the Savings Bank or the Parent may authorize such reimbursement of such
reasonable costs and expenses by separate action upon a written action and
determination of the Board following settlement of the dispute.
18. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
Advance Financial Savings Bank
ATTEST: By:
---------------------------------------
- ----------------------------------
Secretary
WITNESS:
- ---------------------------------- ---------------------------------------
Stephen M. Gagliardi
Employee
EXHIBIT 11
<PAGE>
EXHIBIT 11
Earnings Per Share Calculation
For the period December 31, 1996 through June 30, 1997
Earnings of the Company from December 31, 1996
through June 30, 1997 $492,662
Average shares outstanding 998,392
Earnings per share, for the period December 31, 1996
through June 30, 1997 $0.49
EXHIBIT 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company was recently formed, therefore its results from operations
consist primarily of interest income from the investing of funds from the
proceeds generated by the sale of common stock and expense incurred in the
maintaining of the investment portfolio. The Bank's results of operations are
primarily dependent on its net interest income, which is the difference between
the interest income 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
influenced by the level of non-interest expenses, such as employee salaries and
benefits and other income, such as loan-related fees and fees on deposit-related
services.
Asset/Liability Management
The Bank'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 Bank manages interest rate sensitivity and asset/liability products through
an asset/liability management committee. The asset/liability management
committee meets as necessary to determine the rates of interest for loans and
deposits. Rates on deposits are primarily based on the Bank's need for funds and
on a review of rates offered by other financial institutions in the Bank's
market areas. Interest rates on loans are primarily based on the interest rates
offered by other financial institutions in the Bank's primary market areas as
well as the Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Bank has
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,
since the mid-1980s, the Bank has primarily originated one year, three year and
five year adjustable-rate mortgage loans.
The Committee manages the interest rate sensitivity of the Bank 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 Bank's
liquidity needs, growth, and capital adequacy. The Bank'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.
-4-
<PAGE>
Net Portfolio Value
The Bank computes amounts by which the net present value of cash flow from
assets, liabilities and off balance sheet items ("net portfolio value" or "NPV")
would change in the event of a range of assumed changes in market interest
rates. These computations estimate the effect on the Bank's from instantaneous
and permanent 1% to 4% (100 to 400 basis points) increases and decreases in
market interest rates. Based upon OTS assumptions, the following table presents
the Bank's NPV at June 30, 1997.
<TABLE>
<CAPTION>
Changes in Rates NPV Ratio(1) Change(2)
---------------- ------------ ---------
<S> <C> <C> <C>
+400 bp 10.63% (357)bp
+300 bp 11.72 (249)bp
+200 bp 12.72 (148)bp
+100 bp 13.59 (62)bp
0 bp 14.20 -
-100 bp 14.55 35 bp
-200 bp 14.78 58 bp
-300 bp 15.30 109 bp
-400 bp 15.92 172 bp
</TABLE>
- ---------------
(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 Bank's net portfolio value could be
adversely affected by increases in interest rates but could be favorably
affected by decreases in interest rates. In addition, the Bank would 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 the 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.
-5-
<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, At June 30,
------------------------------------------------------------------------------------- ------------------
1997 1996 1995 1997
--------------------------- -------------------------- ---------------------------- ------------------
Average Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ---------- ------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)........$83,694 $6,769 8.09% $76,096 $6,153 8.09% $69,378 $5,449 7.85% $ 86,436 8.34%
Investment securities(2)... 11,040 702 6.36% 6,826 388 5.68% 7,257 388 5.35% 14,364 6.50%
Mortgage-backed securities. 426 39 9.15% 770 69 8.96% 971 90 9.27% 368 8.93%
------- ------ ------ ------- ------ ------ ------- ------ ------ -------- ------
Total interest-earning
assets.................. 95,160 7,510 7.89% 83,692 6,610 7.90% 77,606 5,927 7.64% 101,168 8.08%
------ ----- ------ ------ ----- ------ ------ ----- ------ ------- ------
Non-interest-earning assets. 3,545 3,042 2,456 3,395
------- ------- ------- -------
Total assets..............$98,705 $86,734 $80,062 $104,563
====== ====== ====== =======
Interest-bearing
liabilities:
Interest-bearing demand
deposits................$12,303 390 3.17% $ 9,975 298 2.99% $ 9,204 279 3.03% $ 13,749 3.14%
Certificates of Deposit... 49,101 2,704 5.51% 50,093 2,787 5.56% 44,695 2,142 4.79% 48,560 5.58%
Savings deposits.......... 16,308 506 3.10% 16,572 543 3.28% 16,933 558 3.30% 15,944 2.86%
Short-term borrowings..... 7,329 398 5.43% 3,105 173 5.57% 3,012 165 5.48% 7,747 5.73%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities............. 85,041 3,998 4.70% 79,745 3,801 4.77% 73,844 3,144 4.26% 86,000 4.70%
----- ------ ----- ------ ----- ------ ------
Noninterest-bearings
liabilities............. 1,786 833 648 2,438
------ ------ ------ -------
Total liabilities.......... 86,827 80,578 74,492 88,438
Retained earnings........... 11,878 6,156 5,570 16,125
------ ------ ------ -------
Total liabilities and
retained earnings........$98,705 $86,734 $80,062 $104,563
====== ====== ====== =======
Net interest income......... $3,512 $2,809 $2,783
===== ===== =====
Interest rate spread(3)..... 3.19% 3.13% 3.38% 3.38%
====== ====== ====== ======
Net yield on interest
earning assets(4)......... 3.69% 3.36% 3.59% 3.13%
====== ====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing
liabilities............... 111.90% 104.95% 105.09% 117.64%
====== ====== ====== ======
</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.
-6-
<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); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------------- --------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable.............. $614 $ 2 $616 $528 $ 176 $704
Mortgage-backed securities.... (31) 1 (30) (19) (2) (21)
Investment securities......... 240 74 314 (23) 23 -
--- --- --- --- ---- ----
Total interest-earning
assets...................... 823 77 900 486 197 683
--- --- --- --- ---- ---
Interest expense:
Interest-bearing demand
deposits.................... 70 22 92 23 (4) 19
Certificates of Deposit....... (55) (28) (83) 259 386 645
Savings deposits.............. (9) (28) (37) (12) (3) (15)
Short-term borrowings......... 235 (10) 225 5 3 8
--- --- --- --- ---- ----
Total interest-bearing
liabilities................ 241 (44) 197 275 382 657
--- --- --- --- ---- ---
Net change in interest income.. $582 $121 $703 $211 $(185) $(26)
=== === === === ==== ===
</TABLE>
-7-
<PAGE>
Comparison of Financial Condition
On September 3, 1996, the Board of Directors of the Bank approved a plan
of conversion to convert from a federally chartered mutual bank to a federally
chartered stock savings bank and simultaneously reorganized into a holding
company form of organization (collectively, the "Conversion"). After approval by
the regulatory authorities and the Bank's members, the Conversion was completed
on December 31, 1996 and as a result, the holding company was formed (the
"Company") and the Bank became a wholly-owned subsidiary of the Company. In
connection with the Conversion on December 31, 1996, the Company completed the
sale of 1,084,450 shares (the "Offering") at $10 per share and receive net
proceeds of approximately $9,449,000. The Company transferred approximately
$4,724,000 of the net proceeds to the Bank for the purchase of all of the
capital stock of the Bank. In addition, $868,000 was loaned to the ESOP for the
purchase of shares in the Offering.
The Company's total assets was $104,563,000 at June 30, 1997, an increase
of $12,711,000 or 13.8% from $91,852,000 at June 30, 1996. The increase in
assets was primarily attributable to the Offering. Total cash and cash
equivalents increased by $2,776,000 to $6,792,000 at June 30, 1997 from
$4,016,000 at June 30, 1996. This increase includes a portion of the inflow of
cash associated with the subscription of orders received for the purchase of
Common Stock in the Offering. Management maintains a level of cash equivalents
which is desirable for meeting normal cash flow requirements of its customers
for the funding of loans and repayment of deposits. Investment securities
increased $3,031,000, from $4,868,000 at June 30, 1996 to $7,899,000 at June 30,
1997. This increase consists predominately of U.S. Government and Agency
securities classified as held to maturity, as all investment purchases made
during this period were classified as held to maturity. These securities have
staggering maturities which range from one to five years. Net loans receivable
increased 9.0% or $7,127,000, from $78,941,000 at June 30, 1996 to $86,068,000
at June 30, 1997. The net increase was primarily attributable to increases in
non-residential mortgages of $3,155,000, 1-4 family mortgages of $3,146,000 and
$1,595,000 in consumer loans and consumer lines of credit, and offset somewhat
by the net sales proceeds of one- to four family mortgages of $1,375,000. Such
increases primarily reflected the economic health of the Bank's market area and
the competitive pricing of the Bank's loan product. The funding of the loan
growth was mainly provided by increases in FHLB borrowings of $3,371,000 and the
net sales proceeds of loans of $1,375,000.
Deposits decreased by $702,000 to $80,069,000 at June 30, 1997 from
$80,771,000 at June 30, 1996. This decrease primarily represents funds withdrawn
by depositors which were used to purchase stock in the Offering and was
partially offset by the Bank offering a new money market product which generated
$4,600,000 in deposits. To support business development, the Company obtained
additional funding through advances from the FHLB of $3,371,000 which increased
their aggregate borrowings to $7,747,000. FHLB borrowings have staggering
maturities which range from one to six years.
Stockholders' equity increased $9,925,000 to $16,125,000 at June 30, 1997
compared to $6,200,000 at June 30, 1996. As discussed previously, the increase
was primarily attributed to the Offering and the result of net retained income
of $548,000 and recognition of shares in the Employee Stock Ownership Plan
amounting to $71,000. Through June 30, 1997, the Company initiated the payment
of dividends of $.16 per share, while maintaining capital ratios well in excess
of regulatory guidelines. Future dividend policies will be determined by the
Board of Directors in light of the earnings and financial condition of the
Company, including applicable governmental regulations and policies.
-8-
<PAGE>
Comparison of the Results of Operations for the Years Ended June 30, 1997 and
1996
Net Income. As a result of the influx of funds related to the Offering and
the corresponding surge in loan demand, net income for the year ended June 30,
1997 increased 31.3% to $548,000 from $417,000 for the same period ended 1996.
Net Interest Income. The Company's net interest income increased $703,000
or 25.0% to $3,511,000 for the year ended June 30, 1997, due to an increase of
$900,000 or 13.6% in interest income, which totaled $7,510,000 for 1997 as
compared to $6,610,000 for 1996. The increase in interest income more than
offset the $197,000 or 5.2% increase in interest expense.
Interest Income. The increase in interest income resulted primarily from
an increase in earnings on loans of $616,000 or 10.0%, interest-bearing deposits
in other institutions of $177,000 or 128.8%, and investment securities of
$134,000 or 61.9%. These increases, which were due to an increase in the average
principal balances of $7,600,000, $1,586,000 and $2,600,000, respectively, were
funded by proceeds from the Offering and advances from FHLB. In addition, the
yield on all investments increased from 5.7% for the year ended June 30, 1996 to
6.4% for the same period ended June 30, 1997. This increase was the result of a
combination of changing the mix of securities by increasing the investments in
U.S. Government securities and a slight upturn in rates.
Interest Expense. Total interest expense increased $197,000 or 5.2%, from
$3,801,000 for the year ended June 30, 1996 to $3,998,000 for the same period
ended June 30, 1997. The increase for fiscal year 1997 was primarily due to an
increase in the average volume of interest-bearing liabilities of $5,296,000,
from $79,745,000 as of June 30, 1996 to $85,041,000 as of June 30, 1997. Of this
amount, average FHLB advances increased from $3,105,000 as of June 30, 1996 to
$7,329,000 as of June 30,1997 to fund an increasing loan environment.
Provision for loan losses. The provision for loan losses decreased
$212,000 or 80.6%, from $263,000 as of June 30, 1996 to $51,000 as of June
30,1997. In 1996, management increased its provision for loan loss due to the
Bank's significant increase in automobile loans, non-residential real estate
loans, and commercial loans as well as incurring a $145,000 charge-off relating
to one borrower. It was determined that the provision for loan loss for fiscal
1997 was adequate due to management's continual evaluation of the adequacy of
the allowance for loan losses which encompasses the overall risk characteristics
of the loan portfolio, trends in the Bank's delinquent and nonperforming loans,
and the impact of economic conditions on borrowers. While asset quality has
slightly declined during this period, management believes that the underlying
collateral supporting such loans provides adequate coverage. There can be no
assurances, however, that future losses will not exceed estimated amounts or
that additional provisions for loan losses will not be required in future
periods.
Noninterest income. Noninterest income increased by $87,000 or 29.6%, from
$294,000 for the year ended June 30, 1996 to $381,000 for the same period ended
June 30, 1997. Service charges on deposit accounts increased $34,000 or 17.6%,
due to the increase in the volume and number of deposit accounts. In addition,
during the second half of 1996, the Bank began a new program to sell fixed rate
mortgage loans which resulted in gains on the sale of loans of $25,000.
Noninterest expense. Noninterest expense increased $825,000 or 38.5%, from
$2,147,000 for the year ended June 30, 1996 to $2,972,000 for the same period
ended June 30, 1997. This increase is largely attributed to a one time special
assessment charge of $470,000 in federal insurance premiums. On September 30,
1996, the President signed into law legislation which included the
recapitalization of the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation by a one
-9-
<PAGE>
time charge to SAIF-insured institutions of 65.7 basis points per one hundred
dollars of insurable deposits.
Pursuant to this legislation, the Bank will pay, in addition to the normal
deposit insurance premium as a member of the SAIF, an annual amount equal to
approximately 6.4 basis points of outstanding SAIF deposits toward the
retirement of the Financing Corporation Bonds ("Fico Bonds") issued in the
1980's to assist in the recovery of the savings and loan industry. Members of
the Bank Insurance Fund ("BIF"), by contrast, will pay, in addition to their
normal deposit insurance premium, approximately 1.3 basis points. Beginning no
later than January 1, 2000, the rate paid to retire the Fico Bonds will be equal
for members of the BIF and the SAIF. The Act also provides for the merging of
the BIF and the SAIF by January 1, 1999 provided there are no financial
institutions still chartered as savings associations at that time. Should the
insurance funds be merged before January 1, 2000, the rate paid by all members
of this new fund to retire the Fico Bonds would be equal.
Compensation and benefits increased $142,000 or 16.0%, due to the hiring
of new employees to further diversify the Bank's operations to meet continually
changing customer demands, as well as increase in employee stock ownership plan
expenses from the distribution of additional shares. Occupancy and equipment
expense increased $85,000 or 32.0% primarily due to increases in depreciation on
furniture and equipment relating to the new branch which opened in December
1995. Other noninterest expense increased by $112,000 or 27.0% due to general
overall increases in all expenses.
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Bank. Data
processing is also essential to most other financial institutions and many other
companies. All of the material data processing of the Bank that could be
affected by this problem is provided by a third party service bureau. The
service bureau of the Bank has advised the Bank that it expects to resolve this
potential problem before the year 2000. However, if the service bureau is unable
to resolve this potential problem in time, the Bank would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial condition
and results of operation of the Bank.
Income Taxes. Income tax expense increased $45,000 or 16.1%, from $276,000
for the year ended June 30, 1996 to $321,000 for the year ended June 30, 1997,
due to the 25.3% increase in income before income taxes. The effective rate on
taxes as of the year ended June 30, 1997 was 36.9% compared to 39.8% from the
same period ended June 30, 1996.
Liquidity and Capital Resources
The 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 predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by the general level
of interest rates, economic conditions and competition. The Bank use its sources
of funds to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.
-10-
<PAGE>
Net cash provided by operating activities for the year ended June 30, 1997
totalled $2,109,000 as compared to net cash used for operating activities of
$643,000 for the year ended June 30, 1996. The increase of $2,752,000 was
primarily attributable to proceeds from the sale of loans of $4,211,000 offset
by loans originated for sale of $2,806,000.
Net cash used in investing activities for the year ended June 30, 1997
totalled $11,375,000 an increase of $5,274,000 from June 30, 1996. The increase
was primarily attributable to net loan originations of $8,578,000 and purchases
of investment securities held to maturity of $5,294,000 offset by proceeds from
maturities and repayments of these securities of $2,250,000.
Net cash provided by financing activities for 1997 totalled $12,042,000.
This was the result of $9,449,000 million in net proceeds from the stock
offering, a net increase of $3,405,000 in FHLB advances offset by a decrease in
deposits of $702,000.
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. Further, the disparity in
insurance premiums as described herein could result in the Savings Bank losing
deposits to the Bank Insurance Fund ("BIF") members who have lower costs of
funds and therefore are able to pay higher rates of interest on deposits.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Bank's commitments to make loans and
management's assessment of the Bank's ability to generate funds.
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. As a result, interest rates have a greater impact on our
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities." The Statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings based on a control-oriented "financial-components"
approach. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and liabilities it has
incurred, derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of Statement No. 125
are effective for transactions occurring after December 31, 1996, except those
provisions relating to repurchase agreements, securities lending, and other
similar transactions and pledged collateral, which have been delayed until after
December 31, 1997 by Statement No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No.
125." The adoption of these statements is not expected to have a material impact
on the Company's consolidated financial position or results of operations.
In February, 1997, the FASB issued Statement No. 128, "Earnings Per
Share," effective for financial statements issued for periods ending after
December 15, 1997. The new standard specifies the
-11-
<PAGE>
computation, presentation, and disclosure requirements for earnings per share
for entities with publicly held common stock. The Company does not anticipate
adoption to have a material impact on presentation and disclosure for earnings
per share.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
presentation of comprehensive income and its components (revenue, expenses,
gains, and losses) in a full set of general purpose financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is presented with the same prominence as other financial
statements. Statement No. 130 requires that companies (i) classify items of
other comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial condition. Reclassification of financial statements for
earlier periods provided for comprehensive purpose is required.
-12-
<PAGE>
SNOGRASS
Certified Public Accountants
Report of Independent Auditors
[LOGO]
Board of Directors and Shareholders
Advance Financial Bancorp
We have audited the accompanying consolidated balance sheet of Advance Financial
Bancorp and subsidiary as of June 30, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, effective
July 1, 1995, the Company changed its method of accounting for the impairment of
loans and the related allowance for loan losses.
/s/ S.R. Snodgrass, A.C.
Steubenville, Ohio
July 18, 1997
S.R. Snodgrass, A.C.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
626 North Fourth Street Steubenville, OH 43952-1982 Phone 614-282-2771 Facsimile: 614-282-1606
</TABLE>
-13-
<PAGE>
ADVANCE FINANCIAL BANCORP
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,
1997 1996
------------- -----------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents:
Cash and amounts due from banks $ 903,981 $ 948,671
Interest-bearing deposits with other institutions 5,888,439 3,067,912
------------- -----------
Total cash and cash equivalents 6,792,420 4,016,583
Investment Securities:
Securities held to maturity (market value of $7,831,187
and $4,761,709) 7,844,305 4,799,596
Securities available for sale 55,051 68,549
------------ -----------
Total investment securities 7,899,356 4,868,145
Mortgage-backed securities held to maturity (market value
of $394,743 and $561,203) 367,553 536,808
Loans held for sale - 1,375,143
Loans receivable (net of allowance for loan losses
of $367,779 and $324,983) 86,067,848 77,565,831
Premises and equipment, net 2,055,651 2,099,470
Federal Home Loan Bank stock, at cost 576,700 559,500
Accrued interest receivable 655,667 521,187
Other assets 148,184 309,726
------------ -----------
TOTAL ASSETS $104,563,379 $91,852,393
============ ===========
LIABILITIES
Deposit accounts $ 80,069,078 $80,770,646
Advances from Federal Home Loan Bank 7,747,449 4,376,452
Advance payments by borrowers for taxes and insurance 186,738 182,977
Accrued interest payable and other liabilities 435,069 322,439
------------ -----------
TOTAL LIABILITIES 88,438,334 85,652,514
------------ -----------
SHAREHOLDERS' 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 and outstanding
at June 30, 1997 108,445 -
Additional paid in capital 10,221,528 -
Retained earnings - substantially restricted 6,597,836 6,209,329
Net unrealized loss on securities (6,569) (9,450)
Unallocated shares - employee stock ownership plan (796,195) -
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 16,125,045 6,199,879
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $104,563,379 $91,852,393
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-14-
<PAGE>
ADVANCE FINANCIAL BANCORP
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
---------- ----------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $6,769,293 $6,152,898
Investment securities 350,885 216,783
Interest-bearing deposits with other
institutions 315,346 137,850
Mortgage-backed securities 38,611 68,875
Federal Home Loan Bank stock 35,732 33,883
---------- ----------
Total interest and dividend income 7,509,867 6,610,289
---------- ----------
INTEREST EXPENSE
Deposits 3,600,068 3,627,782
Advances from Federal Home Loan Bank 398,368 173,624
---------- ----------
Total interest expense 3,998,436 3,801,406
---------- ----------
NET INTEREST INCOME 3,511,431 2,808,883
Provision for loan losses 51,414 262,942
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,460,017 2,545,941
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 228,239 194,080
Gain on sale of loans 30,420 20,364
Gain on sale of real estate 25,363 -
Other income 96,849 79,490
---------- ----------
Total noninterest income 380,871 293,934
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,027,355 885,522
Occupancy and equipment 348,597 263,986
Deposit insurance premiums 577,226 170,525
Professional fees 126,603 95,177
Advertising 99,404 74,812
Data processing 264,432 240,385
Other operating expenses 528,623 416,126
---------- ----------
Total noninterest expense 2,972,240 2,146,533
---------- ----------
Income before income taxes 868,648 693,342
Income taxes 320,510 275,976
---------- ----------
NET INCOME $ 548,138 $ 417,366
========== ==========
Per Share Data: (from December 31, 1996,
conversion date)
Net earnings per share $ .49 -
========== ==========
Average shares outstanding 998,392 -
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-15-
<PAGE>
ADVANCE FINANCIAL BANCORP
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Net
Additional Earnings Unrealized Unallocated Total
Common Paid In Substantially Loss on Shares in Shareholders'
Stock Capital Restricted Securities ESOP Equity
------- ----------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ - $ - $5,791,963 $ (9,454) $ - 5,782,509
Net income 417,366 417,366
Net unrealized gain on
securities 4 4
-------- ----------- ---------- -------- --------- ----------
Balance, June 30, 1996 - - 6,209,329 (9,450) - 6,199,879
Net income 548,138 548,138
Sale of common stock 108,445 10,207,689 (867,560) 9,448,574
Accrued compensation expense -
ESOP 13,839 71,365 85,204
Net unrealized gain on
securities 2,881 2,881
Cash dividends declared
($.16 per share) (159,631) (159,631)
-------- ----------- ---------- -------- --------- -----------
Balance, June 30, 1997 $108,445 $10,221,528 $6,597,836 $ (6,569) $(796,195) $16,125,045
======== =========== ========== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-16-
<PAGE>
Advance Financial Bancorp
and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 548,138 $ 417,366
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and accretion,
net 151,942 127,177
Provision for loan losses 51,414 262,942
Gain on sale of real estate (25,363) -
Gain on sale of loans (30,420) (20,364)
Amortization of ESOP unearned compensation 85,204 -
Origination of loans held for sale (2,805,769) (1,485,034)
Proceeds from the sale of loans 4,211,323 110,088
Increase in accrued interest receivable
and other assets (101,701) (118,905)
Increase in accrued interest
payable and other liabilities 38,360 65,826
Decrease in federal income tax payable (12,193) (3,836)
Increase (decrease) in deferred federal
income taxes (2,162) 2,183
----------- -----------
Net cash provided by (used for)
operating activities 2,108,773 (642,557)
----------- -----------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (5,294,498) (3,050,000)
Maturities and repayments 2,250,000 1,987,130
Investment securities available for sale:
Maturities and repayments 12,280 14,310
Mortgage-backed securities held to maturity:
Maturities and repayments 169,191 369,643
Purchases of Federal Home Loan Bank Stock (17,200) (57,700)
Proceeds from the sale of student loans - 1,378,046
Net increase in loans (8,578,129) (6,259,933)
Purchases of premises and equipment (150,747) (786,000)
Proceeds from sale of premises and equipment 72,863 -
Proceeds from sale of other real estate 161,355 303,446
----------- -----------
Net cash used for investing
activities (11,374,885) (6,101,058)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-17-
<PAGE>
ADVANCE FINANCIAL BANCORP
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
------------ -----------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (701,568) $ 6,072,502
Net increase in short term
advances from Federal Home Loan Bank 404,813 752,300
Proceeds from advances from Federal Home
Loan Bank 3,000,000 800,000
Repayment of advances from Federal Home
Loan Bank (33,816) (18,735)
Net change in advances for taxes and
insurance 3,761 14,748
Proceeds from sale of common stock 9,448,574 -
Dividends paid (79,815) -
----------- -----------
Net cash provided by financing
activities 12,041,949 7,620,815
----------- -----------
Increase in cash and cash
equivalents 2,775,837 877,200
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,016,583 3,139,383
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 6,792,420 $ 4,016,583
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-18-
<PAGE>
ADVANCE FINANCIAL BANCORP
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advance Financial Bancorp (the "Company") was organized in September, 1996
as a State of Delaware chartered corporation. The Company acquired 100% of
the common stock of Advance Financial Savings Bank, f.s.b. (the "Bank") upon
the Bank's conversion from a federally-chartered mutual bank to a
federally-chartered stock savings bank in December, 1996. The operating
results of the Company depend primarily upon the operating results of the
Bank.
The Bank and its wholly-owned service corporation subsidiary, Advance
Financial Service Corporation of West Virginia, are located in Wellsburg,
West Virginia, with branch facilities in Follansbee, West Virginia and
future expansion into Wintersville, Ohio. The Company's principal sources of
revenue emanate from its portfolio of residential real estate, commercial
and consumer loans, as well as, interest earnings on investment securities,
interest-bearing deposits with other financial institutions, and a variety
of deposit services provided to its customers through two locations. The
Bank is subject to regulation and supervision by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary Advance Financial Savings 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 securities, including mortgage-backed securities acquired with the
intent and ability to hold 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.
Certain other equity securities have been classified as available for sale.
Unrealized holding gains and losses on available for sale securities are
reported as a separate component of retained earnings, net of tax, until
realized. Realized securities gains and losses 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.
-19-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1997, there
were no loans held for sale. At June 30, 1996, the cost of loans held for
sale was equal to market value.
Loans
-----
Loans are stated at unpaid principal balances, less loans in process, net
deferred loan fees, and the allowance for loan losses.
Loan origination and commitment fees, as well as, certain direct origination
costs are deferred and amortized as a yield adjustment over the contractual
life of the related loans using the interest method. Amortization of
deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
Loans are generally placed on nonaccrual status when principal or interest
is delinquent for 90 days or more except for those loans which, in
management's judgment, are adequately secured and for which collection is
probable. Any unpaid interest previously accrued on those loans is reversed
from income, and thereafter, interest is recognized only to the extent of
payments received.
Allowance for Loan Losses
-------------------------
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118. Under this Standard, the Company
estimates credit losses on impaired loans based on the present value of
expected cash flows or fair value of the underlying collateral if the loan
repayment is expected to come from the sale or operation of such collateral.
Prior to 1995, the credit losses related to these loans were estimated based
on undiscounted cash flows or the fair value of the underlying collateral.
Statement 118 amends Statement 114 to permit a creditor to use existing
methods for recognizing interest income on impaired loans eliminating the
income recognition provisions of Statement 114. The adoption of these
statements did not have a material effect on the Company's financial
position or results of operations.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate
loans by major risk classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on nonaccrual
status due to payment delinquency or uncertain collectibility, while not
classifying the loan as impaired if the loan is not a commercial or
commercial real estate loan. Factors considered by management in determining
impairment include payment status and collateral value. The amount of
impairment for these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to the loan,
using the original interest rate, and its recorded value, or, as a practical
expedient in the case of collateralized loans, the difference between the
fair value of the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the fair value of
the collateral.
-20-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
-------------------------------------
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured
collectively. Loans that experience insignificant payment delays, which are
defined as 90 days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the borrower's
prior payment record, and the amount of shortfall in relation to the
principal and interest owed.
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 credit 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
change in the near term.
Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans is classified separately on the
balance sheet at the lower of the recorded investment in the property or its
fair value minus estimated costs of sale. Prior to foreclosure, the value of
the underlying collateral is written down by a charge to the allowance for
loan losses, if necessary. Any subsequent write-downs are charged against
operating expenses. Operating expenses of such properties, net of related
income and losses on their disposition are included in other expenses.
Premises and Equipment
----------------------
Land is carried at cost; buildings and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed
primarily by the straight-line method based upon the estimated useful lives
of the assets which range from five to forty years. Expenditures for
maintenance and repairs are charged against income as incurred.
Costs of major additions and improvements are capitalized.
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.
Earnings Per Share
------------------
On December 31, 1996, the Company issued 1,084,450 shares of common stock.
Earnings per share data has been determined by dividing net income since
December 31, 1996 of $492,662 by the weighted average number of shares
issued and outstanding since the original issue date. As discussed in Note
14, the Company accounts for the 86,756 shares acquired by the ESOP in
accordance with Statement of Position 93-6; shares controlled by the ESOP
are not considered in the weighted average shares outstanding until the
shares are committed for allocation to employee accounts. The proforma net
income per share for 1997 is $.55, assuming the shares had been outstanding
for the entire year.
-21-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification
----------------
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassification had no effect on net income.
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.
Cash payments for interest for the fiscal years ended June 30, 1997 and 1996
were $3,987,639 and $3,801,247, respectively. Cash payments for income taxes
for the fiscal years ended June 30, 1997 and 1996 were $316,279 and
$241,884, respectively.
Non cash investing activity included mortgages originated and office
properties created from sales and transfers of real estate owned totaling
$172,110 and real estate acquired in settlement of loans of $130,543 for the
fiscal year ended June 30, 1996. There were no non cash activities for the
fiscal year ended June 30, 1997.
Pending Accounting Pronouncement
--------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities." The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
The provisions of Statement No. 125 are effective for transactions occurring
after December 31, 1996, except those provisions relating to repurchase
agreements, securities lending, and other similar transactions and pledged
collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125, an amendment of FASB Statement No. 125." The
adoption of these statements is not expected to have a material impact on
the Company's consolidated financial position or results of operations.
In February, 1997, the FASB issued Statement No. 128, "Earnings Per Share,"
effective for financial statements issued for periods ending after December
15, 1997. The new standard specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly
held common stock. The Company does not anticipate adoption to have a
material impact on presentation and disclosure for earnings per share.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
presentation of comprehensive income and its components (revenue, expenses,
gains, and losses) in a full set of general purpose financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is presented with the same prominence as other financial
statements. Statement No. 130 requires that companies (i) classify items of
other comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of the statement of financial condition. Reclassification of financial
statements for earlier periods provided for comprehensive purpose is
required.
-22-
<PAGE>
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investments are as follows:
Held-to-maturity
<TABLE>
<CAPTION>
1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and Agency
Obligations $7,844,305 $ 7,058 $ (20,176) $7,831,187
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government and Agency
Obligations $4,799,596 $ 6,020 $ (43,907) $4,761,709
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale
1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Money Fund Securities $ 65,004 $ - $ (9,953) $ 55,051
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Money Fund Securities $ 77,999 $ - $ (9,450) $ 68,549
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities at
June 30, 1997, 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.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
--------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
One year or less $1,750,285 $1,749,187 $ 43,643 $ 36,619
After one through five years 5,594,020 5,592,688 - -
After five through ten years - - 21,361 18,432
After ten years 500,000 489,312 - -
---------- ---------- -------- --------
Total $7,844,305 $7,831,187 $ 65,004 $ 55,051
========== ========== ======== ========
</TABLE>
There were no securities sold during the two year period ended June 30, 1997.
-23-
<PAGE>
3. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed and related
securities are as follows:
Held to Maturity
<TABLE>
<CAPTION>
1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
GNMA certificates $ 200,028 $ 11,642 $ - $ 211,670
Federal Home Loan Mortgage
Corporation certificates 167,525 15,548 - 183,073
---------- ---------- ---------- ----------
Total $ 367,553 $ 27,190 $ - $ 394,743
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 258,991 $ 11,347 $ - $ 270,338
Federal Home Loan Mortgage
Corporation certificates 277,817 13,048 - 290,865
---------- ---------- ---------- ----------
Total $ 536,808 $ 24,395 $ - $ 561,203
========== ========== ========== ==========
</TABLE>
Mortgage-backed securities provide for periodic, generally monthly payments
of principal and interest and have contractual maturities ranging from one
to twenty-five years. 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.
There were no mortgage backed securities sold during the two year period
ended June 30, 1997.
-24-
<PAGE>
4. LOANS RECEIVABLE
Loans receivable are comprised of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C> <C>
Mortgage loans:
1 - 4 family $57,746,390 $54,599,854
Multi-family 1,594,720 1,697,235
Non-residential 11,482,213 8,327,445
Construction 2,454,581 1,900,718
------------------------
73,277,904 66,525,252
------------------------
Consumer loans:
Home improvement 905,589 1,118,956
Automobile 7,419,412 6,178,615
Share loans 1,269,491 1,124,674
Education 89,177 128,045
Other 1,973,221 1,511,864
----------- -----------
11,656,890 10,062,154
----------- -----------
Commercial loans 3,478,025 3,099,876
----------- -----------
Less:
Loans in process 1,760,797 1,548,953
Net deferred loan fees 216,395 247,515
Allowance for loan losses 367,779 324,983
----------- -----------
2,344,971 2,121,451
----------- -----------
Total $86,067,848 $77,565,831
=========== ===========
</TABLE>
In the normal course of business, loans are extended to directors and
executive officers and their associates. In management's opinion, all of
these loans are on substantially the same terms and conditions as loans to
other individuals and businesses of comparable creditworthiness. A summary
of loan activity for those directors, executive officers, and their
associates with loan balances in excess of $60,000 for the year ended June
30, 1997 is as follows:
Balance Amount Balance
1996 Addition Collected 1997
---- -------- --------- ----
$613,545 $484,100 $316,760 $780,885
The Company's loan portfolio is predominantly made up of one to four family
unit first mortgage loans in the Brooke and Hancock counties of West
Virginia and Jefferson County, Ohio. These loans are typically secured by
first lien positions on the respective real estate properties and are
subject to the Company's loan underwriting policies. In general, the
Company's loan portfolio performance is dependent upon the local economic
conditions.
-25-
<PAGE>
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended June 30, 1997
and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of period $324,983 $197,833
Add:
Provisions charged to operations 51,414 262,942
Loan recoveries 11,738 8,896
-------- --------
Total 388,135 469,671
Less loans charged off 20,356 144,688
-------- --------
Balance, end of period $367,779 $324,983
======== ========
</TABLE>
6. PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 303,857 $ 311,877
Office buildings and improvements 1,718,664 1,749,040
Furniture, fixtures, and equipment 1,134,132 1,117,455
---------- ----------
Total 3,156,653 3,178,372
Less: accumulated depreciation 1,101,002 1,078,902
---------- ----------
Premises and equipment, net $2,055,651 $2,099,470
========== ==========
</TABLE>
Depreciation charged to operations amounted to $151,365 and $124,805 for the
years ended June 30, 1997 and 1996, respectively.
7. 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.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Investment securities $144,419 $ 65,540
Mortgage-backed and related securities 6,667 7,769
Loans receivable 504,581 447,878
-------- --------
Total $655,667 $521,187
======== ========
</TABLE>
-26-
<PAGE>
9. DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Non-interest-bearing $ 1,816,038 2.3% $ 1,607,362 2.0%
Savings accounts 15,943,723 19.9 17,378,294 21.4
NOW accounts 7,423,520 9.3 8,036,844 10.0
Money market accounts 6,325,727 7.9 2,893,026 3.6
----------- ----- ----------- -----
31,509,008 39.4 29,915,526 37.0
----------- ----- ----------- -----
Savings certificates:
2.00 - 4.00% 2,265,733 2.8 3,053,637 3.8
4.01 - 6.00% 35,780,250 44.7 37,258,267 46.1
6.01 - 8.00% 10,514,087 13.1 10,513,216 13.0
8.01 - 10.00% - -. 30,000 .1
----------- ----- ----------- -----
48,560,070 60.6 50,855,120 63.0
----------- ----- ----------- -----
Total $80,069,078 100.0% $80,770,646 100.0%
=========== ===== =========== =====
</TABLE>
The scheduled maturities of savings certificates at June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Within one year $35,011,274
Beyond one year but within two years 7,050,728
Beyond two years but within three years 2,758,467
Beyond three years 3,739,601
-----------
Total $48,560,070
===========
</TABLE>
The Company had deposits with a minimum denomination of $100,000 in the
amount of approximately $7,724,255 and $7,760,079 at June 30, 1997 and 1996
respectively. Deposits in excess of $100,000 are not Federally insured. The
Company does not have any brokered deposits.
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996
---- ----
<S> <C> <C>
Passbooks $ 506,312 $ 543,002
NOW and Money Market Deposit accounts 389,745 297,880
Savings certificates 2,704,011 2,786,900
--------- ---------
$3,600,068 $3,627,782
========== ==========
</TABLE>
-27-
<PAGE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consists of the following:
<TABLE>
<CAPTION>
Principal Interest Interest
Due Due Rate 1997 1996
---------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Flexline Advance - Monthly Variable $ - $1,000,000
Advance 10-29-1996 Monthly 4.23% - 595,187
Advance 11-29-1996 Monthly 5.67% - 1,000,000
Open-Repo Plus 10-22-1997 Monthly Variable 1,000,000 -
Advance 12-01-1997 Monthly 5.67% 2,000,000 -
Advance 5-21-1998 Monthly 5.43% 1,000,000 1,000,000
Advance 3-25-2002 Monthly 5.51% 3,000,000 -
Advance 11-13-2002 Monthly 6.51% 747,449 781,265
---------- ----------
$7,747,449 $4,376,452
========== ==========
</TABLE>
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.
The variable interest rate on the Open Repo Plus at June 30, 1997 was 6.26%.
The advance due November 13, 2002 has a monthly scheduled payment of
principal and interest of $6,973 with a balloon payment due at maturity of
$524,863 and is subject to prepayment penalties.
As of June 30, 1997 the Bank had an Open Repo Plus line of credit and a
Flexline Line of Credit with the Federal Home Loan Bank as follows:
<TABLE>
<CAPTION>
Flexline Open Repo Plus
-------- --------------
<S> <C> <C>
Total line of credit $4,757,000 $10,000,000
Outstanding balance - 1,000,000
---------- -----------
Available line of credit $4,757,000 $ 9,000,000
========== ===========
</TABLE>
Interest paid on borrowings for the year ending June 30, 1997 and 1996
amounted to $398,368 and $173,624.
11. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Currently payable:
Federal $286,711 $238,049
State 35,961 35,744
-------- --------
322,672 273,793
Deferred (2,162) 2,183
-------- --------
Total $320,510 $275,976
======== ========
</TABLE>
-28-
<PAGE>
11. INCOME TAXES (Continued)
The following temporary differences gave rise to deferred tax asset and
liabilities at June 30:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $125,045 $110,494
Loan origination fees, net 45,278 57,466
Other, net 21,409 8,050
-------- --------
Deferred tax assets 191,732 176,010
-------- --------
Deferred tax liabilities
Premise and equipment depreciation 199,522 181,629
Tax reserve for loan losses 110,162 117,879
-------- --------
Deferred tax liabilities 309,684 299,508
-------- --------
Net deferred tax liabilities $117,952 $123,498
======== ========
</TABLE>
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 $110,162 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>
1997 1996
----------------- -----------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Provision at statutory rate $295,340 34.0% $235,736 34.0%
State income tax expense, net
of federal tax benefit 23,734 2.7 23,591 3.4
Tax exempt interest (8,007) (.9) (9,349) (1.3)
Other, net 9,443 1.1 25,998 3.7
-------- ---- -------- ----
Total $320,510 36.9% $275,976 39.8%
======== ==== ======== ====
</TABLE>
12. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. The Office of Thrift Supervision sets forth
the capital standards applicable to all thrifts. 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 Bank's financial statements. Capital adequacy
guidelines involve quantitative measures of the Bank's assets, liabilities
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
-29-
<PAGE>
12. REGULATORY CAPITAL (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets, and of
tangible and core capital (as defined in the regulations) to adjusted assets
(as defined). Management believes as of June 30,1997 that the Bank meets all
capital adequacy requirement to which they are subject.
The most recent notification from the Bank's primary regulator categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Bank 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 Bank's category.
The following table reconciles capital under generally accepted accounting
principles to regulatory capital:
<TABLE>
<CAPTION>
June 30,
1997 1996
---- ----
<S> <C> <C>
Total equity $11,930,958 $6,199,879
Unrealized loss on securities 9,953 9,450
----------- ----------
Tier I, core, and tangible capital 11,940,911 6,209,329
Allowance for loan losses 367,779 324,983
----------- ----------
Risk-based capital $12,308,690 $6,534,312
=========== ==========
</TABLE>
At June 30, actual capital levels of the Bank and minimum required levels
are as follows:
<TABLE>
<CAPTION>
June 30,
--------
1997 1996
--------------------- ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital to Risk-Weighted Assets
-------------------------------------
Actual $12,308,690 19.22% $6,534,312 11.72%
For Capital Adequacy Purposes 5,122,800 8.00 4,461,440 8.00
To be "Well Capitalized" 6,403,500 10.00 5,576,800 10.00
Tier I Capital to Risk-Weighted Assets
--------------------------------------
Actual $11,940,911 18.65% $6,209,329 11.13%
For Capital Adequacy Purposes 2,561,400 4.00 2,230,720 4.00
To be "Well Capitalized" 3,842,100 6.00 3,346,080 6.00
Core Capital to Adjusted Assets
-------------------------------
Actual $11,940,911 11.40% $6,209,329 6.76%
For Capital Adequacy Purposes 3,141,960 3.00 2,755,440 3.00
To be "Well Capitalized" 5,236,600 5.00 4,592,400 5.00
Tangible Capital to Adjusted Assets
-----------------------------------
Actual $11,940,911 11.40% $6,209,329 6.76%
For Capital Adequacy Purposes 1,570,980 1.50 1,377,720 1.50
To be "Well Capitalized" N/A N/A N/A N/A
</TABLE>
-30-
<PAGE>
12. REGULATORY CAPITAL (Continued)
Prior to the enactment of The Small Business Job Protection Act discussed in
Note 11, the Bank accumulated approximately $1,004,932 of retained earnings
at December 31, 1996, which amount represents allocations of income to bad
debt deductions for tax purposes only. Since this amount represents the
accumulated bad debt reserves prior to 1988, no provision for federal income
tax has been made for such amount. If any portion of this amount is used
other than to absorb loan losses (which is not anticipated), the amount will
be subject to federal income tax at the current corporate rate.
13. RETIREMENT PLAN
The Bank has a profit-sharing plan with a 401(k) feature. The 401(k) allows
employees to make contributions to the plan up to 12% of their annual
compensation. The Bank 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
Bank's contributions for the benefit of covered employees amounted to
$20,111 and $56,190 for the years ended June 30, 1997 and 1996,
respectively.
14. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
During the year ended June 30, 1997, 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 principle 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 are added to participant
accounts and reported as compensation. Compensation expense for the ESOP was
$85,204 for the year ended June 30, 1997.
The following table represents the components of the ESOP shares at June 30,
1997:
Allocated shares 2,226
Shares released for allocation 4,910
Shares distributed -
Unallocated shares 79,620
----------
Total ESOP shares 86,756
==========
Fair value of ESOP shares $1,174,395
==========
-31-
<PAGE>
15. COMMITMENTS AND CONTINGENT LIABILITIES
Loan Commitments
----------------
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to originate loans
Fixed rate $ 347,670 $1,176,000
Variable rate $ 517,892 $ 855,000
Loans in process $1,760,797 $1,548,953
Unused lines of credit $4,788,369 $2,046,746
</TABLE>
The range of interest rates on fixed rate residential mortgage loan
commitments was 8.0% to 9.25% at June 30, 1997.
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.
Lease Commitments
The future lease commitments as of June 30, 1997 for all noncancellable
equipment and land leases follows:
Fiscal Year
Ending June 30, Amount
--------------- ------
1998 $ 84,015
1999 83,956
2000 66,000
2001 67,800
2002 72,600
2003 and thereafter 1,970,900
----------
$2,345,271
==========
-32-
<PAGE>
15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Lease Commitments (Continued)
-----------------------------
The Company entered into a forty year land lease for their Follansbee
branch, commencing January 1, 1996 and a 10 year land lease for their future
Wintersville, Ohio branch, commencing March 1, 1997. The Company has two
five year renewal option periods under both of these leases.
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.
16. CONVERSION AND REORGANIZATION
In September 1996, the Board of Directors of the Bank adopted the Plan of
Conversion pursuant to which the Bank proposed to convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank
and concurrently formed a Bank Holding Company.
As part of the conversion process, the Company was organized in September,
1996 at the direction of the Board of Directors of the Bank for the purpose
of acquiring all of the capital stock to be issued by the Bank in the
Conversion. The Company became a bank holding company with its only
significant assets being all of the outstanding capital stock of the Bank,
which was acquired on December 31, 1996 by exchanging $4,724,287 of the
proceeds received in the public offering for all of the common stock of the
Bank, and a percentage of the conversion proceeds permitted to be retained.
From the proceeds of the Conversion, $108,445 was allocated to common stock,
and $10,207,689, which is net of $528,366 conversion costs, was allocated to
additional paid-in capital.
In accordance with regulations, at the time that the Bank converted from a
mutual savings bank to a stock savings bank, a portion of retained earnings
was restricted by establishing a liquidation account. The liquidation
account will be maintained for the benefit of eligible account holders who
continue to maintain their accounts at the Bank after the Conversion. The
liquidation account will be reduced annually to the extent that eligible
account holders have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Bank each account
holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held.
17. SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
On September 30, 1996, the President signed into law legislation which
included, among other things, recapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC") by a one time charge to SAIF-insured institutions of 65.7 basis
points per one hundred dollars of insurable deposits. The gross effect to
the Bank amounted to $469,908, which is reflected in the consolidated
financial statement of income for the year ended June 30, 1997.
-33-
<PAGE>
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The estimated carrying amounts and fair values at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,792,420 $ 6,792,420 $ 4,016,583 $ 4,016,583
Securities held to maturity 7,844,305 7,831,187 4,799,596 4,761,709
Securities available-for-sale 55,051 55,051 68,549 68,549
Mortgage-backed securities
held to maturity 367,553 394,743 536,808 561,203
Loans receivable 86,067,848 86,726,000 77,565,831 77,828,000
Federal Home Loan Bank Stock 576,700 576,700 559,500 559,500
Accrued interest receivable 655,667 655,667 521,187 521,187
Loans held for sale - - 1,375,143 1,375,143
------------ ------------ ----------- -----------
Total $102,359,544 $103,031,768 $89,443,197 $89,691,874
============ ============ =========== ===========
Financial liabilities:
Deposits $80,069,078 $80,091,000 $80,770,646 $80,741,000
Advances from Federal Home Loan
Bank 7,747,449 7,699,000 4,376,452 4,314,000
Advance payment by borrowers for
taxes and insurance 186,738 186,738 182,977 182,977
Accrued interest payable 36,684 36,684 25,887 25,887
------------ ------------ ----------- -----------
Total $ 88,039,949 $ 88,013,422 $85,355,962 $85,263,864
============ ============ =========== ===========
</TABLE>
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.
-34-
<PAGE>
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
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 Due from Banks, Interest-bearing Deposits with Other Institutions,
----------------------------------------------------------------------------
Federal Home Loan Bank Stock, Accrued Interest Receivable, and Accrued
----------------------------------------------------------------------------
Interest Payable
----------------
The fair value is equal to the current carrying value.
Investment Securities, Mortgage-backed Securities, and Loans Held for Sale
--------------------------------------------------------------------------
The fair value of securities held to maturity 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.
The fair value of securities available for sale is equal to the current
carrying value.
Loans, Deposits, and Advances from Federal Home Loan Bank
---------------------------------------------------------
The fair value of loans, certificates of deposit, and advances from Federal
Home Loan Bank is estimated by discounting the future cash flows using a
simulation model which estimates future cash flows and constructs 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 the year end.
Commitments to Extend Credit
----------------------------
The financial instruments are generally not subject to sale and estimated
fair values are not readily available. The contractual amounts of unfunded
commitments and letters of credit are presented previously in this report.
19. PARENT COMPANY
Effective December 31, 1996 active operations of Advance Financial Bancorp
were initiated with the approval of the stock conversion of the Bank and
correspondent purchase of all the stock of the wholly-owned subsidiary
savings bank by the Company which coincided with the initial public offering
of the Company stock. The condensed financial statements of Advance
Financial Bancorp are as follows:
CONDENSED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Deposits with subsidiary bank $ 4,247,712
Investment in subsidiary bank 11,127,999
Loan receivable from ESOP 796,195
Other assets 35,838
-----------
TOTAL ASSETS $16,207,744
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 82,699
Shareholders' equity 16,125,045
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,207,744
===========
</TABLE>
-35-
<PAGE>
19. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF INCOME
FOR THE PERIOD DECEMBER 31, 1996 TO JUNE 30, 1997
<TABLE>
<CAPTION>
INCOME
------
<S> <C>
Interest income - loans $ 35,133
--------
OPERATING EXPENSES 67,686
------------------ --------
Loss before equity in undistributed earnings of subsidiary (32,553)
Equity in undistributed earnings of subsidiary 511,217
--------
Income before income taxes 478,664
Income tax benefit 13,998
--------
NET INCOME $492,662
========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
FOR THE PERIOD DECEMBER 31, 1996 TO JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
--------------------
Net income $ 492,662
Adjustments to reconcile net income to net cash
provided by operating activities
Undistributed net income of subsidiary (511,217)
Increase in other assets (32,452)
Increase in other liabilities 16,724
----------
Net cash provided by operating activities (34,283)
----------
INVESTING ACTIVITIES
ESOP loan repayments 71,365
Net cash used in investing activities 71,365
FINANCING ACTIVITIES
Net proceeds from sales of common stock 4,290,445
Dividends paid (79,815)
--------
Net cash provided by financing activities 4,210,630
----------
Increase in cash and cash equivalents 4,247,712
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD -
----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $4,247,712
==========
</TABLE>
-36-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 904
<INT-BEARING-DEPOSITS> 5,888
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55
<INVESTMENTS-CARRYING> 7,844
<INVESTMENTS-MARKET> 7,831
<LOANS> 86,436
<ALLOWANCE> 368
<TOTAL-ASSETS> 104,563
<DEPOSITS> 80,069
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 622
<LONG-TERM> 3,747
0
0
<COMMON> 108
<OTHER-SE> 16,017
<TOTAL-LIABILITIES-AND-EQUITY> 104,563
<INTEREST-LOAN> 6,769
<INTEREST-INVEST> 390
<INTEREST-OTHER> 351
<INTEREST-TOTAL> 7,510
<INTEREST-DEPOSIT> 3,600
<INTEREST-EXPENSE> 3,998
<INTEREST-INCOME-NET> 3,511
<LOAN-LOSSES> 51
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 529
<INCOME-PRETAX> 869
<INCOME-PRE-EXTRAORDINARY> 869
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 548
<EPS-PRIMARY> .49
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.69
<LOANS-NON> 155
<LOANS-PAST> 453
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 325
<CHARGE-OFFS> 20
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 368
<ALLOWANCE-DOMESTIC> 368
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
