United States Securities and Exchange Commission
Washington, D.C. 20552
FORM 10QSB
{x} QUARTERLY REPORT UNDER SECTION 13 OF 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
{ } 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
-------------------------
(Exact name of registrant as specified in its charter)
West Virginia 55-0753533
------------- ----------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1015 Commerce Street, Wellsburg, WV 26070
-----------------------------------------
(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
subjected to such filing requirements for the past 90 days. Yes x No
--- ---
State the number of shares outstanding for 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 January 29, 1999: 996,648
<PAGE>
Advance Financial Bancorp
Index
Page
Number
------
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet ( Unaudited) as of
December 31, 1998 and June 30, 1998 3
Consolidated Statement of Income (Unaudited)
For the Six Months ended December 31, 1998 and 1997 4
Consolidated Statement of Income (Unaudited
For the Three Months ended December 31, 1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited)
For the Six Months ended December 31, 1998 and 1997 6
Notes to the Unaudited Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis 8--14
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Default Upon Senior Securities 15
Item 4 - Submissions of Matters to a vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
<S> <C> <C>
Assets
Cash and Cash Equivalents:
Cash and amounts due from banks $1,206,369 $1,334,831
Interest-bearing deposits with other institutions 4,209,855 7,749,362
------------ ------------
Total cash and cash equivalents 5,416,224 9,084,193
Investment Securities:
Securities held to maturity (fair value
of $1,245,452 and $1,753,325) 1,242,048 1,745,667
Securities available for sale 3,255,059 264,020
------------ ------------
Total investment securities 4,497,107 2,009,687
Mortgaged-backed securities held to maturity
(fair value of $1,357,779 and $364,031) 1,338,217 339,362
Loans held for sale 2,002,156 1,454,700
Loans receivable, (net of allowance for loan losses
of $551,002 and $477,654 ) 102,869,973 95,590,197
Office properties and equipment, net 4,070,974 4,082,857
Federal Home Loan Bank Stock, at cost 622,200 622,200
Accrued interest receivable 644,971 617,980
Other assets 482,627 384,237
------------ ------------
TOTAL ASSETS $121,944,449 $114,185,413
============ ============
Liabilities:
Deposits $97,036,507 $88,551,543
Advances from Federal Home Loan Bank 9,000,000 10,000,000
Advances from borrowers for taxes and insurance 182,741 193,346
Accrued interest payable and other liabilities 427,009 512,402
------------ ------------
TOTAL LIABILITIES 106,646,257 99,257,291
------------ ------------
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 10,320,174 10,288,928
Retained earnings - substantially restricted 7,306,161 7,130,056
Net unrealized loss on securities (24,111) (13,650)
Unearned Employee Stock Ownership Plan shares (ESOP) (652,646) (715,158)
Unearned Restricted Stock Plan shares (RSP) (758,968) (869,636)
Treasury Stock (53,802 shares at cost) (1,000,863) (1,000,863)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,298,192 14,928,122
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $121,944,449 $114,185,413
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-3-
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
1998 1997
---------- ----------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $4,195,272 $3,752,359
Investment securities 63,535 220,955
Interest-bearing deposits with other institutions 209,741 116,887
Mortgage-backed securities 16,719 16,883
Dividends on Federal Home Loan Bank Stock 20,388 18,541
---------- ----------
Total interest and dividend income 4,505,655 4,125,625
---------- ----------
INTEREST EXPENSE
Deposits 2,166,850 1,881,300
Advances from Federal Home Loan Bank 246,527 235,036
---------- ----------
Total interest expense 2,413,377 2,116,336
---------- ----------
NET INTEREST INCOME 2,092,278 2,009,289
Provision for loan losses 75,000 46,365
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,017,278 1,962,924
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 186,085 125,199
Gain on sale of loans 70,235 39,685
Other income 137,313 48,595
---------- ----------
Total noninterest income 393,633 213,479
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 859,037 642,840
Occupancy and equipment 293,208 181,355
Professional fees 85,362 115,056
Advertising 63,998 59,208
Data processing charges 172,177 145,485
Other expenses 409,369 365,468
---------- ----------
Total noninterest expenses 1,883,151 1,509,412
---------- ----------
Income before income taxes 527,760 666,991
Income taxes 207,452 246,771
---------- ----------
NET INCOME $320,308 $420,220
========== ==========
EARNINGS PER SHARE
Basic $ .33 $ .42
Diluted $ .33 N/A
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-4-
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31
1998 1997
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $2,150,478 $1,938,596
Investment securities 36,230 89,524
Interest-bearing deposits with other institutions 89,658 55,278
Mortgage-backed securities 9,002 8,420
Dividends on Federal Home Loan Bank Stock 10,194 9,274
---------- ----------
Total interest and dividend income 2,295,562 2,101,092
---------- ----------
INTEREST EXPENSE
Deposits 1,088,214 946,476
Advances from Federal Home Loan Bank 121,793 124,409
---------- ----------
Total interest expense 1,210,007 1,070,885
---------- ----------
NET INTEREST INCOME 1,085,555 1,030,207
Provision for loan losses 37,500 30,694
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,048,055 999,513
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 99,654 67,456
Gain on sale of loans 37,010 19,428
Other income 73,013 31,265
---------- ----------
Total noninterest income 209,677 118,149
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 465,818 336,696
Occupancy and equipment 154,208 96,016
Professional fees 47,741 52,416
Advertising 30,268 24,324
Data processing charges 86,659 71,481
Other expenses 174,984 216,539
---------- ----------
Total noninterest expenses 959,678 797,472
---------- ----------
Income before income taxes 298,054 320,190
Income taxes 112,575 104,532
---------- ----------
NET INCOME $ 185,479 $ 215,658
========== ==========
EARNINGS PER SHARE
Basic $ .19 $ .20
Diluted $ .19 N/A
See accompanying notes to the unaudited consolidated financial statements
-5-
<PAGE>
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended
December 31
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 320,308 $ 420,220
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 104,566 83,422
Provision for loan losses 75,000 46,365
Amortization of unearned ESOP and RSP 204,426 71,667
Gain on sale of loans (70,235) (39,685)
Origination of loans held for sale (6,169,869) (2,305,678)
Proceeds from the sale of loans 5,692,648 2,345,363
Increase in other assets and liabilities (205,385) (60,819)
------------ ------------
Net cash (used in) provided by operating activities (48,541) 560,855
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (1,500,000) (1,000,000)
Maturities and repayments 2,000,000 4,350,000
Investment securities available for sale:
Purchases (3,013,675) --
Maturities and repayments 6,895 6,188
Mortgage-backed securities held to maturity:
Purchases (1,006,296) --
Maturities and repayments 7,448 5,294
Net increase in loans (7,296,031) (8,328,238)
Purchases of premises and equipment (147,925) (381,344)
------------ ------------
Net cash used in investing activities (10,949,584) (5,348,100)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 8,484,964 1,158,213
Proceeds (Repayments) from advances from Federal Home Loan Bank (1,000,000) 1,982,250
Net change in advances for taxes and insurance (10,605) (4,621)
Cash dividends paid (144,203) (161,016)
------------ ------------
Net cash provided by financing activities 7,330,156 2,974,826
------------ ------------
Decrease in cash and cash equivalents (3,667,969) (1,812,419)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,084,193 6,792,420
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,416,224 $ 4,980,001
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 2,414,931 $ 2,108,190
Income taxes 230,779 192,000
</TABLE>
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 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, 1999 or any other
interim period.
These statements should be read in conjunction with the consolidated statements
of and for the year ended June 30, 1998 and related notes which are included on
the Form 10-KSB (file no. 0-21885).
NOTE 2 - EARNINGS PER SHARE
There were no convertible securities which would effect the numerator in
calculating basic and dilutive earnings per share; therefore, net income as
presented on the Consolidated Statements of Income (Unaudited) for the six and
three month periods and the quarter ended for December 31, 1998 and 1997 will be
used as the numerator. The following table sets forth a reconciliation of the
denominator of the basic and dilutive earnings per share computation in
accordance with SFAS No. 128.
1998 1997
------- ---------
Denominator:
Denominator for basic earnings per share 956,287 1,006,833
Weighted-average shares
Effect of dilutive securities:
Employee stock options - N/A
------- ---------
Dilutive potential common shares 956,287 1,006,833
Denominator;
Denominator for dilutive earnings per share adjusted
Weighted-average shares 956,287 1,006,833
======= =========
NOTE 3 - COMPREHENSIVE INCOME
Effective July 1, 1998, the Bank adopted the Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." For the six months ended
December 31, 1998, comprehensive income totaled $309,847.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND JUNE 30, 1998
- ------------------------------------------------------------------------
Total assets increased by approximately $7,750,000 to $121,944,449 at December
31, 1998 from $114,185,413 at June 30, 1998, primarily as a result of the
opening in June 1998 of the Wintersville, Ohio branch (the "Wintersville
Branch"). The Wintersville branch contributed approximately $6.1 million in loan
growth and $6.4 million in deposit growth, respectively, during the six month
period ended December 1998.
Interest-bearing deposits with other financial institutions decreased by
$3,539,477 to $4,209,855 at December 31, 1998 from $7,749,362 at June 30, 1998.
This decrease was used primarily to purchase investment securities, including
available for sale fixed mortgage-backed securities and FHLB Bonds and held to
maturity ARM mortgaged-backed securities.
Investment securities available for sale increased by $2,991,039 to $3,255,059
at December 31, 1998 from $264,020 at June 30, 1998. This increased included two
$1 million FHLB Bonds with callable options in December of 1999 with rates
averaging approximately 6% and two $500,000 fixed mortgage-backed securities
with coupon rates of 6.25% and 6.50%. Management placed these investments into
this category for liquidity purposes while maximizing interest yields in excess
of the federal overnight rates paid on Interest-bearing demand deposits.
Investment securities held to maturity decreased by $503,619 to $1,242,048 at
December 31, 1998 from $1,745,667 at June 30, 1998. This decrease is the result
of four $500,000 bonds being called during the six-month period. Management
replaced all but one of these types of bonds with similar instruments.
Mortgaged-backed securities held to maturity increased by $998,855 to $1,338,217
at December 31, 1998 from $339,362 at June 30, 1998. This increase included the
purchase of two Adjustable Rate mortgage-backed instruments. Management placed
these investments into this category due to the instruments ability to absorb
rate fluctuations.
Net loans receivable increased by $7,827,232 or 8.1% from $97,044,897 at June
30, 1998 to $104,872,129 at December 31, 1998. Loan demand has been bolstered by
the new Wintersville, Ohio branch , and the growth of the Bank's commercial
lending. The primary result is an increase in non-residential mortgages of
$4,742,000 and commercial loans of $2,625,000. See "Risk Elements".
Deposits increased by $8,484,964 or 9.6% from $88,551,543 at June 30, 1998 to
$97,036,507 at December 31, 1998. This increase is represented by an increase in
demand deposits and fifteen to twenty-five month certificate of deposit
products. Demand deposits increased $3,780,000 which is comprised of an increase
in the "Money Market over $10,000" type of $2,000,000, an increase in
non-interest bearing demand of $930,000, and an increase in core NOW accounts of
$700,000. Certificates of Deposits yielding 5% to 5.5% with maturities ranging
from thirteen months to twenty-five months have increased $5,800,000 of which
$1,000,000 came from renewals of variable type certificate products. The
competitiveness of these certificate products coupled with the opening of the
new Wintersville branch has led to an increase in the bank's customer base.
Equity capital increased by approximately, $370,000 or 2.5% from $14,928,122 at
June 30, 1998 to $15,298,192 at December 31, 1998. Net income of $320,000 and
the recognition of shares in the Employee Stock Ownership Plan and Restricted
Stock Plan of $204,000 were offset by the payment of cash dividends of $144,000,
and a decline in net unrealized loss on securities of $10,000. The Board of
Directors will determine future dividend policies in light of earnings and
financial condition of the Company, including applicable governmental
regulations and policies.
-8-
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
- --------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997
- --------------------------
Net interest income increased $55,000 or 5% to $1,086,000 for the three months
ended December 31, 1998, compared to $1,031,000 for the three months ended
December 31, 1997. The increase in interest income resulted primarily from an
increase in fluctuations of average volume of the underlying principle balances
in interest earning assets. Interest income increased $195,000 or 9.3% primarily
from an increase in earnings on loans of $212,000 or 11.% as the average
principle balance increased $11,169,000 or 12% from $92,881,000 for the period
ended 1997 to $104,050,000 for the period ended 1998. Offsetting this increase
was a decrease in earnings on investments and interest-bearing deposits with
other financial institutions, as average principal balances increased $114,000
or 1.1% from $10,009,000 for the period ended 1997 compared to $10,123,000 for
the period ended 1998. However the average yield on these investments and
deposits decreased .75% due to diminishing yields in the entire bond market.
Net interest income increased $83,000 or 4% to $2,092,000 for the six
months ended December 31, 1998, compared to $2,009,000 for the six months ended
December 31, 1997. The increase in interest income resulted primarily from an
increase in fluctuations of average volume of the underlying principle balances
in interest earning assets as the interest rate spread remained stable at 3.20%
for the six month periods. Interest income increased $380,000 or 9.2% primarily
from earnings on loans which increased $442,000 or 11.8% as the average
principle balance increased $10,539,000 or 11.6% from $91,095,000 for the period
ended 1997 to $101,634,000 for the period ended 1998. Offsetting this increase
was a decrease in earnings on investments and interest-bearing deposits with
other financial institutions as average principal balances declined $471,000 or
4.3% from $10,918,000 for the period ended 1997 compared to $10,447,000 for the
period ended 1998.
Interest expense increased $139,000 or 13% for the three months ended December
31, 1998 compared to the same period ended 1997. This increase was primarily due
to an increase in interest on deposits of $141,800 or 14.9 % resulting from an
increase in average certificates and interest-bearing demand deposits of
$9,431,000 and $4,360,475, respectively, while being offset by a decline in
average principle balance of savings deposits of $281,000.
Interest expense increased $297,000 or 14% for the six months ended December 31,
1998 compared to the same period ended 1997. This increase was primarily due to
an increase in interest on deposits of $285,500 or 15.2 % resulting from an
increase in average certificates and interest-bearing demand deposits of
$8,693,000 and $3,799,000, respectively, while being offset by a decline in
average principle balance of savings deposits of $440,000.
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 of loan
losses increased by $6,800 and $28,500 , respectively, for the three and six
months ended December 31, 1998 compared to the same period 1997. See "Risk
Elements".
Noninterest income increased $91,500 or 78% to $210,000 for the three months
ended December 31, 1998 from $118,000 for the same period ended December 31,
1997. This increase is primarily due to gains on the sale of fixed rate loans of
$17,500, increase in income recognized from servicing rights of loans sold of
$39,800 and an increase in service charges on deposits of $31,500.
-9-
<PAGE>
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
- --------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997 (CONTINUED)
- --------------------------------------
Noninterest income increased $181,000 or 84% from $213,000 for the six months
ended December 31, 1997 to $394,000 for the same period ended 1998. Service
charges on deposit accounts increased $61,000 from 1997 to 1998 due to an
increase in volume from the Wintersville branch and due to a marginal increase
in fees. The bank sold fixed rate mortgages in the secondary market during the
six-month period, which resulted in an increase in gains on the sale of loans of
$30,500. Other income increased $88,700 primarily due to the recognition of
$71,500 of servicing rights income from the loans sold while volume increases
occurred in all other income type accounts.
Noninterest expense increased $162,000 or 20% to $959,500 for the three months
ended December 31, 1998 from $797,500 for the same 1997 period. Noninterest
expense increased $374,000, or 25% to $1,883,000 for the six months ended
December 31, 1998 from $1,509,000 for the same 1997 period. For the three and
six month periods of 1998 , compensation and employee benefits increased
$129,000 and $216,000, respectively, due to the hiring of new employees and
related benefits for the new branch facility, as well as, additional costs for
the Employee Stock Ownership and Restricted Stock Plans of $56,200 and $91,300,
respectively. Occupancy and equipment increased $58,000 and $111,800,
respectively, due primarily to an increase in depreciation expense for the new
branch facility. For the six months ended professional fees decreased $30,000
due to a decrease in services for compliance with regulatory requirements and
employee benefit plans. Data processing expenses increased for the three and six
months ended $15,000 and $27,000, respectively, due primarily to the increase in
transaction volumes as a result of the Wintersville branch. Other expenses
increased $44,000 mainly due to Restricted Stock Plan costs and dividend
equivalent rights on options of the Company's directors.
-10-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The bank's primary sources of funds are deposits, amortization and prepayments
of loans, maturities of investment securities, and funds provided from
operations. While scheduled loan prepayments are a relatively predicable source
of funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, the Bank
invests excess funds in overnight deposits, which provide liquidity to meet
lending requirements.
The Bank has other sources of liquidity if the need for additional funds arises.
An additional source of funds includes RepoPlus line of credit with the Federal
Home Loan Bank (FHLB) of Pittsburgh amounting to $10 million. The Bank currently
has no outstanding amount due on the RepoPlus line of credit.
The Bank, as of December 31, 1998, had outstanding advances from the FHLB of $9
million. The outstanding advances were used to fund the loan demand for the 1-4
family fixed rate residential loan portfolio and to fund the construction and
furnishing of the new branch facility in Wintersville, Ohio. The advances are
secured by a blanket lien on qualified collateral, defined principally as
investment securities and mortgage loans which are owned by the Bank free and
clear of any liens or encumbrances. Advances amounting to $8 million with effect
interest rates approximating 5.45% will mature in 2002.
As of December 31, 1998 the Bank has commitments to fund loans of approximately
$789,000 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 leveraged capital ratios in order to assess compliance
with regulatory guidelines. At December 31, 1998, both the Company and the Bank
exceeded the minimum risk-based and leveraged capital ratio requirements. The
Company's and the Bank's total risk-based, Tier I risk-based and Tier I leverage
ratios are 18.89%, 18.23%, 12.56% and 16.23%, 15.58%, and 10.75%, respectively,
at December 31, 1998.
On January 19, 1999, the Company announced its intention to repurchase up to
49,363 shares, or 5%, of its outstanding common stock. The repurchase will be
made in open-market transactions subject to the availability of stock.
-11-
<PAGE>
RISK ELEMENTS
- -------------
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days 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.
December 31, June 30,
1998 1998
----------- ----------
Loans on a nonaccrual basis $ 434 $ 283
Loans past due 90 days or more and still accruing 252 169
----- -----
Total nonperforming loans 686 452
----- -----
Other real estate 57 76
Repossessed assets 6 13
----- -----
Total nonperforming assets $ 749 $ 541
===== =====
Nonperforming loans as a percentage of total loans .65% .46%
===== =====
Nonperforming assets as a percentage of total assets .61% .47%
===== =====
Allowance for loan losses to nonperforming loans 80.32% 105.68%
===== ======
Management monitors impaired loans on a continual basis. As of December 31,
1998, impaired loans had no material effect on the company's financial position
or results from operations.
During the six month period ended December 31, 1998, loans increased $7,827,000
and nonperforming loans increased $234,000 while the allowance for loan losses
increased $73,300 for the same period. The percentage of allowance for loan
losses to loans outstanding increased from .4% at June 30, 1998 to .5% at
December 31, 1998 in response to the overall growth in the loan portfolio.
Specifically, as previously discussed, the Bank's market area has generated
significant growth in the commercial real estate and commercial loan segments.
The level of funding for the provision is a reflection of the overall loan
demand and is not an indication of any decline in the quality of the loan
portfolio. 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 regularly performs an analysis to identify the inherent risks of loss
in its loan portfolio. This evaluation includes evaluations of concentrations of
credit, past loss experience, current economic conditions, amount and
composition of loan portfolio (including loans being specifically monitored by
management), estimated fair value of underlying collateral, loan commitments
outstanding, delinquencies, and other information available at such times.
-12-
<PAGE>
RISK ELEMENTS (CONTINUED)
- -------------------------
The Company monitors its allowance for loan losses and makes future adjustments
to the allowance through the provision for loan losses as economic conditions
dictate. Management continues to offer a wide variety of loan products coupled
with the recent change in mix of the loan portfolio i.e., growth in the
commercial real estate and commercial loan portfolios. Although the Company
maintains its allowance for loan losses at a level that it considers to be
adequate to provide for the inherent risk of loss in its portfolio, there can be
no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods due
to the higher degree of credit risk which might result from the change in the
mix of the loan portfolio.
-13-
<PAGE>
YEAR 2000 EVALUATION
- --------------------
Rapid and accurate data processing is essential to the Bank's operations. Many
computer programs can only distinguish the final two digits of the year entered
(a common programming practice in prior years) and are expected to read entries
for the year 2000 as the year 1900 or as zero and an incorrect attempt to
compute payment, interest, delinquency and other data. The Bank has been
evaluating both information technology (computer systems) and non-information
technology systems (e.g. vault timers, electronic door lock and elevator
controls). Based upon such evaluations; management has determined that the Bank
has year 2000 risk in three areas: (1) Bank's own computers, (2) Computers of
others used by the Bank's borrowers, and (3) Computers of others who provide the
Bank with data processing.
BANK'S OWN COMPUTERS. The Bank expects to spend approximately $25,000 through
June 30, 1999 to upgrade its computer system. The cost estimate for the upgrade
has been reduced from the $50,000 estimate made at June 30, 1998 as a result of
successful testing. The upgrade is expected to eliminate the year 2000 risk. The
Bank does not expect to have material costs to address this risk after September
30, 1999. At December 31, 1998, the Bank had expended approximately $3,200 of
the $25,000 total estimated cost for the upgrade. The Bank expects, though there
is no assurance, to be 2000 compliant in this risk area by March 31, 1999.
COMPUTERS OF OTHERS USED BY OUR BORROWERS The Bank has evaluated most of their
borrowers and does not believe the year 2000 problem should, on an aggregate
basis, impact their ability to make payments to the Bank. The Bank believes that
most of their residential borrowers are not dependent on their home computers
for income and that none of their commercial borrowers are so large that the
year 2000 problem would render them unable to collect revenue or rent and, in
turn, continue to make loan payments to the Bank. The Bank does not expect any
material costs to address this risk area and believes they are year 2000
compliant in this risk area.
COMPUTERS OF OTHERS WHO PROVIDE US WITH DATA PROCESSING This risk is primarily
focused on one third party service bureau that provides virtually all of the
Bank's data processing. Effective November of 1998, this service bureau has
advised the Bank that they are now year 2000 compliant.
CONTINGENCY PLAN. The Bank is continuing to monitor any changes to the service
bureau and any effects that might have on their status as year 2000 compliant.
If the service bureau fails, the Bank will attempt to locate an alternative
service bureau that is year 2000 compliant. If the Bank is unsuccessful, the
Bank will enter deposit balances and interest with its existing computer system.
If this labor-intensive approach is necessary, management and employees will
become much less efficient. However, the Bank believes that they would be able
to operate in this manner indefinitely, until their existing service bureau, or
their replacement, is able to again provide data processing services. If very
few institutional service bureaus were operating in the year 2000, the Bank's
replacement costs, assuming the Bank could negotiate an agreement, could be
material.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
NONE
Item 2 - Changes in securities
NONE
Item 3 - Defaults upon senior securities
NOT APPLICABLE
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 Rights Plan **
10 Employment Agreement between the Bank and Stephen M.
Gagliardi ***
10.1 1998 Stock Option Plan ****
10.2 Restricted Stock Plan and Trust Agreement ****
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 10K-SB (File No.
0-21885) filed September 23, 1997
**** Incorporated by reference to the proxy statement for the Special Meeting of
the Stockholders on January 20, 1998 and filed with the SEC on December
12, 1997.
(b) None
-15-
<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: February 4, 1999 By: /s/Stephen M. Gagliardi
-------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: February 4, 1999 By: /s/Stephen M. Magnone
-------------------------------------
Stephen M. Magnone
Vice President and CFO
-16-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,206
<INT-BEARING-DEPOSITS> 4,210
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,255
<INVESTMENTS-CARRYING> 2,580
<INVESTMENTS-MARKET> 2,603
<LOANS> 105,423
<ALLOWANCE> 551
<TOTAL-ASSETS> 121,944
<DEPOSITS> 97,037
<SHORT-TERM> 0
<LIABILITIES-OTHER> 610
<LONG-TERM> 9,000
0
0
<COMMON> 108
<OTHER-SE> 15,190
<TOTAL-LIABILITIES-AND-EQUITY> 121,944
<INTEREST-LOAN> 4,195
<INTEREST-INVEST> 290
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,506
<INTEREST-DEPOSIT> 2,167
<INTEREST-EXPENSE> 2,413
<INTEREST-INCOME-NET> 2,092
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,883
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 528
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 3.62
<LOANS-NON> 434
<LOANS-PAST> 252
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 478
<CHARGE-OFFS> 3
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 551
<ALLOWANCE-DOMESTIC> 551
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
