<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 March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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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 May 2, 1998: 1,073,606 shares
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ADVANCE FINANCIAL BANCORP
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
March 31, 1998 and June 30, 1997 3
Consolidated Statement of Income (Unaudited)
for the Nine Months ended March 31, 1998 and 1997 4
Consolidated Statement of Income (Unaudited)
for the Nine Months ended March 31, 1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended March 31, 1998 and 1997 6
Consolidated Statement of Stockholders' Equity 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Recent Developments 9-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Default Upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, June 30,
1998 1997
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ASSETS
Cash and Cash Equivalents:
Cash and amounts due from banks $ 889,888 $ 903,981
Interest-bearing deposits with
other institutions 7,709,067 5,888,439
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Total cash and cash equivalents 8,598,955 6,792,420
Investment Securities:
Securities held to maturity (fair value
of $2,255,344 and $7,831,187) 2,245,256 7,844,305
Securities available for sale 186,970 55,051
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Total investment securities 2,432,226 7,899,356
Mortgage-backed securities held to maturity
(fair value of $379,084 and $394,743) 352,616 367,553
Loans receivable, (net of allowance for loan
losses of $338,495 and $367,779) 94,906,232 86,067,848
Office properties and equipment, net 2,953,221 2,055,651
Federal Home Loan Bank Stock, at cost 586,500 576,700
Accrued interest receivable 634,203 655,667
Other assets 204,345 148,184
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TOTAL ASSETS $ 110,668,296 $ 104,563,379
============= =============
LIABILITIES
Deposits $ 82,610,578 $ 80,069,078
Advances from Federal Home Loan Bank 11,720,606 7,747,449
Advances from borrowers for taxes and insurance 135,339 186,738
Accrued interest payable and other liabilities 607,050 435,069
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TOTAL LIABILITIES 95,073,573 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 10,270,853 10,221,528
Retained Earnings - substantially restricted 7,026,430 6,597,836
Net unrealized gain (loss) on securities 3,260 (6,569)
Unearned Employee Stock Ownership Plan
shares (ESOP) (730,375) (796,195)
Unearned Restricted Stock Plan (RSP) (867,008) -
Treasury stock (10,844 shares, at cost) (216,882) -
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TOTAL STOCKHOLDERS' EQUITY 15,594,723 16,125,045
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TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 110,668,296 $ 104,563,379
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
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ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Nine Months Ended March 31,
1998 1997
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INTEREST AND DIVIDEND INCOME
Loans $ 5,751,640 $ 4,999,114
Investment securities 271,825 224,886
Interest-bearing deposits with
other institutions 195,562 232,131
Mortgage-backed securities 25,111 30,048
Dividends on Federal Home Loan Bank Stock 27,902 26,566
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Total interest and dividend income 6,272,041 5,512,745
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INTEREST EXPENSE
Deposits 2,808,676 2,707,227
Advances from Federal Home Loan Bank 675,547 288,900
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Total interest expense 3,184,224 2,996,127
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NET INTEREST INCOME 3,087,817 2,516,618
Provision for loan losses 59,865 28,569
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,027,952 2,488,049
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NONINTEREST INCOME
Service charges on deposit accounts 195,664 168,231
Gain on sale of loans 83,696 23,296
Other income 70,084 48,164
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Total noninterest income 349,444 239,691
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NONINTEREST EXPENSE
Compensation and employee benefits 984,283 722,995
Occupancy and equipment 274,127 239,455
Deposit insurance premiums 39,481 564,330
Professional fees 145,873 69,160
Advertising 89,253 77,502
Data processing charges 221,490 189,574
Other expenses 503,851 395,550
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Total noninterest expense 2,258,360 2,258,566
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Income before income taxes 1,119,037 469,174
Income taxes 426,319 185,160
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NET INCOME $ 692,718 $ 284,014
============ ============
EARNINGS PER SHARE
Basic $ .69 $ .27
Diluted $ .69 $ .27
See accompanying notes to the unaudited consolidated financial statements.
4
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ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended March 31,
1998 1997
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INTEREST AND DIVIDEND INCOME
Loans $ 1,999,281 $ 1,705,683
Investment securities 50,870 74,911
Interest-bearing deposits with
other institutions 78,675 124,908
Mortgage-backed securities 8,228 8,983
Dividends on Federal Home Loan Bank Stock 9,362 9,062
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Total interest and dividend income 2,146,417 1,923,547
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INTEREST EXPENSE
Deposits 927,376 869,163
Advances from Federal Home Loan Bank 140,511 105,733
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Total interest expense 1,067,888 974,896
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NET INTEREST INCOME 1,078,529 948,651
Provision for loan losses 13,500 11,185
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,065,029 937,466
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NONINTEREST INCOME
Service charges on deposit accounts 70,465 54,689
Gain on sale of loans 37,763 7,720
Other income 27,737 14,922
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Total noninterest income 135,965 77,331
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NONINTEREST EXPENSE
Compensation and employee benefits 341,443 253,210
Occupancy and equipment 92,772 84,999
Deposit insurance premiums 13,190 12,728
Professional fees 30,817 35,984
Advertising 30,045 29,642
Data processing charges 76,005 66,710
Other expenses 164,685 161,101
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Total noninterest expense 748,959 644,374
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Income before income taxes 452,036 370,423
Income taxes 179,538 141,279
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NET INCOME $ 272,498 $ 229,144
============ ============
EARNINGS PER SHARE
Basic $ .28 $ .27
Diluted $ .28 $ .27
See accompanying notes to the unaudited consolidated financial statements.
5
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ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended March 31,
1998 1997
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OPERATING ACTIVITIES
Net income $ 692,718 $ 284,013
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion, net 126,224 99,742
Provision for loan losses 59,865 28,569
Amortization of unearned ESOP 141,950 28,246
Origination of loans held for sale (5,202,939) -
Proceeds from sale of loans 5,286,635 1,375,143
Decrease in other assets and liabilities 108,077 127,844
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Net cash provided by operating activities 1,212,530 1,943,557
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INVESTING ACTIVITIES
Proceeds from maturities of held to maturity
securities 6,600,000 2,000,000
Purchases of held to maturity securities (1,000,000) (3,050,000)
Purchases of available for sale securities (126,250) -
Principal collected on available
for sale securities 8,725 9,995
Principal collected on mortgage-backed
securities 14,953 163,794
Net increase in loans (8,981,945) (7,439,408)
Purchases of Federal Home Loan Bank stock (9,800) (17,200)
Purchases of office properties and equipment (1,024,262) (78,537)
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Net cash used for investing activities (4,518,578) (8,411,356)
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FINANCING ACTIVITIES
Net increase (decrease)in deposits 2,541,500 (1,462,789)
Proceeds from sale of common stock - 9,485,274
Proceeds from advances
from Federal Home Loan Bank 3,973,157 3,379,658
Dividends paid (239,981) -
Net change in advances for taxes
and insurance (51,399) (52,531)
Purchase of RSP (893,813) -
Purchase of treasury stock (216,882) -
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Net cash provided by financing activities 5,112,583 11,349,612
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Increase in cash and cash equivalents 1,806,535 4,881,813
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 $ 8,598,955 $ 8,898,396
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 3,177,733 $ 2,984,901
Income taxes 230,118 87,500
See accompanying notes to the unaudited consolidated financial statements.
6
<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,
1998.
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. 0-21885).
NOTE 2 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings Per Share." This statement
redefines the standards for computing earnings per share (EPS) previously
found in Accounting Principles Board opinion No. 15, Earnings Per Share.
Statement 128 establishes new standards for computing and presenting EPS and
requires dual presentation of "basic" and "diluted" EPS on the face of income
statement for all entities with complex capital structures. Under Statement
128, basic EPS is to be computed based upon income available to common
shareholders and the weighted average number of common shares outstanding for
the period. Diluted EPS is to reflect the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. Statement 128 also requires the
restatement of all prior-period EPS data presented.
The following table sets forth the computation of basic and diluted earnings
per share. There were no convertible securities which would effect the
numerator in calculating basic and diluted earnings per share; therefore, net
income as presented on the Consolidated Statement of Income (Unaudited) will
be used as the numerator. The following tables set forth a reconciliation of
the denominator of the basic and diluted earnings per share computation.
Nine Months Ended March 31,
1998 1997
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Denominator
Denominator for basic earnings per
share - weighted-average shares 1,003,628 1,001,125
Employee stock options 1,158 -
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Denominator for diluted earnings per
share - adjusted weighted-average
average assumed conversions 1,004,786 1,001,125
============= =============
Three Months Ended March 31,
1998 1997
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Denominator
Denominator for basic earnings per
share - weighted-average shares 982,082 1,001,125
Employee stock options 1,158 -
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Denominator for diluted earnings per
share - adjusted weighted-average
average assumed conversions 983,240 1,001,125
============= =============
NOTE 3 - EMPLOYEE BENEFITS
Restrictive Stock Bonus Plan (RSP)
- ---------------------------------
In December 1997, the Board of Directors adopted a RSP for certain officers
and employees which was approved by stockholders at a special meeting held on
January 20, 1998. The objective of this Plan is to enable the Company and the
Bank to retain its corporate officers, key employees, and directors who have
the experience and ability necessary to manage these entities. Directors,
officers, and key employees who are selected by members of a Board appointed
committee are eligible to receive benefits under the RSP. The non-employee
directors of the Company and the Bank serve as trustees for the RSP, which has
the responsibility to invest all funds contributed by the Bank to the Trust
created for the RSP.
In February 1998, the Trust purchased with funds contributed by the Bank,
shares of the common stock of which 26,024 shares were issued to directors and
chief executive officer, and 17,354 shares remained unissued. Directors,
officers, and key employees who terminate their association with the Company
shall forfeit the right to any shares which were awarded but not earned.
The Company granted a total of 26,024 shares of common stock on January 20,
1998 of which 5,205 shares became immediately vested under the plan. These
shares vest over a five year period beginning January 20, 1998. The RSP
shares purchased in the conversion initially will be excluded from
stockholder's equity. The Company recognizes compensation expense in the
amount of fair value of the common stock at the grant date, pro rata over the
years during which the shares are payable and recorded as an addition to
stockholders' equity.
Stock Option Plan
- -----------------
In December, 1997, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees which was approved by stockholders at a
special meeting held on January 20, 1998. An aggregate of 108,445 shares of
authorized but unissued common stock of the Company were reserved for future
issuance under the plan. The stock options typically have expiration terms of
ten years subject to certain extensions and early terminations. The per
share exercise price of a stock option shall be, at a minimum, equal to the
fair value of a share of common stock on the date the option is granted.
Proceeds from the exercise of the stock options are credited to common stock
for the aggregate par value and the excess is credited to additional paid - in
capital.
The following table presents share data related to the stock option plan:
Shares Under Option
---------------------
1998 1997
------- -------
Outstanding, beginning of the year - -
Granted during the year 65,061 -
Canceled during the year - -
Exercised during the year - -
------- -------
Outstanding at end of year (at prices ranging
From $209 to $270 per share) 65,061 -
======= =======
NOTE 4 - PENDING ACCOUNTING PRONOUNCEMENTS
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 (revenues,
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 purposes is required.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND JUNE 30, 1997
- ---------------------------------------------------------------------
Total assets increased by approximately $6,105,000 to $110,668,000 at March
31, 1998 from $104,563,000 at June 30, 1997.
Interest-bearing deposits with other institutions increased from $5,888,000 at
June 30, 1997 to $7,709,067 at March 31, 1998. This increase of $1,821,000 or
30.9% represents called investment securities which have been allotted to meet
outstanding loan commitments.
Investment securities decreased from $7,899,000 at June 30, 1997 to $2,432,000
at March 31, 1998, or 69.2%. This decrease in the U.S. Government securities
held to maturity classification was the result of approximately $6.6 million
in securities being called during the nine month period. Management replaced
only $1 million of these type investment securities with similar instruments
with maturities ranging from three to six years and used the remaining
proceeds to satisfy loan demand.
Net loan receivables increased $8,839,000 or 10.3% from $86,068,000 at June
30, 1997 to $94,906,000 at March 31, 1998. There were increases in
residential mortgages of $4,045,000, non-residential mortgages of $3,152,000
and $971,000 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. This loan growth was funded by investment securities
being called and increased borrowings with the Federal Home Loan Bank of
$3,973,000 also contributed to this funding.
Net office properties and equipment increased $898,000 or 43.7% from
$2,056,000 at June 30, 1997 to $2,953,000 at March 31, 1999. This is directly
related to preparation for the new branch opening in Wintersville, Ohio.
Deposits increased slightly by $2,541,000 or 3.2% to $82,611,000 at March 31,
1998 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 $7,541,000 at March
31, 1998 from $5,353,000. Customer preference to this new product is exhibited
by a decline in savings accounts which has offset the growth of this new
product.
Equity capital decreased by $530,000 for the nine months ended March 31, 1998,
as a result of the purchase of shares of outstanding stock for $894,000 to
fund the restricted stock plan and the purchase of $217,000 of treasury stock.
Also contributing to the overall decrease was the payment of cash dividends of
$240,000. This decline was offset by net income of $693,000 and recognition
of shares in the Employee Stock Ownership and Restricted Stock Plans amounting
to $142,000. 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
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COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31,
1998 AND 1997
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Net income increased $409,000 to $693,000 for the nine months ended March 31,
1998 from $284,000 for the same period ended 1997. This increase was
primarily due to an increase in net interest income of $571,000 coupled a
decrease in FDIC insurance of $525,000 offset with an increase in compensation
and employee benefits of $288,000.
Net interest income increased $571,000 or 22.7%, to $3,088,000 for the nine
months ended March 31, 1998 compared to $2,517,000 for the same period ended
1997. The increase in interest income resulted primarily from an increase in
earnings on loans of $753,000 or 15.1% and investment securities of $47,000 or
20.8%. These increases, which were due to an increase in the average
principal balances of $9,838,000 for loans coupled with an increase in yields
on both loans and investment securities of 23 and 24 basis points,
respectively. Offsetting this increase of interest income was a decline in
interest on interest-bearing deposits with other institutions of $37,000 or
15.7% from $232,000 for the nine months ended March 31, 1997 compared to the
$196,000 for the same period ended 1998.
Interest expense increased $188,000 or 6.3% from $2,996,000 for the nine
months ended March 31, 1997 to $3,184,000 for the same period ended 1998. The
increase was primarily due to an increase in the average volume of
interest-bearing liabilities of $6,296,000 due to the marketing of a new money
market deposit product as previously discussed. In addition, there was a
$2,322,000 or 32.3% increase in the average balance of advances from the FHLB
to meet the growing loan demand. This was offset by a decline in the average
balance of savings deposits of $1,706,000 or 10.4%, as customers preferred the
advantages of the new deposit product, as well as a decline the cost of funds
from 4.6% for the nine months ended March 31, 1997 to 4.5% for the same period
ended March 31, 1998.
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 $31,000 for the six months ended March 31, 1998
compared to the same period ended 1997. See "Risk Elements."
Noninterest income which is comprised principally of service charges on
deposit accounts increased $110,000 or 45.6% to $349,000 as of March 31, 1998
from $240,000 for the same period ended 1997. Service charges on deposit
accounts increased from $168,000 as of March 31, 1997 to $196,000 as of March
31, 1998 driven by an increase in volume. The Bank sold fixed rate mortgage
loans in the secondary market during the year which resulted in an increase on
gains on the sale of loans of $60,000. Other income increased $22,000 or
45.5% primarily due to a $13,000 increase in ATM income as the bank began
charging noncustomer users a $.50 transaction fee during the fourth quarter of
1997.
Noninterest expense overall remained relatively constant. However, there was
a decrease in federal deposit insurance premiums largely attributable to a one
time charge of $470,000 in federal insurance premiums in the September 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.
Countering this decrease was an increase of $261,000 or 38.8% in compensation
and benefits due to the hiring of new employees to further diversify the
Bank's operations to meet continually changing customer demands, as well as an
increase of $118,000 attributable to Employee Stock Ownership Plan.
Professional fees increased by $77,000 or 110.9% due to an increase in
services for compliance with regulatory requirements and employee benefit
plans. Data processing expense increased $31,000 due to both volume of
transactions and an increase in third party costs. Occupancy and equipment
increased $35,000 or 14.5% due primarily to an increase in depreciation
expense for equipment. Other expense increased $108,000 or 23.4% as $27,000
was recognized with the adoption of the Restricted Stock Plan and $18,000 was
recognized with the addition of franchise taxes for the year. There were also
increases of $18,000 to ATM expense for replacement of ATM cards to Debit
cards and $17,000 of consumer card expense associated with the implementation
of merchant and credit card programs.
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 (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 unable the compute payment, interest, or delinquency.
Rapid and accurate data processing is essential to our operations. Data
processing is also essential to most other financial institutions and many
other companies.
All of our material data processing that could be affected by this problem is
provided by a third party service bureau. Our service bureaus has advised us
that it expects to resolve this potential problem before the year 2000.
However, if this potential problem is not resolved before the year 2000, we
would likely experience significant data processing delays, mistakes, or
failures. The delays, mistakes, or failures could have a significant adverse
impact on our financial condition and our results of operations.
Income tax expense increased $241,000 to $426,000 for the nine months ended
March 31, 1998 compared to $185,000 for the same period ended March 31, 1997
due to the higher level of pre-tax income.
9
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND 1997
- ----------------------------------------------------------------------------
Net income increased $43,000 or 18.9% to $272,000 for the three months ended
March 31, 1998 from $229,000 for the same period ended 1997. This increase
was primarily due to an increase in net interest income of $130,000 coupled a
decrease in compensation and benefits of $88,000.
Net interest income increased $130,000 or 11.6% from $949,000 for the three
months ended March 31, 1997 to $1,079,000 for the same period ended 1998.
Interest income on loans increased $294,000 while interest income on
interest-bearing deposits in other institutions and investment securities
decreased $46,000 and $24,000, respectively. In addition, interest expense on
deposits and advances from the Federal Home Loan Bank increased $58,000 and
$35,000, respectively. This fluctuation within the net interest income
accounts is due to an increase in average interest earning assets over
interest-bearing liabilities of $6,249,000 coupled with an increasing interest
rate spread of 27 basis points due primarily to an increase in loan demand
within the Bank's market area.
Provision for loan losses increased $2,000 to $13,000 for the three months
ended March 31, 1998 compared to $11,000 for the same period ended March 31,
1997. This increase is derived from management's continual monitoring of the
quality of its loan portfolio and its determination of the adequacy of the
allowance for loan losses. In March, 1998, the Board of Directors implemented
a plan to increase the monthly provision for loan losses to $12,500 with the
intent of increasing its allowance for loan losses for the growing loan demand
within the Bank's market area.
Noninterest income increased from $77,000 for the three months ended March 31,
1997 to $136,000 for the same period ended March 31, 1998. This increase is
primarily due to gains on sale of fixed rate mortgage loans of $30,000 and an
increase in volume of service charges on deposit accounts of $16,000.
Noninterest expense increased $105,000 or 16.2% to $749,000 for the three
months ended March 31, 1998 compared to $644,000 for the same period ended
March 31, 1997. There was an increases of $88,000 or 34.9% to compensation
and employee benefits for those same reasons as discussed previously. Other
noninterest expense accounts increased marginally during this same time
period.
Income taxes increased $38,000 or 28.1%to $179,000 for the three months ended
March 31, 1998 from $141,000 for the same period ended March 31, 1997. This
increase was the result of an increase in pre-tax income of $82,000.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The 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 Bank has other sources of liquidity if a need for additional funds arises.
Additional sources of funds include a flex line of credit and a RepoPlus line
of credit with the federal Home Loan Bank ("FHLB") of Pittsburgh amounting to
$4.8 million and $10 million, respectively. In addition, as of March 31,
1998, the Bank had outstanding advances from the FHLB of $11,721,000.
As of March 31, 1998 the Company has commitments to fund loans of
approximately $4,939,000 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 Bank's total risk-based, Tier I
risk-based and Tier I leverage capital ratios in order to assess compliance
with regulatory guidelines. At March 31, 1998, both the Company and the Bank
exceeded the minimum risk-based and leverage capital ratios requirements.
The Company's and Bank's total risk-based, Tier I risk-based and Tier I
leverage ratios are 21.9%, 21.4%, 14.2%, and 16.6%, 16.2%, and 10.7%
respectively at March 31, 1998.
11
<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.
March 31, June 30,
1998 1997
--------- ---------
(dollars in thousands)
Loans on nonaccrual basis $ 221 $ 155
Loans past due 90 days or more and still accruing 438 453
--------- ---------
Total nonperforming loans 659 608
--------- ---------
Nonperforming loans as a percent of total loans .69% 0.70%
========= =========
Nonperforming assets as a percent of total assets .60% 0.58%
========= =========
Allowance for loan losses to nonperforming loans 51.29% 60.53%
========= =========
At March 31, 1998 and June 30, 1997, no real estate or other assets were held
as foreclosed or repossessed property.
Management monitors impaired loans on a continual basis. As of March 31,
1997, impaired loans had no material effect on the company's financial
position or results of operations.
During the nine month period ended March 31, 1998, loans increased $8,838,000
and nonperforming loans increased $51,000 while the allowance for loan losses
decreased $29,000 for the same period. The percentage of allowance for loan
losses to loans outstanding remained relatively stable at .4% for both March
31, 1998 and June 30, 1997. 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 March 31,
1998 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.
12
<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 March 31, 1998
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
On January 20, 1998, at a Special Meeting of Stockholders, the
Company announced that the following proposals were ratified:
Stock Option Plan
The ratification of the 1998 Stock Option Plan for the Company.
There were 595,778 affirmative votes and 66,159 negative votes.
The number of votes abstaining were 1,879.
Ratification of Restrictive Stock Plan
The ratification of the Restricted Stock Plan for the Bank. There
were 451,605 affirmative votes and 210,332 negative votes.
The number of votes abstaining were 1,879.
Item 5 - Other information
NONE
Item 6 - Exhibits and reports on Form 8-K
a) 10.1 1998 Stock Option Plan*
10.2 Restricted Stock Plan*
27 Financial Data Schedule (electronic filing only)
* Incorporated by reference to the definitive proxy statement for
the special meeting of shareholders on January 20, 1998. (File
no. 0-21885)
b) NONE
13
<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: May 15, 1998 By:\s\ Stephen M. Gagliardi
--------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
14
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