-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GY6Ld1aWqNmZ4CWNsuxXVWavUKKMpfGfBjQFwgT3LF8vNm1vTIdsqQy1/s/4V1KO cC8KkHJuJ/ue/72mP7bjQg== 0001018712-98-000036.txt : 19981116 0001018712-98-000036.hdr.sgml : 19981116 ACCESSION NUMBER: 0001018712-98-000036 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCE FINANCIAL BANCORP CENTRAL INDEX KEY: 0001023398 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 550753533 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-21885 FILM NUMBER: 98747911 BUSINESS ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 BUSINESS PHONE: 3047373531 MAIL ADDRESS: STREET 1: 1015 COMMERCE STREET CITY: WELLSBURG STATE: WV ZIP: 26070 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20552 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 other 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 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 October 31, 1998: 1,030,648 shares ADVANCE FINANCIAL BANCORP INDEX Page Number ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet (Unaudited) as of September 30, 1998 and June 30, 1998 3 Consolidated Statement of Income (Unaudited) for the Three Months ended September 30, 1998 and 1997 4 Consolidated Statement of Stockholders' Equity (Unaudited) as of September 30, 1998 5 Consolidated Statement of Cash Flows (Unaudited) for the Three Months ended September 30, 1998 and 1997 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Recent Developments 8-12 PART II - OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Default Upon Senior Securities 13 Item 4. Submissions of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 ADVANCE FINANCIAL BANCORP CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, June 30, 1998 1998 ------------- ------------- ASSETS Cash and Cash Equivalents: Cash and amounts due from banks $ 1,404,643 $ 1,334,831 Interest-bearing deposits with other institutions 8,448,613 7,749,362 ------------- ------------- Total cash and cash equivalents 9,853,256 9,084,193 Investment Securities: Securities held to maturity (fair value of $1,255,929 and $1,753,325) 1,249,168 1,745,667 Securities available for sale 223,755 264,020 ------------- ------------- Total investment securities 1,472,923 2,009,687 Mortgage-backed securities held to maturity (fair value of $360,422 and $364,031) 335,454 339,362 Loans held for sale 555,350 1,454,700 Loans receivable, (net of allowance for loan losses of $512,162 and $477,654) 98,891,582 95,590,197 Office properties and equipment, net 4,104,296 4,082,857 Federal Home Loan Bank Stock, at cost 622,200 662,200 Accrued interest receivable 602,735 617,980 Other assets 489,880 384,237 ------------- ------------- TOTAL ASSETS $116,927,676 $114,185,413 ============= ============= LIABILITIES Deposits $92,272,932 $88,551,543 Advances from Federal Home Loan Bank 9,000,000 10,000,000 Advances from borrowers for taxes and insurance 129,984 193,346 Accrued interest payable and other liabilities 458,300 512,402 ------------- ------------- TOTAL LIABILITIES 101,861,216 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 10,301,514 10,288,928 Retained Earnings - substantially restricted 7,184,325 7,130,056 Net unrealized loss on securities (37,697) (13,650) Unearned Employee Stock Ownership Plan shares (ESOP) (674,962) (715,158) Unearned Restricted Stock Plan (RSP) (814,302) (869,636) Treasury stock (53,802 shares, at cost) (1,000,863) (1,000,863) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 15,066,460 14,928,122 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $116,927,676 $ 114,185,413 ============= =============
See accompanying notes to the unaudited consolidated financial statements. 3 ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended September 30, 1998 1997 ------------ ------------ INTEREST AND DIVIDEND INCOME Loans $ 2,044,794 $ 1,813,763 Investment securities 27,305 131,431 Interest-bearing deposits with other institutions 120,083 61,609 Mortgage-backed securities 7,717 8,463 Dividends on Federal Home Loan Bank Stock 10,194 9,267 ------------ ------------ Total interest and dividend income 2,210,093 2,024,533 ------------ ------------ INTEREST EXPENSE Deposits 1,078,636 934,824 Advances from Federal Home Loan Bank 124,734 110,627 ------------ ------------ Total interest expense 1,203,370 1,045,451 ------------ ------------ NET INTEREST INCOME 1,006,723 979,082 Provision for loan losses 37,500 15,671 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 969,223 963,411 ------------ ------------ NONINTEREST INCOME Service charges on deposit accounts 86,431 57,743 Gain on sale of loans 33,225 20,257 Other income 64,300 17,330 ------------ ------------ Total noninterest income 183,956 95,330 ------------ ------------ NONINTEREST EXPENSE Compensation and employee benefits 393,219 306,144 Occupancy and equipment 139,000 85,339 Professional fees 37,621 62,640 Advertising 33,730 34,884 Data processing charges 85,518 74,004 Other expenses 234,385 148,929 ------------ ------------ Total noninterest expense 923,473 711,940 ------------ ------------ Income before income taxes 229,706 346,801 Income taxes 94,877 142,239 ------------ ------------ NET INCOME $ 134,829 $ 204,562 ============ ============ EARNINGS PER SHARE: Basic $ .15 $ .20 Diluted $ .15 $ N/A
See accompanying notes to the unaudited consolidated financial statements. 4
ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) Un- Un- Net allocated allocated Additional Unrealized Shares Shares Total Comp- Common Paid-In Retained Loss On Held by Held by Treasury Stockholders 'rehensive Stock Capital Earnings Securities ESOP RSP Stock Equity Income --------- ----------- ---------- --------- --------- --------- ----------- ----------- --------- Balance, June 30, 1998 $ 108,445 $10,288,928 $7,130,056 $ (13,650) $(715,158) $(869,636) $(1,000,863) $14,928,122 $ Net Income 134,829 134,829 134,829 Other comprehensive income: Unrealized gain on available for sale securities (24,047) (24,047) (24,047) Comprehensive income Accrued compensation expense for RSP 55,334 55,334 Release of earned ESOP shares 12,586 40,196 52,782 Cash dividends declared (80,560) (80,560) --------- ----------- ---------- --------- --------- --------- ----------- ----------- --------- Balance, Sept. 30, 1998 $ 108,445 $10,301,514 $7,184,325 $ (37,697) $(674,962) $(814,302) $(1,000,863) $15,066,460 $ 110,782 ========= =========== ========== ========= ========= ========= =========== =========== =========
See accompanying notes to the unaudited consolidated financial statements. 5 ADVANCE FINANCIAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net income $ 134,829 $ 204,562 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 72,690 32,596 Provision for loan losses 37,500 15,671 Amortization of unearned ESOP and RSP 108,116 31,410 Gain on sale of loans (33,225) (20,257) Origination of loans held for sale (1,839,749) (1,298,335) Proceeds from sale of loans 2,772,324 2,773,292 Decrease in other assets and liabilities (136,761) 157,364 ------------ ------------ Net cash provided by operating activities 1,115,724 1,896,303 ------------ ------------ INVESTING ACTIVITIES Proceeds from maturities of held to maturity securities 1,000,000 2,550,000 Purchases of held to maturity securities 500,000 (1,000,000) Principal collected on available for sale securities 3,610 2,975 Principal collected on mortgage - backed securities 3,911 1,960 Net increase in loans (3,338,885) (6,643,133) Purchases of office properties and equipment (97,413) (108,827) ------------ ------------ Net cash used for investing activities (2,928,777) (5,197,025) ------------ ------------ FINANCING ACTIVITIES Net increase (decrease)in deposits 3,721,389 778,424 Proceeds from advances from Federal Home Loan Bank (1,000,000) (8,803) Dividends paid (75,910) (79,815) Net change in advances for taxes and insurance (63,362) (67,809) ------------ ------------ Net cash provided by financing activities 2,582,117 621,997 ------------ ------------ Increase (decrease) in cash and cash equivalents 769,064 (2,678,725) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,084,193 6,792,420 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,853,257 $ 4,113,695 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest on deposits and borrowings $ 1,186,998 $ 1,034,636 Income taxes 155,000 136,000
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 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, 1999 or any other interim period. These statements should be read in conjunction with the consolidated statements as 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 In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. 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) for September 30, 1998 and 1997 will be used as the numerator. The following table sets forth a reconciliation of the denominator of the basic and diluted earnings per share computation. 1998 1997 ------- ------- Denominator: Denominator for basic earnings per share weighted-average shares 894,054 999,477 Effect of dilutive securities: Employee stock options - N/A ------- ------- Dilutive potential common shares 894,054 999,477 Denominator for diluted earnings per share-adjusted weighted-average shares 894,054 999,477 ------- ------- NOTE 3 - COMPREHENSIVE INCOME Effective July 1, 1998, the Bank adopted the Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." In adopting Statement No. 130, the Bank is required to present comprehensive income and its components in a full set of general purpose financial statements. The Bank has elected to report the effects of Statement No. 130 as part of the Statement of Changes in Stockholders' Equity. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998 - ------------------------------------------------------------------------- Total assets increased by approximately $2,742,000 to $116,928,000 at September 30, 1998 from $114,185,000 at June 30, 1998. Deposits, which increased by $3,721,000, were used to supplement the bank's growing loan demand of $2,402,000, as well as repay $1,000,000 of Advances from the Federal Home Loan Bank. Interest-bearing deposits with other institutions increased from $7,749,000 at June 30, 1998 to $8,449,000 at March 31, 1998. This increase of $700,000 or 9.0% represents called investment securities which have been allocated to meet outstanding loan commitments. Investment and mortgage-backed securities decreased $541,000 or 23.0% from $2,349,000 at June 30, 1998 to $1,808,000 at September 30, 1998. This decrease resulted primarily from limited activity within the U.S. Government securities held to maturity portfolio as only $500,000 of the $1.0 million in called securities were replaced with similar instruments. Due to the current interest rate environment, management is seeking higher returns by aggressively marketing its commercial and mortgage loan products. Net loan receivables increased $2,402,000 or 2.5% from $97,045,000 at June 30, 1998 to $99,447,000 at September 30, 1998. Loan demand was bolstered by the new Wintersville, Ohio branch, which resulted in an increase in non-residential mortgages of $1,100,000 and commercial loans of $589,000. Deposits increased $3,721,000 or 4.2% to $92,273,000 at September 30, 1998 from $88,552,000 at June 30, 1998. This increase primarily represents $2,712,000 in deposits accumulated via fifteen to twenty-five month certificate of deposit products yielding between 5.3% and 5.5% and $681,000 from a premium yielding money market deposit product. The competitiveness of the deposit products coupled with the opening of the new Wintersville, Ohio branch has led to an increase in the bank's customer base. Equity capital increased by $131,000 or .88% from $14,928,000 at June 30, 1998 to $15,066,000 at September 30, 1998. Net income of $135,000 and the recognition of shares in the Employee Stock Ownership Plan and Restricted Stock Plan of $108,000 were offset by the payment of cash dividends of $81,000 and a decline in the net unrealized loss on securities of $24,000. 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 COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED - ------------------------------------------------------------------ SEPTEMBER 30, 1998 AND 1997 Net income decreased $70,000 or 34.1% to $135,000 for the three months ended September 30, 1998 from $205,000 for the same period ended 1997 as noninterest expense increased by $212,000 while noninterest income rose by only $89,000. Net interest income increased $28,000 or 2.8%, to $1,007,000 for the three months ended September 30, 1998 compared to $979,000 for the same period ended 1997. This increase is almost entirely due to fluctuations in the average volume of the underlying principal balances as the interest rate spread remained stable at 3.2% for both three month periods ended September 30, 1998 and 1997. Interest income increased $186,000 or 9.2% primarily resulting from an increase in earnings on loans of $231,000 as the average principal balance increased $10,410,000 or 11.7% from $89,313,000 for the period ended 1997 to $99,723,000 for the period ended 1998. Offsetting this increase was a net decrease of $46,000 in earnings on investment securities and interest-bearing deposits with other institutions as average principal balances declined $913,000 or 8.2% from $11,143,000 for the period ended 1997 compared to $10,230,000 for the period ended 1998. Interest expense increased $158,000 or 15.1% for the three months ended September 30, 1998 compared to the same period ended 1997. This increase was primarily due to an increase in interest on deposits of $144,000 resulting from increases in average principal balances of certificates of deposit and interest-bearing demand deposits of $8,282,000 and $4,248,000, respectively, while being offset somewhat by a decline in the average principal balance of savings deposits of $592,000. As stated previously these increases stem from the new Wintersville branch. 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 $22,000 for the three months ended September 30, 1998 compared to the same period ended 1997. See "Risk Elements". Noninterest income increased $89,000 or 93.0% from $95,000 for the three months ended September 30, 1997 to $184,000 for September 30, 1998. Service charges on deposit accounts increased $29,000 from 1997 to 1998 due to an increase in volume from the new Wintersville, Ohio branch. The Bank sold fixed rate mortgage loans in the secondary market during the three month period which resulted in an increase on gains on the sale of loans of $13,000. Other income increased $47,000 or primarily due to the recognition of $32,000 of servicing rights income from loans sold while volume increases occurred in all other income type accounts. Noninterest expense increased $212,000 or 29.7% from $712,000 for the three months ended September 30, 1997 to $923,000 for the same period ended September 30, 1998. Compensation and employee benefits increased $87,000 or 28.4% due to the hiring of new employees and related benefits for the new branch office, as well as an additional increase of $18,000 attributable to the Employee Stock Ownership Plan. Professional fees decreased by $25,000 or 40.0% due to an decrease in services for compliance with regulatory requirements and employee benefit plans. Occupancy and equipment increased $54,000 or 62.9% due primarily to an increase in depreciation expense for equipment. Other expense increased $86,000 or 63.0% mainly due to recognition of $55,000 of amortization expense for the Restricted Stock Plan as well as nominal increases in all other expense type accounts. Data processing expenses increased $12,000 or 15.6% due to both volume of transactions and an increase in third party costs. Income tax expense decreased $47,000 or 33.3% from $142,000 for the three months ended September 30, 1997 compared to $95,000 for the same period ended 1998 due to a decline in the level of pre-tax income by 33.8%. 9 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. An additional source of funds includes a RepoPlus line of credit with the Federal Home Loan Bank ("FHLB") of Pittsburgh amounting to $10 million. In addition, as of September 30, 1998, the Bank had outstanding advances from the FHLB of $9,000,000. As of September 30, 1998 the Company has commitments to fund loans of approximately $13.4 million 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 September 30, 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 18.2%, 18.9%, 12.8%, and 15.7%, 16.3%, and 11.0% respectively at September 30, 1998. 10 RISK ELEMENT - ------------ The table below presents information concerning nonperforming assets including nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectibility of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower. September 30, June 30, 1998 1998 --------- --------- (dollars in thousands) Loans on nonaccrual basis $ 334 $ 283 Loans past due 90 days or more and still accruing 183 169 --------- --------- Total nonperforming loans 517 452 --------- --------- Other real estate 57 76 Repossessed assets 6 13 -------- -------- Total nonperforming assets $ 580 $ 541 ======== ======== Nonperforming loans as a percent of total loans .52% 0.46% ====== ====== Nonperforming assets as a percent of total assets .49% 0.47% ====== ====== Allowance for loan losses to nonperforming loans 99.03% 88.19% ====== ====== Management monitors impaired loans on a continual basis. As of September 30, 1998, impaired loans had no material effect on the company's financial position or results of operations. During the three month period ended September 30, 1998, loans increased $2,368,000 and nonperforming loans increased $65,000 while the allowance for loan losses increased $35,000 for the same period. The percentage of allowance for loan losses to loans outstanding increased from .4% at June 30, 1998 to .5% at September 30, 1998 in response to the overall growth in the loan portfolio. Specifically, 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 believes the level of the allowance for loan losses at September 30, 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. 11 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) are expected to read entries for the year 2000 as the year 1900 or as zero and incorrectly 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 $50,000 through June 30, 1999 to upgrade its computer system. This 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 June 30, 1998, none of the estimated $50,000 had been expensed. The Bank expects, though there is no assurance, to be year 2000 compliant in this risk area by December 31, 1998. 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 the 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. This service bureau is not year 2000 compliant but had advised the Bank that it expects to be compliant before the year 2000. If this problem is not solved before the year 2000, the bank would likely experience significant delays, mistakes or failures. These delays, mistakes or failures could have a significant impact on our financial condition and results of operations. CONTINGENCY PLAN. The Bank is monitoring their service bureau to evaluate whether its data processing system will fail and is being provided with periodic updates on the status of testing and upgrades being made by the service bureau. If the Bank 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 financial institution service bureaus were operating in the year 2000, the bank's replacement costs, assuming the Bank could negotiate an agreement, could be material. 12 PART II - OTHER INFORMATION Item 1 - Legal proceedings NONE Item 2 - Changes in securities NONE Item 3 - Defaults upon senior securities N/A Item 4 - Submission of matters to a vote of security holders None Item 5 - Other information NONE Item 6 - Exhibits and reports on Form 8-K (a) List of Exhibits: 3(i) Certificate of Incorporation of Advance Financial Bancorp* 3(ii) Bylaws of Advance Financial Bancorp* 4(i) Specimen Stock Certificate* 4(ii) Shareholders Rights Plan** 10 Employment Agreement between the Bank and Stephen M. Gagliardi*** 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. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized. Advance Financial Bancorp Date: November , 1998 By:\s\ Stephen M. Gagliardi -------------------------------------- Stephen M. Gagliardi President and Chief Executive Officer Date: November , 1998 By:\s\ Stephen M. Magnone -------------------------------------- Stephen M. Magnone Vice President and CFO 14 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS JUN-30-1999 SEP-30-1998 1,405 8,449 0 0 224 1,585 1,616 99,959 512 116,928 92,273 0 595 9,000 0 0 108 14,951 116,928 2,045 155 10 2,210 1,079 1,203 1,007 37 0 923 230 0 0 0 135 .15 .15 3.65 334 183 0 0 478 3 0 512 512 0 0
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