<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
------------ ------------
Commission File Number 0-21885
--------------------------------
Advance Financial Bancorp
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(Exact name of registrant as specified in its charter)
West Virginia 55-0753533
- ------------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1015 Commerce Street, Wellsburg, WV 26070
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(Address of principal executive offices)
(304) 737 - 3531
------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at November 4, 1997: 1,084,450 shares
<PAGE>
ADVANCE FINANCIAL BANCORP
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
September 30, 1997 and June 30, 1997 3
Consolidated Statement of Income (Unaudited)
for the Three Months ended September 30, 1997 and 1997 4
Consolidated Statement of Cash Flows (Unaudited)
for the Three Months ended September 30, 1997 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Recent Developments 7-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Default Upon Senior Securities 11
Item 4. Submissions of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and amounts due from banks $ 1,111,571 $ 903,981
Interest-bearing deposits with other institutions 3,002,124 5,888,439
------------- -------------
Total cash and cash equivalents 4,113,695 6,792,420
Investment Securities:
Securities held to maturity (fair value
of $6,307,403 and $7,831,187) 6,300,166 7,844,305
Securities available for sale 58,469 55,051
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Total investment securities 6,358,635 7,899,356
Mortgage-backed securities held to maturity
(fair value of $393,973 and $394,743) 365,593 367,553
Loans receivable, (net of allowance for loan losses
of $297,713 and $367,779) 91,220,353 86,067,848
Office properties and equipment, net 2,126,021 2,055,651
Federal Home Loan Bank Stock, at cost 576,700 576,700
Accrued interest receivable 690,253 655,667
Other assets 265,756 148,184
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TOTAL ASSETS $ 105,717,006 $ 104,563,379
============= =============
LIABILITIES
Deposits $ 80,847,502 $ 80,069,078
Advances from Federal Home Loan Bank 7,738,646 7,747,449
Advances from borrowers for taxes and insurance 118,929 186,738
Accrued interest payable and other liabilities 732,387 435,069
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TOTAL LIABILITIES 89,437,464 88,438,334
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STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; 500,000 shares
authorized, none issued - -
Common Stock, $.10 par value; 2,000,000 shares authorized
1,084,450 shares issued and outstanding 108,445 108,445
Additional paid - in capital 10,231,998 10,221,528
Retained Earnings - substantially restricted 6,720,578 6,597,836
Net unrealized loss on securities (6,224) (6,569)
Unearned Employee Stock Ownership Plan shares (ESOP) (775,255) (796,195)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 16,279,542 16,125,045
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 105,717,006 $ 104,563,379
============= =============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
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<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $ 1,813,763 $ 1,623,884
Investment securities 131,431 80,248
Interest-bearing deposits with other institutions 61,609 29,303
Mortgage-backed securities 8,463 11,491
Dividends on Federal Home Loan Bank Stock 9,267 8,966
------------ ------------
Total interest and dividend income 2,024,533 1,753,892
------------ ------------
INTEREST EXPENSE
Deposits 934,824 905,796
Advances from Federal Home Loan Bank 110,627 73,516
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Total interest expense 1,045,451 979,312
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NET INTEREST INCOME 979,082 774,580
Provision for loan losses 15,671 3,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 963,411 771,580
------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 57,743 57,208
Gain on sale of loans 20,257 6,818
Other income 17,330 18,858
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Total noninterest income 95,330 82,884
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NONINTEREST EXPENSE
Compensation and employee benefits 306,144 229,087
Occupancy and equipment 85,339 88,227
Deposit insurance premiums 13,150 515,593
Professional fees 62,640 23,358
Advertising 34,884 29,050
Data processing charges 74,004 67,133
Other expenses 135,779 107,043
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Total noninterest expense 711,940 1,059,491
------------ ------------
Income before income taxes 346,801 (205,025)
Income taxes 142,239 (55,596)
------------ ------------
NET INCOME $ 204,562 $ (149,429)
============ ============
EARNINGS PER SHARE .20 -
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 204,562 $ (149,429)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net 32,596 15,222
Provision for loan losses 15,671 3,000
Proceeds from sale of loans 1,318,592 995,143
Increase in federal deposit insurance premiums - 469,908
Decrease (increase) in other assets and liabilities 168,517 (192,365)
------------ ------------
Net cash provided by operating activities 1,739,938 1,141,479
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INVESTING ACTIVITIES
Proceeds from maturities of held to maturity 2,550,000 500,000
securities
Purchases of held to maturity securities (1,000,000) -
Principal collected on available for sale securities 2,975 -
Principal collected on mortgage - backed securities 1,960 19,264
Net increase in loans (6,486,768) (3,195,917)
Purchases of office properties and equipment (108,827) (17,167)
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Net cash used for investing activities (5,040,660) (2,693,820)
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FINANCING ACTIVITIES
Net increase (decrease)in deposits 778,424 (1,756,727)
Proceeds (repayments)from advances
from Federal Home Loan Bank (8,803) 2,991,750
Dividends paid (79,815) -
Net change in advances for taxes and insurance (67,809) (61,543)
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Net cash provided by financing activities 621,997 1,173,480
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Decrease in cash and cash equivalents (2,678,725) (378,861)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 6,792,420 4,016,583
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CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 4,113,695 $ 3,637,722
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 1,034,636 $ 974,509
Income taxes 136,000 87,500
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
ADVANCE FINANCIAL BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Advance Financial Bancorp (the
"Company"), includes its wholly-owned subsidiary, Advance Financial Savings
Bank (the"Bank"), and its wholly-owned subsidiary, Advance Financial Service
Corporation of West Virginia. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the fiscal year ended June 30,
1997.
These statements should be read in conjunction with the consolidated
statements as of and for the year ended June 30, 1997 and related notes which
are included on the Form 10-KSB (file no. 333-13021).
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND JUNE 30, 1997
- -------------------------------------------------------------------------
Total assets increased by approximately $1,154,000 to $105,717,000 at
September 30, 1997 from $104,563,000 at June 30, 1997. Total cash and cash
equivalents decreased by $2,679,000 or 49.4% to $4,114,000 at September 30,
1997 from $6,792,000 at June 30, 1997. This decrease was used primarily to
supplement the growing loan demand within the bank=s market area.
Investment securities decreased $1,541,000 or 19.5% from $7,899,000 at
June 30, 1997 to $6,359,000 at September 30, 1997. This decrease in the U.S.
Government securities held to maturity classification was the result of
approximately $2.5 million in securities being called during the three month
period. Management opted to only replace $1 million of these type investment
securities with similar instruments with maturities ranging from three to six
years.
Net loan receivables increased 6.0% from $86,068,000 at June 30, 1997 to
$91,220,000 at September 30, 1997, or approximately $5,153,000. The net
increase was primarily attributable to the increase in non-residential
mortgages of $2,116,000 and $993,000 in participation loans. 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 the means discussed above, specifically the
usage of interest-bearing deposits with other institutions and the maturity of
investment securities.
Deposits increased slightly by $778,000 to $80,847,000 at September 30, 1997
from $80,069,000 at June 30, 1997. This increase primarily represents deposits
accumulated via a new money market product for balances greater than $10,000
offered at a preferential rate which has grown to $6,485,000. Customer
preference to this new product is exhibited by a decline in both savings and
certificates of deposit accounts which has offset the growth of this new
product.
Equity capital increased by $154,000 for the three months ended September 30,
1997, as a result of net income of $205,000 and recognition of shares in the
Employee Stock Ownership Plan amounting to $32,000. Cash dividends paid of
approximately $80,000 reduced the impact of these other events. 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.
7
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
- ------------------------------------------------------------------
SEPTEMBER 30, 1997 AND 1996
- ---------------------------
Net income increased $354,000 to $205,000 for the three months ended
September 30, 1997 from a loss of $149,431 for the same period ended
September 30, 1996.
Net interest income increased $205,000 or 26.4%, to $979,000 for the three
months ended September 30, 1997 compared to $775,000 for the three months
ended September 30, 1996. The increase in interest income resulted primarily
from an increase in earnings on loans of $190,000 or 11.7%, investment
securities of $51,000, and interest-bearing deposits in other institutions of
$32,000. These increases, which were due to an increase in the average
principal balances of $8.6 million of loans, $3.2 million of investment
securities, and $.7 million of interest bearing deposits which were funded by
proceeds from the Offering in December 1996 and advances from FHLB. In
addition, the yield on investments increased from 6.0% for the three months
ended September 30, 1996 to 6.6% for the same three month period ended
September 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 increase in rates.
Interest expense increased $66,000 or 6.7% from $979,000 for the three months
ended September 30, 1996 to $1,045,000 for the same period ended 1997. The
increase was primarily due to the average volume of interest-bearing
liabilities increasing $2,594,000 million from $85,590,000 as of
September 30, 1996 to $88,184,000 as of September 30, 1997. The increase was
due to the marketing of a new deposit product coupled with an increase in the
average balance of advances from the FHLB of $1,871,000. The Bank has
utilized these borrowings to fund their recent loan growth.
Based upon management's continuing evaluation of the adequacy of the allowance
for loan losses which encompasses the overall risk characteristics of the
various portfolio segments, past experience with losses, the impact of
economic conditions on borrowers, and other relevant factors, the provision
for loan losses increased by $13,000 for the nine months ended September 30,
1997 compared to the same period ended 1996. See "Risk Elements".
Noninterest income which is comprised principally of service charges on
deposit accounts increased $12,000 or 15.0% to $95,000 as of September 30,
1997 from $83,000 as of September 30, 1996. Service charges on deposit
accounts remained consistent between the two periods. 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 $20,000.
Noninterest expense decreased $348,000 or 32.8% to $712,000 as of
September 30, 1997 from $1,059.000 as of September 30, 1996. This decrease is
largely attributed to a one time charge of $470,000 in federal insurance
premiums in the first quarter of 1996. 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 time charge to SAIF-insured institutions of 65.7 basis
points per one hundred dollars of insurable deposits. A reduced level of
insurance premiums is anticipated in future periods as a result of this one-
time charge.
Compensation and benefits increased $77,000 or 33.6%, due to the hiring of new
employees to further diversify the Bank's operations to meet continually
changing customer demands, as well as increases of $31,000 attributable to
Employee Stock Ownership Plan expenses. Professional fees increased by
$39,000 to $63,000 as of September 30, 1997 compared to $23,000 for the same
period ended 1996 due to an increase in services for compliance with
regulatory requirements. Other noninterest expense increased by $29,000 due
to the addition of franchise taxes for the quarter ended September 30, 1997
coupled with general overall increases in all expenses.
Income tax expense increased $198,000 to $142,000 for the three months ended
September 30, 1997 compared to a benefit of $55,596 for the same period ended
September 30, 1996 due to higher levels of pre-tax income.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Savings Bank's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of investment securities, and funds provided
from operations. While scheduled loan repayments are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions, and competition. In addition,
the Savings Bank invests excess funds in overnight deposits which provide
liquidity to meet lending requirements.
The Savings Bank has other sources of liquidity if a need for additional funds
arises. Additional sources of funds include a flex line of credit with the
Federal Home Loan Bank ("FHLB") of Pittsburgh amounting to $4.8 million. As
of September 30, 1997, the Savings Bank had outstanding advances from the FHLB
of $7,739,000.
As of September 30, 1997, the Company has relatively significant commitments
to fund loans of approximately $1,123,000 as a direct result of the economic
health of the Bank's market area and the competitive pricing of the Bank's
loan products.
Management monitors both the Company's and the Savings Bank's total risk-
based, Tier I risk-based and Tier I leverage capital ratios in order to
assess compliance with regulatory guidelines. At September 30, 1997, both the
Company and the Savings Bank exceeded the minimum risk-based and leverage
capital ratios requirements. The Company's and Savings Bank's total risk-
based, Tier I risk-based and Tier I leverage ratios are 24.6%, 24.2%, 15.5%,
18.6%, 18.1%, and 11.6% respectively at September 30, 1997.
9
<PAGE>
RISK ELEMENT
- ------------
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other
real estate loans, and repossessed assets. A loan is classified as nonaccrual
when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest
is discontinued, future income is recognized only when cash is received.
Renegotiated loans are those loans which terms have been renegotiated to
provide a reduction or deferral of principal or interest as a result of the
deterioration of the borrower.
September 30, June 30,
1997 1997
--------- ---------
(dollars in thousands)
Loans on nonaccrual basis $ 329 $ 155
Loans past due 90 days or more 455 453
Renegotiated loans - -
--------- ---------
Total nonperforming loans 784 608
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Nonperforming loans as a percent of total loans 0.86% 0.70%
====== ======
Nonperforming assets as a percent of total assets 0.74% 0.58%
====== ======
Allowance for loan losses to nonperforming loans 38.01% 60.53%
====== ======
At September 30, 1997 and 1996, no real estate or other assets were held as
foreclosed or repossessed property.
Management monitors impaired loans on a continual basis. As of September 30,
1997, impaired loans had no material effect on the company's financial
position or results of operations.
During the three month period ended September 30, 1997, loans increased
$5,153,000 and nonperforming loans decreased $176,000 while the allowance for
loan losses increased $16,000 for the same period. The percentage of
allowance for loan losses to loans outstanding declined slightly to .3% as of
September 30, 1997 compared to .4% as of September 30, 1996. Nonperforming
loans are primarily made up of one to four family residential mortgages. The
collateral requirements on such loans reduce the risk of potential losses to
an acceptable level in management's opinion.
Management believes the level of the allowance for loan losses at
September 30, 1997 is sufficient; however, there can be no assurance that the
current allowance for loan losses will be adequate to absorb all future loan
losses. The relationship between the allowance for loan losses and
outstanding loans is a function of the credit quality and known risk
attributed to the loan portfolio. The on-going loan review program and credit
approval process is used to determine the adequacy of the allowance for loan
losses.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal proceedings
From time to time, the Company and its subsidiary may be a party to
various legal in the ordinary course of business. At September 30, 1997 there
were no legal proceedings of a material nature.
Item 2 - Changes in securities
NONE
Item 3 - Defaults upon senior securities
N/A
Item 4 - Submission of matters to a vote of security holders
NONE
Item 5 - Other information
NONE
Item 6 - Exhibits and reports on Form 8-K
(a) List of exhibits:
3(i) Certificate of Incorporation of Advance Financial Bancorp*
3(ii) Bylaws of Advance Financial Bancorp*
4(i) Specimen Stock Certificate*
4(ii) Shareholders Right Plan**
10 Employment Agreement between the Bank and Stephen M.
Gagliardi***
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.
*** Incorporated by reference to the June 30, 1997 Form 10-KSB
(File No. 0-21885) filed September 23, 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advance Financial Bancorp
Date: November , 1997 By:\s\ Stephen M. Gagliardi
--------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
By:\s\ Noreen Mechling
--------------------------------------
Noreen Mechling
Chief Financial Officer and Treasurer
12
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,112
<INT-BEARING-DEPOSITS> 3,002
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58
<INVESTMENTS-CARRYING> 6,666
<INVESTMENTS-MARKET> 6,701
<LOANS> 91,220
<ALLOWANCE> 298
<TOTAL-ASSETS> 105,717
<DEPOSITS> 80,848
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 851
<LONG-TERM> 3,739
0
0
<COMMON> 108
<OTHER-SE> 16,172
<TOTAL-LIABILITIES-AND-EQUITY> 105,717
<INTEREST-LOAN> 1,814
<INTEREST-INVEST> 240
<INTEREST-OTHER> 71
<INTEREST-TOTAL> 2,025
<INTEREST-DEPOSIT> 935
<INTEREST-EXPENSE> 1,045
<INTEREST-INCOME-NET> 979
<LOAN-LOSSES> 16
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 712
<INCOME-PRETAX> 347
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205
<EPS-PRIMARY> .20
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.84
<LOANS-NON> 329
<LOANS-PAST> 455
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 368
<CHARGE-OFFS> 100
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 298
<ALLOWANCE-DOMESTIC> 298
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
