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
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCAHANGE
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 April 23, 1999: 981,285
Advance Financial Bancorp
Index
Page
Number
------
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited) as of
March 31, 1999 and June 30, 1998 3
Consolidated Statement of Income (Unaudited)
For the Nine Months ended March 31, 1999 and 1998 4
Consolidated Statement of Income (Unaudited)
For the Three Months ended March 31, 1999 and 1998 5
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months ended March 31, 1999 and 1998 6
Notes to the Unaudited Consolidated Financial Statements 7--8
Item 2 - Management's Discussion and Analysis 9--16
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Default Upon Senior Securities 17
Item 4 - Submissions of Matters to a vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
ADVANCE FINANCIAL BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, June 30,
1999 1998
------------- -------------
Assets
Cash and Cash Equivalents:
Cash and amounts due from banks $ 1,178,173 $ 1,334,831
Interest-bearing deposits with other institutions 4,951,114 7,749,362
------------- -------------
Total cash and cash equivalents 6,129,287 9,084,193
Investment Securities:
Securities held to maturity (fair value of $991,138 and $1,753,325) 999,740 1,745,667
Securities available for sale 2,076,109 264,020
------------- -------------
Total investment securities 3,075,849 2,009,687
Mortgage-backed Securites:
Securities held to maturity (fair value $1,140,117 and $379,084) 1,122,254 339,362
Securities available for sale 1,946,699 --
------------- -------------
Total mortgage-backed securities 3,068,953 339,362
Loans held for sale 994,500 1,454,700
Loans receivable, (net of allowance for loan losses
of $575,622 and $477,654 ) 105,645,149 95,590,197
Office properties and equipment, net 4,011,593 4,082,857
Federal Home Loan Bank Stock, at cost 622,200 622,200
Accrued interest receivable 677,428 617,980
Other assets 425,583 384,237
------------- -------------
TOTAL ASSETS $ 124,650,542 $ 114,185,413
============= =============
Liabilities:
Deposits $ 100,251,497 $ 88,551,543
Advances from Federal Home Loan Bank 9,000,000 10,000,000
Advances from borrowers for taxes and insurance 141,319 193,346
Accrued interest payable and other liabilities 425,505 512,402
------------- -------------
TOTAL LIABILITIES 109,818,321 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 10,325,461 10,288,928
Retained earnings - substantially restricted 7,434,924 7,130,056
Unearned Employee Stock Ownership Plan shares (ESOP) (630,956) (715,158)
Unearned Restricted Stock Plan shares (RSP) (721,886) (869,636)
Treasury Stock (103,165 and 53,802 shares, at cost) (1,626,890) (1,000,863)
Accumulated Other Comprehensive Income (56,877) (13,650)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 14,832,221 14,928,122
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 124,650,542 $ 114,185,413
============= =============
See accompanying notes to the unaudited consolidated financial statements.
-3-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED
MARCH 31
1999 1998
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $6,335,060 $5,751,640
Investment securities 119,705 271,825
Interest-bearing deposits with other institutions 259,931 195,562
Mortgage-backed securities 55,565 25,111
Dividends on Federal Home Loan Bank Stock 30,360 27,902
---------- ----------
Total interest and dividend income 6,800,621 6,272,040
---------- ----------
INTEREST EXPENSE
Deposits 3,215,903 2,808,676
Advances from Federal Home Loan Bank 365,672 375,547
---------- ----------
Total interest expense 3,581,575 3,184,223
---------- ----------
NET INTEREST INCOME 3,219,046 3,087,817
Provision for loan losses 112,500 59,865
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,106,546 3,027,952
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 277,191 195,664
Gain on sale of loans 86,567 73,220
Gain on sale of investments 13,745 --
Other income 205,219 80,560
---------- ----------
Total noninterest income 582,722 349,444
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,306,900 1,001,706
Occupancy and equipment 441,627 274,127
Professional fees 107,998 145,875
Advertising 98,663 89,253
Data processing charges 257,060 221,491
Other expenses 612,422 525,907
---------- ----------
Total noninterest expenses 2,824,670 2,258,359
---------- ----------
Income before income taxes 864,598 1,119,037
Income taxes 335,592 426,319
---------- ----------
NET INCOME $ 529,006 $ 692,718
========== ==========
EARNINGS PER SHARE
Basic 0.56 0.69
Diluted 0.56 0.69
See accompanying notes to the unaudited consolidated financial statements.
-4-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
1999 1998
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $2,139,788 $1,999,281
Investment securities 56,170 50,870
Interest-bearing deposits with other institutions 50,190 78,675
Mortgage-backed securities 38,846 8,228
Dividends on Federal Home Loan Bank Stock 9,972 9,362
---------- ----------
Total interest and dividend income 2,294,966 2,146,416
---------- ----------
INTEREST EXPENSE
Deposits 1,049,053 927,376
Advances from Federal Home Loan Bank 119,145 140,511
---------- ----------
Total interest expense 1,168,198 1,067,887
---------- ----------
NET INTEREST INCOME 1,126,768 1,078,529
Provision for loan losses 37,500 13,500
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,089,268 1,065,029
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 91,106 70,465
Gain on sale of loans 16,332 33,534
Gain on sale of investments 13,745 --
Other income 67,906 31,967
---------- ----------
Total noninterest income 189,089 135,966
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 447,863 358,866
Occupancy and equipment 148,419 92,772
Professional fees 22,636 30,819
Advertising 34,665 30,045
Data processing charges 84,883 76,006
Other expenses 203,053 160,451
---------- ----------
Total noninterest expenses 941,519 748,959
---------- ----------
Income before income taxes 336,838 452,036
Income taxes 128,140 179,538
---------- ----------
NET INCOME $ 208,698 $ 272,498
========== ==========
EARNINGS PER SHARE
Basic $ .23 0.28
Diluted $ .23 0.28
See accompanying notes to the unaudited consolidated financial statements.
-5-
ADVANCE FINANCIAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31
1999 1998
------------ ------------
OPERATING ACTIVITIES
Net Income $ 529,006 $ 692,718
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion, net 158,545 126,224
Provision for loan losses 112,500 59,865
Amortization of unearned ESOP and RSP 268,485 141,950
Gain on sale of investments (13,745) --
Gain on sale of loans (86,567) (73,220)
Origination of loans held for sale (8,302,946) (5,202,939)
Proceeds from the sale of loans 8,849,713 5,359,855
(Increase) decrease in other assets and liabilities (87,186) 98,279
------------ ------------
Net cash (used in) provided by operating activities 1,427,805 1,202,732
------------ ------------
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases (2,987,988) (1,000,000)
Maturities and repayments 3,737,988 6,600,000
Investment securities available for sale:
Purchases (2,000,000) (126,250)
Maturities and repayments 146,512 8,725
Mortgage-backed securities held to maturity:
Purchases (1,006,296) --
Maturities and repayments 225,855 14,953
Mortgage-backed securities available for sale:
Purchases (2,034,336) --
Maturities and repayments 73,959 --
Net increase in loans (10,167,452) (8,981,945)
Purchases of premises and equipment (168,715) (1,024,262)
------------ ------------
Net cash used in investing activities (14,180,473) (4,508,779)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 11,699,954 2,541,500
(Repayments) Proceeds from advances from Federal Home Loan Bank (1,000,000) 3,973,157
Net change in advances for taxes and insurance (52,027) (51,399)
Purchase of treasury stock (626,027) (216,882)
Purchase of RSP stock -- (893,813)
Cash dividends paid (224,138) (239,981)
------------ ------------
Net cash provided by financing activities 9,797,762 5,112,582
------------ ------------
(Decrease) increase in cash and cash equivalents (2,954,906) 1,806,535
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,084,193 6,792,420
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,129,287 $ 8,598,955
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 3,578,452 $ 3,177,733
Income taxes 250,476 230,118
See accompanying notes to the unaudited consolidated financial statements.
-6-
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
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.
Nine Months Ended March 31
1999 1998
--------- ---------
Denominator:
Denominator for basic earnings per share
Weighted-average shares 951,949 1,003,628
Effect of dilutive securities:
Employee stock options -- 1,158
--------- ---------
Dilutive potential common shares 951,949 1,004,786
Denominator;
Denominator for dilutive earnings per share adjusted
Weighted-average shares 951,949 1,004,786
========= =========
-7-
NOTE 2 - EARNINGS PER SHARE (CONTINUED)
Three Months Ended March 31
1999 1998
------- -------
Denominator:
Denominator for basic earnings per share
Weighted-average shares 982,082
921,500
Effect of dilutive securities:
Employee stock options -- 1,158
------- -------
Dilutive potential common shares 921,500 983,240
Denominator;
Denominator for dilutive earnings per share adjusted
Weighted-average shares 921,500 983,240
======= =======
NOTE 3 - COMPREHENSIVE INCOME
Effective July 1, 1998, the Bank adopted the Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." For the nine months ended
March 31, 1999, comprehensive income totaled $485,779.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND JUNE 30, 1998
- ---------------------------------------------------------------------
Total assets increased by approximately $10,465,000 to $124,650,542 at March 31,
1999 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 $9 million in loan and deposit
growth during the nine-month period ended March 31, 1999.
Interest-bearing deposits with other financial institutions decreased by
$2,798,248 to $4,951,114 at March 31, 1999 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 Federal Home Loan Bank
("FHLB") Bonds and held to maturity adjustable rate mortgaged-backed securities.
Investment securities available for sale increased by $1,812,089 to $2,076,109
at March 31, 1999 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%. 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 $745,927 to $999,740 at
March 31, 1999 from $1,745,667 at June 30, 1998. This decrease is the result of
four $500,000 and one $250,000 bonds being called during the nine-month period.
Management replaced all but two of these types of bonds with similar
instruments.
Mortgaged-backed securities held to maturity increased by $782,892 to $1,122,254
at March 31, 1999 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.
As part of the Company's asset/liability management to control interest rate
risk, in December 1998, the Company began to purchase fixed rate mortgage-backed
securities and classify them as available for sale. At March 31, 1999, the
balance of mortgage-backed securities available for sale was $1,946,699. This
included four separate instruments with rates ranging from 6.25% to 7%. Three of
the instruments have 15 year maturites, while the other matures in 30 years.
Net loans receivable increased by $9,594,752 to $106,639,649 at March 31, 1999
from $97,044,897 at June 30, 1998. The new Wintersville, Ohio branch and the
growth of the Bank's commercial lending have bolstered loan demand. The primary
result is an increase in non-residential mortgages of approximately $6,270,000
and commercial loans of approximately $2,900,000. See "Risk Elements".
Deposits increased by $11,699,954 to $100,251,497 at March 31, 1999 from
$88,551,543 at June 30, 1998. This increase is represented by an increase in
regular savings deposits, demand deposits and fifteen to twenty-five month
certificate of deposit products. Regular savings deposits have increased
approximately $789,000 over the nine-month period and a net increase over the
past three month period of approximately $868,000. Demand deposits increased
approximately $5,070,000 which is comprised of an increase in the "Money Market
over $10,000" type of $3,395,000, an increase in non-interest bearing demand of
$1,037,000, and an increase in commercial checking of $700,000. Certificates of
Deposits yielding 5% to 5.5% with maturities ranging from nine months to
twenty-five months have increased $6,825,000 of which $1,000,000 has come from
renewals of various types of short and long term 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.
-9-
COMPARISON OF FINANCIAL CONDITION AT MARCH 31,1999 AND JUNE 30,1998 (CON'T)
- ---------------------------------------------------------------------------
Equity capital decreased by approximately, $96,000 or .6% from $14,928,122 at
June 30, 1998 to $14,832,221 at March 31, 1999. Net income of $529,006 and the
recognition of shares in the Employee Stock Ownership Plan and Restricted Stock
Plan of $268,485 were offset by the payment of cash dividends of $224,000, a
decline in net unrealized loss on securities of $43,000 and the purchase of
49,363 shares of treasury stock. The total cost of the treasury stock purchase
was $626,027 for an average of $12.68 per share. 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.
-10-
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
Net interest income increased $48,000 or 4.4% to $1,126,770 for the three months
ended March 31, 1999, Compared to $1,078,530 for the three months ended March
31, 1998. 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 $148,550 or 6.9% primarily from an
increase in earnings on loans of $140,500 or 7.0 %, as the average principle
balance increased $10,614,000 or 11.2% from $94,984,000 for the period ended
1998 to $105,598,000 for the period ended 1999. Interest income on investments
and interest-bearing deposits with other financial institutions increased
approximately $8,000, as average principal balances increased $1,860,000 or 19%
from $9,737,198 for the period ended 1998 compared to $11,597,689 for the period
ended 1999.
Net interest income increased $132,000 or 4.3% to $3,219,000 for the nine months
ended March 31, 1999, compared to $3,087,000 for the nine months ended March 31,
1998. 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 $528,600 or 8.4% primarily from
earnings on loans which increased $583,500 or 10.1% as the average principle
balance increased $10,590,000 or 11.5% from $91,931,000 for the period ended
1998 to $102,521,000 for the period ended 1999. Offsetting this increase was a
decrease in earnings on investments and interest-bearing deposits with other
financial institutions of $54,800 as average principal balances remained
consistent at approximately $10,830,000 for both nine month periods.
Interest expense increased $100,300 or 9.4% for the three months ended March 31,
1999 compared to the same period ended 1998. This increase was primarily due to
an increase in interest on deposits of $121,700 or 13.1 % resulting from an
increase in average deposits of $16,135,000 or 20.4% from $79,178,000 for the
period ended 1998 compared to $95,313,000 for the period ended 1999. Offsetting
this increase in interest expense on deposits was a decrease in interest expense
on advances from the FHLB of $21,000 or 15.2% as the average balance on advances
decreased $2,391,800 from $11,391,831 for the period ended 1998 compared to
$9,000,000 for the period ended 1999.
Interest expense increased $397,400 or 12.5% for the nine months ended March 31,
1999 compared to the same period ended 1998. This increase was primarily due to
an increase in interest on deposits of $407,200 or 14.5 % resulting from an
increase in average deposits of $13,055,000 or 16.5% for the period ended 1999
compared to the same period ended 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 of loan
losses increased by $24,000 and $52,635, respectively, for the three and nine
months ended March 31, 1999 compared to the same period 1998. See "Risk
Elements".
Noninterest income increased $53,100 or 39.1% to $189,089 for the three months
ended March 31, 1999 from $135,966 for the same period ended March 31, 1998.
This increase is primarily due to gains on the sale of fixed rate loans and
related servicing rights of $11,100, a gain on sale of an equity investment of
$13,745 and an increase in service charges on deposits of $20,600.
-11-
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 1999 and 1998 (CONTINUED)
Noninterest income increased $233,300 or 68% from $349,444 for the nine months
ended March 31, 1998 to $582,722 for the same period ended 1999. Service charges
on deposit accounts increased $81,500 from 1998 to 1999 primarily due to an
increase in volume from the Wintersville branch. The bank sold fixed rate
mortgages in the secondary market during the nine-month period, which resulted
in an increase in gains on the sale of loans and related servicing rights of
$107,500.
Noninterest expense increased $192,560 or 25.7% to $941,500 for the three months
ended March 31, 1999 from $749,000 for the same 1998 period. Noninterest expense
increased $566,300 or 25.1% to $2,824,700 for the nine months ended March 31,
1999 from $2,258,400 for the same 1998 period. For the three and nine month
periods of 1999, compensation and employee benefits increased $89,000 and
$305,000, 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. Occupancy and equipment increased $56,000
and $167,500, respectively, due primarily to an increase in depreciation and
occupancy expenses of the new branch facility. For the nine months ended
professional fees decreased $37,900 due to a decrease in services for compliance
with regulatory requirements and employee benefit plans. Data processing
expenses increased for the three and nine months ended 1999 by $9,000 and
$36,000, respectively, due primarily to the increase in transaction volumes as a
result of the Wintersville branch. Other expenses increased $42,600 and $86,500
for the three and nine months ended 1999, respectively, due to benefit costs in
connection with the Company's directors, as well as, operational costs due to
additional transaction volume.
-12-
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 a RepoPlus line of credit with the
Federal Home Loan Bank of Pittsburgh amounting to $10 million. The Bank
currently has no outstanding amount due on the RepoPlus line of credit.
The Bank, as of March 31, 1999, 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
effective interest rates approximating 5.45% will mature in 2002.
As of March 31, 1999 the Bank has commitments to fund loans of approximately
$2,573,000 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 March 31, 1999, 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 18.05%, 17.37%, 11.89% and 16.04%, 15.38%, and 10.66%, respectively,
at March 31, 1999.
-13-
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.
March 31, June 30,
1999 1998
------ ------
Loans on a nonaccrual basis $ 693 $ 283
Loans past due 90 days or more and still accruing 254 169
------ ------
Total nonperforming loans 947 452
------ ------
Other real estate 58 76
Repossessed assets 26 13
------ ------
Total nonperforming assets $1,031 $ 541
------ ------
Nonperforming loans as a percentage of total loans 0.89% 0.46%
====== ======
Nonperforming assets as a percentage of total assets 0.83% 0.47%
====== ======
Allowance for loan losses to nonperforming loans 60.78% 105.68%
====== ======
Management monitors impaired loans on a continual basis. As of March 1999,
impaired loans had no material effect on the company's financial position or
results from operations.
During the nine month period ended March 31, 1999, loans increased approximately
$9,595,000 and nonperforming loans increased $495,000 while the allowance for
loan losses increased $98,000 for the same period. Specifically, as discussed
herein, 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. Nonaccrual loans
consist of $204,000 in one to four family residential mortgages, $368,000 in
commercial real estate and $96,000 in commercial loans. 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.
-14-
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.
Changing economic conditions and changing loan demand of the Company's lending
area has altered the mix of the loan portfolio. The following is a breakdown of
the loan portfolio mix at March 31, 1999 and June 30, 1998:
March 31, June 30,
1999 1998
------------ ------------
Mortgage loans:
1-4 family $ 57,839,406 $ 57,904,667
Multi-family 1,936,194 1,786,427
Non-residential 21,490,057 15,581,130
Construction 3,164,678 5,017,202
------------ ------------
84,430,335 80,289,426
------------ ------------
Consumer Loans:
Home Improvement 1,163,531 1,000,801
Automobile 8,283,789 7,659,017
Share loans 1,373,438 1,296,684
Other 2,290,919 2,389,041
------------ ------------
13,111,677 12,345,543
------------ ------------
------------ ------------
Commercial Loans 9,575,465 6,675,780
------------ ------------
Less:
Loans in process 788,891 3,061,801
Net deferred loan fees 107,815 181,097
Allowance for loan losses 575,622 477,654
------------ ------------
1,472,328 3,720,552
------------ ------------
Total $105,645,149 $ 95,590,197
============ ============
-15-
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.
Successful and timely completion of the year 2000 project is based upon
management's best estimates derived from various assumptions of future events
which are inherently uncertain. These events include readiness of all vendors,
suppliers and customers. No assurance can be given that the year 2000 plan will
be successfully completed by the year 2000 in which case the Company could incur
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial statements of the
Company.
BANK'S OWN COMPUTERS. As of March 31, 1999, the Bank has upgraded its computer
system to comply with the year 2000 risk. Such costs expended were not material
to the financial statements of the Company.
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. The Bank's written contingency plan is currently in its final phases
of completion. The Bank believes that the plan will be completed, validated and
approved by June 30, 1999.
-16-
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)
(b) None
- -----------------
* 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.
-17-
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 6, 1999 By: /s/Stephen M. Gagliardi
----------------------------------------
Stephen M. Gagliardi
President and Chief Executive Officer
Date: May 6, 1999 By: /s/Stephen M. Magnone
----------------------------------------
Stephen M. Magnone
Vice President and CFO
-18-