Filed Pursuant to Rule 424(b)(3)
Registration No. 333-148219
PROSPECTUS
WILLIAM PENN BANCORP, INC.
(Proposed Holding Company for William Penn Bank, FSB)
Up to 1,381,511 Shares of Common Stock (Subject to Increase to up to 1,586,655
Shares)
William Penn Bancorp, Inc. is the proposed federally chartered mid-tier
holding company for William Penn Bank, FSB. In connection with the mutual
holding company reorganization of William Penn Bank, FSB, William Penn Bancorp,
Inc. is offering for sale up to 1,381,511 shares of its common stock,
representing approximately 28% of its common stock to be outstanding upon
completion of the offering. In addition, William Penn Bancorp, Inc. intends to
contribute to the newly established William Penn Bank Community Foundation
shares of its common stock equal to approximately 2% of its total outstanding
common stock upon completion of the offering. The remaining 70% of the common
stock outstanding upon completion of this offering will be held by William Penn,
MHC, the mutual holding company to be formed in connection with the
reorganization. Upon completion of the offering, William Penn Bancorp, Inc. will
have between 3,639,063 and 4,923,437 total shares outstanding, including the
shares contributed to the foundation and the shares held by William Penn, MHC.
The total number of shares of William Penn Bancorp, Inc. common stock
outstanding upon completion of the offering is subject to an independent
appraisal that must be updated before the offering can be completed and may be
increased to an adjusted maximum of 5,661,953 shares without resoliciting
subscribers. The shares sold in the offering would, in that case, total
1,586,655 shares.
The offering is expected to expire at 12:00 noon, Eastern Time, on
March 17, 2008. We may extend this expiration date without notice to you until
May 1, 2008, unless the Office of Thrift Supervision approves a later date.
Keefe, Bruyette & Woods, Inc. will use its best efforts to assist us in
our selling efforts, but is not required to purchase any of the common stock
that is being offered for sale. Purchasers will not pay a commission to purchase
shares of common stock in the offering. All shares being sold are being offered
at a price of $10.00 per share. The offering will not be completed if we do not
sell a minimum of 1,024,740 shares. We expect that our common stock will trade
on the OTC Bulletin Board.
The minimum purchase is 25 shares. Once submitted, orders are
irrevocable unless the offering is terminated or extended beyond May 1, 2008. If
the offering is extended beyond May 1, 2008, subscribers will have the right to
modify or rescind their purchase orders. We will hold funds received with orders
in a deposit account that we have established at William Penn Bank, FSB for that
sole purpose. We may decide during the offering also to hold funds received with
orders in a deposit account at another insured depository institution. In either
case, we will pay interest on all funds received at a rate equal to William Penn
Bank, FSB's regular passbook savings rate. If we do terminate the offering, we
will promptly return your funds with interest. If we extend the offering beyond
May 1, 2008, you will be given an opportunity to confirm, modify or rescind your
order, and if an affirmative response is not received, we will promptly return
your funds with interest.
This investment involves a degree of risk,
including the possible loss of principal.
Please read Risk Factors beginning on page 12.
===================================================================================================================
OFFERING SUMMARY
Price Per Share: $10.00
Maximum,
Minimum Midpoint Maximum As adjusted
----------------- ----------------- ----------------- -----------------
Number of shares 1,024,740 1,203,125 1,381,511 1,586,655
Gross proceeds $ 10,247,400 $ 12,031,250 $ 13,815,110 $ 15,866,550
Estimated offering expenses $ 613,390 $ 629,688 $ 645,985 $ 664,727
Estimated net proceeds $ 9,634,010 $ 11,401,562 $ 13,169,125 $ 15,201,823
Estimated net proceeds per share $ 9.40 $ 9.48 $ 9.53 $ 9.58
See Plan of Distribution and Marketing Arrangements on page 103 for a
description of the underwriting commission paid in connection with this
offering.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
None of the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
For assistance on how to subscribe, please contact the stock
information center at (215) 945-0124.
Keefe, Bruyette & Woods
The date of this prospectus is February 11, 2008
TABLE OF CONTENTS
Page
-------
Summary 1
Risk Factors 12
A Warning About Forward-Looking Statements 18
Use of Proceeds 20
Our Policy Regarding Dividends 20
Market for the Stock 21
Capitalization 22
Pro Forma Data 23
Comparison of Valuation and Pro Forma Information With and Without the Foundation 31
Historical and Pro Forma Capital Compliance 32
Recent Developments 33
Selected Financial and Other Data 37
Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Business of William Penn, MHC 53
Business of William Penn Bancorp, Inc. 53
Business of William Penn Bank, FSB 54
Regulation 75
Taxation 83
Management 84
The Reorganization and Offering 90
Proposed Purchases By Directors and Management 110
William Penn Bank Community Foundation 111
Restrictions on Acquisition of William Penn Bancorp 114
Description of Capital Stock 117
Transfer Agent and Registrar 118
Legal and Tax Opinions 118
Experts 118
Registration Requirements 118
Where You Can Find Additional Information 118
Index to Consolidated Financial Statements F-1
[Map page]
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SUMMARY
This summary contains an overview of the key aspects of the offering.
To understand this offering fully, you should read this entire document
carefully, including the consolidated financial statements and the notes to the
consolidated financial statements beginning on page F-1 of this document.
Throughout this document, the terms "we", "us" or "our" refer to William Penn
Bancorp, Inc. or William Penn Bank, FSB, or both, as the context indicates. We
also refer to William Penn Bank, FSB as "the Bank."
William Penn Bancorp, Inc.
William Penn Bancorp, Inc. is being formed to serve as a holding
company for William Penn Bank, FSB, a federally-chartered savings bank
originally established in 1870. William Penn Bancorp's principal executive
offices will be located at the administrative offices of the Bank at 8150 Route
13, Levittown, Pennsylvania 19057. The phone number at that address is (215)
945-1200.
The Reorganization and Offering
This chart shows our current corporate structure (before this
offering).
-----------------------------------------
Members
-----------------------------------------
100% |
-----------------------------------------
William Penn Bank, FSB
-----------------------------------------
This chart shows our new corporate structure (after this offering).
William Penn, MHC will hold 70% of the outstanding stock of William Penn
Bancorp, approximately 28% will be held by public stockholders and approximately
2% will be held by the charitable foundation.
- -----------------------------------------
Members
- -----------------------------------------
100% |
- ----------------------------------------- ------------------------------- ----------------------------------
William Penn, MHC Public Stockholders William Penn Bank
Community Foundation
- ----------------------------------------- ------------------------------- ----------------------------------
70% | approximately 28% | approximately 2% |
--------------------------------------------------------------------------------------------------
William Penn Bancorp, Inc.
--------------------------------------------------------------------------------------------------
100% |
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William Penn Bank, FSB
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Purpose of the Offering
The primary reason for our decision to sell stock is to support our
future growth plans. The proceeds of the offering will increase our capital,
allowing us to seek to implement a growth strategy while maintaining a solid
capital position. Our growth strategy calls for increasing and diversifying our
loans and deposits and expanding our branch network. We intend to increase our
origination of multi-family residential real estate loans and nonresidential
commercial real estate loans. William Penn Bank currently operates three offices
located in Bucks County, Pennsylvania. We currently plan to open up to three new
offices within approximately the next five years.
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Selling stock will also mean that William Penn Bank's depositors,
employees, management and directors will have an opportunity to acquire an
equity ownership interest in us and thereby obtain an economic interest in our
future operations. In addition, we intend to utilize stock benefit plans as a
means of attracting and retaining qualified and experienced officers, directors
and employees. In connection with the offering, we will establish an employee
stock ownership plan under which all eligible full time employees of the Bank
will receive shares of William Penn Bancorp common stock.
Use of Proceeds
William Penn Bank will receive a minimum of 50% of the net proceeds
from the offering as a capital contribution and will use those proceeds for
general business purposes. The offering proceeds may in part be used to finance
the opening of new branches.
We will lend a portion of the offering proceeds to the William Penn
Bank, FSB Employee Stock Ownership Plan to enable it to buy up to 8% of the
aggregate shares sold in the offering plus shares contributed to the foundation.
The balance of the offering proceeds will be retained by William Penn Bancorp
and deposited with or loaned to William Penn Bank, providing the Bank with funds
to support the Bank's lending activities. William Penn Bancorp will use the
offering proceeds it retains for general corporate purposes, which may include
repurchasing shares of its common stock and paying cash dividends.
Conduct of the Offering
Rights to subscribe for shares of William Penn Bancorp common stock
have the following order of priority:
o Priority 1 - depositors of William Penn Bank at the close of business on
September 30, 2006 with deposits of at least $50.00.
o Priority 2 - the William Penn Bank, FSB Employee Stock Ownership Plan.
o Priority 3 - depositors of William Penn Bank at the close of business on
December 31, 2007 with deposits of at least $50.00.
o Priority 4 - all other depositors of William Penn Bank as of January 31,
2008 and borrowers of William Penn Bank as of June 1, 2005 whose borrowings
remained outstanding as of January 31, 2008.
Please note: Subscription rights are not transferable, and persons with
subscription rights may not subscribe for shares for the benefit of any other
person. If you violate this prohibition, you may lose your rights to purchase
shares and may face criminal prosecution and/or other sanctions.
We are offering for sale a minimum of 1,024,740 shares and a maximum of
1,381,511 shares. The independent appraisal that we used to set the number of
shares being offered must be updated before we can complete the stock offering,
and this could result in the number of shares being increased to up to an
adjusted maximum of 1,586,655 shares. We may sell that number of shares without
any notice to you. If the updated independent appraisal is higher than the
adjusted maximum, we will be required to return all subscribers' funds to them
(with interest) and conduct a resolicitation of all orders received. Subscribers
would in that case be permitted to modify, rescind or resubmit their orders
prior to the expiration of the resolicitation offering. It is possible that we
would increase the purchase limitations in such a situation. Any change in the
estimated valuation range would first need to be approved by the Office of
Thrift Supervision.
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If we sell between the maximum and the adjusted maximum number of
shares, the William Penn Bank, FSB Employee Stock Ownership Plan will have the
first priority right to purchase the additional shares to the extent that its
subscription has not previously been filled. Any shares remaining will be
allocated in the order of the priorities described above. See The Reorganization
and Offering - Subscription Offering for a description of the allocation
procedure.
We may offer shares not sold in the subscription offering to the
general public in a community offering. In the community offering, we will give
a preference first to residents of Bucks County, Pennsylvania, second to other
residents of Pennsylvania, and third to the general public. This part of the
offering may commence concurrently with the subscription offering or any time
thereafter and may terminate at any time without notice but no later than May 1,
2008, unless extended.
Shares not sold in the subscription or community offering may be
offered for sale in a syndicated community offering, which would be an offering
to the general public on a best efforts basis managed by Keefe, Bruyette &
Woods, Inc. This part of the offering may terminate at any time without notice
but no later than May 1, 2008, unless extended.
We have the right to reject, in whole or in part, any orders for stock
received in the community offering and syndicated community offering.
Deadline for Ordering Stock
The subscription offering will expire at 12:00 noon, Eastern time, on
March 17, 2008. We may extend this expiration date without notice to you for up
to 45 days, until May 1, 2008. Once submitted, your order is irrevocable unless
the offering is extended beyond May 1, 2008. We may request permission from the
Office of Thrift Supervision to extend the offering beyond May 1, 2008, but in
no event may the offering be extended beyond March 25, 2010. If the offering is
extended beyond May 1, 2008, we will notify each subscriber, and subscribers
will have the right to confirm, modify or rescind their subscriptions. If an
affirmative response is not received, a subscriber's subscription will be
canceled and funds will be returned promptly with interest.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned promptly with interest.
Purchase Limitations
Limitations on the purchase of stock in the offering have been set by
the plan of reorganization and stock issuance adopted by our Board of Directors.
These limitations include the following:
o The minimum purchase is 25 shares.
o No individual may purchase more than 25,000 shares.
o The purchases of individuals who are considered to be associates of each
other or who are deemed to be acting in concert with each other will be
limited so that no more than 25,000 shares in aggregate are purchased by
such individuals. Persons with joint account relationships are presumed to
be acting in concert with each other and may only purchase up to an
aggregate of 25,000 shares.
Please call the stock information center if you have any questions
about how any shares you may order, including what persons may be deemed to be
your associates or acting in concert with you. Contact information for the stock
information center appears on page 11.
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If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by the Board, with the concurrence of the Office of
Thrift Supervision. Thus, we may increase or decrease the purchase limitations.
In the event the maximum purchase limitation is increased, persons who
subscribed for the maximum will be notified and permitted to increase their
subscription.
Procedure for Ordering Stock
If you want to place an order for shares in the offering, you must
complete an original stock order form and send it to us together with full
payment. You must sign the certification that is on the reverse side of the
stock order form. We must receive your stock order form before the end of the
subscription offering or the end of the community offering, as appropriate. Once
we receive your order, you cannot cancel or change it without our consent. We
may, in our sole discretion, reject orders received in the community offering or
syndicated community offering either in whole or in part. If your order is
rejected in part, you cannot cancel the remainder of your order.
To ensure that we properly identify your subscription rights, you must
provide on your stock order form all of the information requested for each of
your deposit accounts.
You may pay for shares in the subscription offering or the community
offering in either of the two following ways:
o By check or money order made payable to "William Penn Bancorp, Inc."
o By authorizing withdrawal from an account at William Penn Bank. To use
funds in a William Penn Bank IRA account, you must transfer your account to
an unaffiliated institution or broker. Since IRA account transfers take
time to complete, please contact the stock information center as soon as
possible for assistance.
We will hold funds received with orders in a deposit account that we
have established at William Penn Bank for that sole purpose. We may decide
during the offering also to hold funds received with orders in a deposit account
at another insured depository institution. In either case, we will pay interest
on all funds received at a rate equal to William Penn Bank's regular passbook
savings rate from the date we receive your funds until the offering is completed
or terminated.
All funds authorized for withdrawal from deposit accounts with us,
including certificates of deposit, will continue to earn interest at the
applicable account or certificate of deposit rate until the offering is
completed or terminated. However, if, as a result of a withdrawal from a
certificate of deposit, the balance falls below the minimum balance requirement,
the remaining funds will be transferred to a savings account and will earn
interest at our regular passbook savings rate. There will be no early withdrawal
penalty for withdrawals from certificates of deposit used to pay for stock.
Proposed Stock Purchases by Management
Our directors and executive officers and their associates have
indicated that they intend to purchase an aggregate of approximately 103,500
shares of common stock in the offering. If 1,203,125 shares are sold (the
midpoint of the offering range), their anticipated purchases would represent
8.6% of the shares sold in the offering and 2.4% of the total shares outstanding
after the offering, including shares issued to William Penn, MHC. At the maximum
of the offering range, these percentages decrease to 7.5% and 2.1%.
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Our Estimated Pro Forma Market Value
Our estimated pro forma market value was established by an independent
appraisal provided by RP Financial LC. The appraisal was based on our current
and projected financial condition and results of operations and also reflects
the effect of the capital to be raised by the offering as well as the effect of
the stock benefit plans we expect to implement after the offering.
RP Financial has estimated that as of February 1, 2008 the pro forma
market value of William Penn Bancorp ranged from a minimum of $36.4 million to a
maximum of $56.6 million. This valuation is based on the full pro forma market
value of William Penn Bancorp as though we were undertaking a full mutual to
stock conversion in which all of the shares outstanding upon completion of the
offering (other than the shares held by the charitable foundation) would have
been sold in the offering without the issuance of any shares to a mutual holding
company. The Board of Directors considered the Bank's present level of capital
and our business plan in order to determine the percentage of shares to be sold
in the offering, with the result that 70% of our pro forma market value will be
held by William Penn, MHC.
Peer Group Analysis. RP Financial relied primarily on the comparative
market value methodology in determining the estimated pro forma market value of
William Penn Bancorp. In applying this methodology, RP Financial analyzed
financial and operational comparisons of William Penn Bank with a group of
companies deemed to be comparable to us. In accordance with Office of Thrift
Supervision appraisal guidelines, the peer group companies for a minority
offering are other mutual holding companies. In that the market pricing ratios
for the peer group companies may reflect a discount for the controlling majority
interest owned by the mutual holding companies, that discount would also be
reflected in our pro forma market value since our market value is estimated in
relation to the peer group companies' market value.
Ten publicly traded mutual holding companies were selected to comprise
the peer group for estimating our pro forma market value. The companies in the
peer group range in asset size from $133 million to $390 million (based on
September 30, 2007 data) and have market capitalizations ranging from $9.2
million to $68.7 million (based on February 1, 2008 market prices). RP Financial
examined how we compare to the peer group on various bases, including earnings
prospects, market area, management, acquisition activity in the state of
Pennsylvania, stock market conditions, subscription interest, liquidity and
dividend policy.
In estimating our pro forma market value, RP Financial took into
account that this type of offering is typically priced at a discount on a
price-to-book basis to publicly traded companies. One measure of profitability
is the return on equity, which measures the amount of net income produced by a
company in relation to that company's net worth. Since it will take a period of
time to invest and leverage the additional capital provided by the offering, the
return on equity for William Penn Bancorp is expected to be low compared to
other publicly traded mutual holding companies that have been in existence for
longer periods. RP Financial also took into account that this type of offering
is typically priced at a discount on a price-to-book basis to publicly traded
companies due to the inherent uncertainty regarding the degree of success any
issuer will have in effectively deploying capital. After the offering, William
Penn Bancorp will be faced with the challenge of successfully investing the
additional capital to generate profitable and competitive earnings returns in a
difficult interest rate environment.
RP Financial utilized the market pricing ratios of the peer group to
establish appropriate pro forma pricing ratios for William Penn Bancorp. The
estimated pro forma market value was established based on how William Penn Bank
compares to the peer group companies on a financial and operational basis. As
indicated by the ratios below, William Penn's value on a price to book basis is
discounted relative to the peer group's average and median price to book value.
The reasons for this pricing discount
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are (1) the peer group companies on average demonstrate stronger asset and loan
growth than William Penn, (2) the trading market for William Penn's common stock
will be less liquid than the market for the peer group companies and (3) there
has been an overall downturn in the market for thrift stocks over the last year
and the after-market performance of other recent offerings by mutual holding
companies has generally been unfavorable.
Pricing Ratios. Consistent with Office of Thrift Supervision appraisal
guidelines, RP Financial's analysis relied primarily on two key market pricing
ratios: the price-to-earnings ratio and the price-to-book value ratio. The ratio
of "price-to-earnings" is calculated as the price of one share of stock divided
by the earnings per share. The price per share in the offering is $10.00. On a
pro forma fully converted basis, William Penn Bancorp's estimated earnings for
the twelve-month period ended December 31, 2007 would have been $2.0 million at
the maximum of the offering range, or approximately $0.41 per share, resulting
in a pro forma fully converted price-to-earnings ratio of 24.39x at the maximum
of the offering range ($10.00 is 24.39 times greater than $0.41). The ratio of
"price-to-book value" is calculated as the price of one share of stock divided
by the per share value of the company's net worth (also known as the per share
book value). On a pro forma fully converted basis, William Penn Bancorp's
estimated total equity is $75.4 million at the maximum of the offering range, or
approximately $15.32 per share, resulting in a pro forma fully converted
price-to-book ratio of 65.27% at the maximum of the offering range ($10.00 is
65.27% of $15.32). See Pro Forma Data at page 23 for a full discussion of these
projections and The Offering Range at page 100 for a full discussion of the
calculation of the ratios.
We intend to contribute approximately 2.0% of the total shares
outstanding upon completion of the offering to a charitable foundation to be
established by William Penn Bancorp. We will also contribute $150,000 in cash to
the charitable foundation to fund its expenses. The contribution of cash and
stock to the foundation has the effect of reducing the estimated pro forma
market value of William Penn Bancorp.
Shown below are the average and median price to core earnings multiples
and price to book value ratios for the peer group companies and William Penn
Bancorp, Inc. based on core earnings for the twelve-month period ended December
31, 2007. Core earnings exclude any one time non-operating and extraordinary
items. Core earnings for William Penn excludes the prepayment penalty for the
refinancing of Federal Home Loan Bank Advances incurred during the quarter ended
December 31, 2007 and also reflects an adjustment for the reduced interest
expense on Federal Home Loan Bank Advances that resulted from the refinancing.
Ratios for the peer group are based on stock prices as of February 1, 2008.
At or For the Twelve Months Ended
December 31, 2007
-----------------------------------
Price-to-Core Price-to-Book
Earnings
Multiple Value Ratio
------------------- ---------------
Pricing ratios for peer group:
Average 23.43x 137.94%
Median 23.43x 137.23%
Pro forma pricing ratios for William Penn Bancorp:
Minimum 19.23x 86.96%
Midpoint 22.73x 98.72%
Maximum 26.32x 109.65%
Maximum, as adjusted 32.26x 121.21%
Fully-Converted Pricing Ratios. The pricing ratios in the following
table are calculated on a fully-converted basis, as though we had sold the full
amount (100%) of our estimated pro forma market value instead of only
approximately 28% of that value. The pricing ratios for the peer group have also
been adjusted to assume that they were fully public, with all of their
outstanding shares held by public
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stockholders. The fully-converted ratios for the peer group give effect to the
pro forma impact on earnings and book value assuming that the shares held by
each company's mutual holding company were sold at their respective trading
prices as of February 1, 2008. Comparing our pricing ratios to the peer group
companies on a fully-converted basis removes the distortion created by comparing
a company that sold approximately 28% of its outstanding common stock in a
minority stock offering (such as we plan to do) with companies that sold a
greater percentage of their outstanding common stock. Repurchases by the peer
group companies of shares of their common stock after their respective offerings
can distort the comparison. The non-fully-converted public ownership ratios of
the peer group companies as of February 1, 2008 ranged between a low of 31.0%
and a high of 47.7%.
At or For the Twelve Months Ended
December 31, 2007
-----------------------------------------
Fully-Converted Fully-Converted
Price-to-Core Price-to-Book
Earnings Multiple Value Ratio
------------------- ---------------------
Pricing ratios for peer group (on a fully-converted basis):
Average 26.90x 81.22%
Median 29.73x 82.33%
Pro forma pricing ratios for William Penn Bancorp
(on a fully-converted basis):
Minimum 18.18x 56.50%
Midpoint 21.28x 61.24%
Maximum 24.39x 65.27%
Maximum, as adjusted 27.78x 69.25%
After-Market Performance. The following tables provide information
regarding the after-market performance of publicly traded mutual holding
companies that have converted in approximately the past twelve months. These
tables are not intended to indicate how our stock may perform. The independent
appraisal is not necessarily indicative of the post-stock offering trading
value; you should not assume or expect that William Penn Bancorp's common stock
will trade at or above the $10.00 per share purchase price. We expect that
William Penn Bancorp's common stock will be traded on the OTC Bulletin Board.
Appreciation From Initial
Offering Price
------------------------------------------------
Date of After After After
Initial 1 1 1 Through
Issuer (Market/Symbol) Offering Day Week Month 2/1/08
-------------- ------- -------- --------- ----------
Meridian Interstate Bancorp, Inc. (NASDAQ:EBSB) 1/23/2008 (4.0)% (5.0)% (2.5)% (2.5)%
Sound Financial, Inc. (OTCBB: SNFL) 1/9/2008 (10.0)% (9.4)% (5.3)% (5.3)%
Northfield Bancorp, Inc. (NASDAQ: NFBK) 11/8/2007 4.5 % 16.7 % 4.9 % 4.5 %
LaPorte Bancorp, Inc. (NASDAQ: LPSB) 10/15/2007 (8.1)% (17.2)% (18.7)% (29.9)%
FSB Cmty Bankshares, Inc. (OTCBB: FSBC) 8/15/2007 -- % -- % (5.0)% (14.3)%
Beneficial Mutual Bancorp (NASDAQ: BNCL) 7/16/2007 (7.9)% (6.2)% (13.0)% (3.3)%
Hometown Bancorp, Inc. (OTCBB: HTWC) 6/29/2007 0.0 % 0.0 % (12.5)% (28.0)%
TFS Financial Corp. (NASDAQ: TFSL) 4/23/2007 17.9 % 17.2 % 23.3 % 20.2 %
Sugar Creek Financial (OTCBB: SUGR) 4/4/2007 0.0 % 5.0 % 6.0 % (9.0)%
Delanco Bancorp, Inc. (OTCBB: DLNO) 4/2/2007 0.0 % 0.0 % (5.0)% (27.5)%
Oritani Financial Corp. (NASDAQ: ORIT) 1/24/2007 59.7 % 53.5 % 55.0 % 17.1 %
Polonia Bancorp (OTCBB: PBCP) 1/16/2007 1.0 % 0.1 % 0.6 % 2.7 %
MSB Financial Corp. (NASDAQ: MSBF) 1/5/2007 23.0 % 21.0 % 19.3 % 2.8 %
Mainstreet Financial Corp. (OTCBB: MSFN) 12/27/2006 10.0 % 10.0 % (2.5)% (38.0)%
Average 6.2 % 6.1 % 3.2 % (10.8)%
Median 0.0 % 0.1 % (2.5)% (7.2)%
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The following table presents the after-market performance of the
fourteen companies listed above broken down into two groups: companies that
trade on NASDAQ and companies that trade on the OTC Bulletin Board. As shown
below, the companies that are NASDAQ traded have generally traded better than
companies that are traded on the OTC Bulletin Board.
Appreciation From Initial
Offering Price
--------------------------------------------------------
After 1 After 1 After 1 Through
Day Week Month 2/1/08
-------- -------- ------- ----------
NASDAQ Traded Companies
- -----------------------
Average 12.2% 11.4% 9.8% (4.5)%
Median 4.5% 16.7% 4.9% (2.5)%
OTC Bulletin Board Traded Companies
- -----------------------------------
Average 0.1% 0.8% (3.4)% (17.1)%
Median 0.0% 0.0% (5.0)% (14.3)%
The stock price of a particular company is subject to various factors,
including, but not limited to, the amount of proceeds a company raises, the
company's historical and anticipated operating results, the nature and quality
of the company's assets, the company's market area, and the quality of
management and management's ability to deploy proceeds (such as through loans
and investments, the acquisition of other financial institutions or other
businesses, the payment of dividends and common stock repurchases). In addition,
stock prices may be affected by general market and economic conditions, the
interest rate environment, the market for financial institutions and merger or
takeover transactions, the presence of professional and other investors who
purchase stock on speculation, as well as other unforeseeable events not in the
control of management. Before you make an investment decision, we urge you to
carefully read this prospectus, including, but not limited to, the Risk Factors
section beginning on page 12. You should not assume that William Penn Bancorp's
common stock will trade at prices similar to other mutual holding companies.
Contribution to William Penn Bank Community Foundation
To further our commitment to our local community, we intend to
establish a charitable foundation as part of the offering. The foundation will
be dedicated exclusively to supporting charitable causes and community
development activities in the communities in which we operate. We will
contribute to the foundation: (i) cash in the amount of $150,000 and (ii)
approximately 2% of our total shares of common stock outstanding upon completion
of the offering. As a result of the issuance of shares and the contribution of
cash, we will record an after-tax expense of approximately $636,000 during the
quarter in which the offering is completed, assuming the offering is completed
at the midpoint.
Issuing shares of common stock to the charitable foundation will:
o dilute the voting interests of purchasers of shares of our common
stock in the offering; and
o result in an expense, and a reduction in earnings during the
quarter in which the contribution is made, equal to the full
amount of the contribution to the charitable foundation.
The expense of the contribution to the foundation will be offset in
part by a corresponding tax benefit; however, our ability to utilize the tax
deduction is limited by the fact that we are permitted to deduct only an amount
equal to 10% of our annual taxable income in any one year. We are permitted
under the Internal Revenue Code to carry-forward the excess contribution over
the five-year period following the contribution to the foundation. We anticipate
that substantially all of the contribution should be deductible over the
six-year period (i.e., the year in which the contribution is made and the
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succeeding five-year period), however, if we do not have sufficient earnings we
may not be able to use the deduction in full.
The establishment and funding of the charitable foundation has been
approved by our Board of Directors, subject to the approval of the members of
William Penn Bank. A vote to approve the funding of the foundation will be taken
at the meeting of members separate from the members' vote on the reorganization
and stock offering. If the members vote to approve the reorganization and stock
offering but not the funding of the foundation, we will conduct the
reorganization and stock offering without the foundation.
For more information about the foundation, see Risk Factors - The
contribution of shares to the Charitable Foundation will dilute your ownership
interests and adversely affect net income in fiscal 2008 at page 17, Comparison
of Valuation and Pro Forma Information With and Without the Foundation at page
31 and William Penn Bank Community Foundation at page 110.
Conditions to Completing the Offering
We cannot complete the offering unless:
o we sell at least 1,024,740 shares, the minimum of the offering range;
o the members of William Penn Bank vote to approve the reorganization and
offering; and
o we receive final authorization from the Office of Thrift Supervision to
complete the offering.
Office of Thrift Supervision authorization does not constitute a
recommendation or endorsement of an investment in our stock by the Office of
Thrift Supervision.
Market for William Penn Bancorp's Common Stock
We expect that our common stock will trade on the OTC Bulletin Board.
Keefe, Bruyette & Woods, Inc. currently intends to become a market maker in the
common stock, but it is under no obligation to do so. We cannot assure you that
other market makers will be obtained or that an active and liquid trading market
for the shares of common stock will develop or if developed, will be maintained.
After our common stock begins trading, you may contact a stock broker to buy or
sell shares.
Dividends
We have not yet established a dividend policy, and we have not yet made
plans as to the amount or timing of cash dividends that William Penn Bancorp may
pay after the offering. The timing, amount and frequency of dividends will be
determined by the Board of Directors. There are also restrictions on our ability
to pay dividends. See Our Policy Regarding Dividends.
It is expected that, if and when William Penn Bancorp adopts a dividend
policy, William Penn Bank will declare dividends to it in amounts necessary to
allow it to pay dividends to its shareholders. In determining whether to pay
dividends to William Penn Bancorp, William Penn Bank's Board of Directors will
consider a number of factors, including: (i) the Bank's results of operations
and financial condition; (ii) full compliance with regulatory capital
requirements and dividend restrictions; (iii) tax considerations; and (iv)
general economic conditions.
If we pay dividends to stockholders of William Penn Bancorp, it is
anticipated that dividends payable to William Penn, MHC would be waived. We must
receive the non-objection of the Office of
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Thrift Supervision for any dividend waiver by William Penn, MHC. See Regulation
- - Regulation of William Penn Bancorp.
Restrictions on the Acquisition of Shares of William Penn Bancorp
Under current Office of Thrift Supervision regulations, we can prohibit
anyone from acquiring more than 10% of William Penn Bancorp's outstanding common
stock for the five year period following the offering. However, because we are
majority owned by William Penn, MHC, this means that someone who holds 10% of
our outstanding common stock controls approximately 36% of the minority shares
held by stockholders other than William Penn, MHC and the foundation.
The Office of Thrift Supervision has recently proposed changes to its
regulations that would permit us to apply the 10% limit to the minority shares
so that no entity, person or group acting in concert may during the five years
following the offering acquire or vote more than 10% of the minority shares held
by stockholders other than William Penn, MHC.
Tax Effects of the Offering
The reorganization and offering will not be a taxable transaction for
purposes of federal or state income taxes for William Penn, MHC, William Penn
Bancorp, William Penn Bank or persons eligible to subscribe for stock in the
offering. See Material Federal and State Tax Consequences of the Offering.
Stock Benefits to the Directors and Management from the Offering
We intend to establish certain benefit plans that will use our stock to
provide additional compensation to employees and directors. The William Penn
Bank, FSB Employee Stock Ownership Plan, for the benefit of employees eligible
to participate in the plan, intends to purchase 8% of the aggregate shares sold
in the offering plus contributed to the foundation. We also intend to adopt a
stock option plan and a restricted stock plan for the benefit of directors and
officers no earlier than six months after completion of the offering which must
be approved by stockholders. Officers, directors, and employees will not be
required to pay cash for shares received under the William Penn Bank, FSB
Employee Stock Ownership Plan or shares received under the restricted stock
plan, but will be required to pay the exercise price to exercise stock options.
The exercise price for the options will be at least equal to the market price of
our common stock on the date of grant.
The stock benefit plans will result in additional annual compensation
and benefit expenses, thereby reducing our earnings. The following table
presents information, at the maximum of the offering range, regarding the number
of shares and options expected to be made available under the stock benefit
plans. The value of the share awards is based on an assumed value of $10.00 per
share; however, this does not mean you should assume the stock will trade at or
above $10.00 per share. It could trade below $10.00 per share. The value of the
option grants was determined using the Black-Scholes option-pricing formula.
Ultimately, the value of awards under the stock benefit plans will depend on the
actual trading price of our stock.
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At the Maximum of the Offering Range
------------------------------------------------------------------------------------------
Percentage of
Persons Shares Sold
Eligible Number and
to of Percentage of Contributed
Receive Estimated Shares/ Total Shares to the
Awards Value Options Outstanding Foundation
--------------------- ------------ ----------- --------------- ---------------
Employee Stock Ownership Plan Employees $1,181,620 118,162 2.40% 8.00%
Restricted Stock Directors/Employees 964,990 96,499 1.96% 6.53%
Stock Options Directors/Employees 931,217 241,248 4.90% 16.33%
------------ ----------- --------------- ---------------
$3,077,837 455,909 9.26% 30.86%
============ =========== =============== ===============
Dilution. If newly issued shares are used to fund stock options and
awards made under the restricted stock plan instead of outstanding shares
purchased in the open market by William Penn Bancorp, the resulting dilution to
your ownership interest in William Penn Bancorp would be 4.7% for the option
plan and 1.9% for the restricted stock plan. It is our current intention,
however, to purchase stock in the open market to fund the restricted stock plan
and the stock option plan to avoid stockholder dilution. The cost of purchasing
shares in the open market will depend on the trading price of the stock at the
time the purchases are made. We would expect to be able to use existing equity
to fund the purchase of shares.
Stockholder Approval. Under recently approved Office of Thrift
Supervision regulations, the stock option plan and the restricted stock plan
must be approved by a majority of the total votes actually cast by our public
stockholders - meaning all stockholders other than our mutual holding company
parent, William Penn, MHC, which will own 70% of our outstanding stock upon
completion of the offering and will continue to hold a majority of our
outstanding stock so long as we remain in mutual holding company form. The stock
option plan and restricted stock plan will comply with all applicable Office of
Thrift Supervision regulations in effect at the time the plans are adopted. If
the Office of Thrift Supervision regulations were to change in the future to
eliminate the requirement to obtain the separate vote of the public stockholders
then William Penn, MHC would control the outcome of any vote.
See Management - Future Stock Benefit Plans for more information about
the stock benefit plans.
Possible Conversion of William Penn, MHC to Stock Form
In the future, William Penn, MHC may convert from the mutual holding
company form of organization, wherein a majority of the outstanding stock is
held by the mutual holding company, to a corporation with 100% of its shares
held by public stockholders. This type of conversion transaction is commonly
known as a "second-step conversion." The Board of Directors has no current plans
to undertake a second-step conversion transaction.
Stock Information Center
For assistance, please contact the stock information center at (215)
945-0124. The stock information center's hours of operation are generally Monday
10:00 a.m. to 4:00 p.m., Tuesday through Thursday 9:00 a.m. to 4:00 p.m., and
Friday 9:00 a.m. to 3:00 p.m. The stock information center is closed on weekends
and holidays.
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RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
We realize income primarily from the difference between interest earned on loans
and investments and interest paid on deposits and borrowings. Our net interest
income has suffered in recent years as the result of changes in interest rates.
We may continue to experience compression of our interest rate spread and net
interest margin and changes in interest rates may continue to adversely affect
us.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income. Our net interest income has suffered in recent
years as the result of the continued compression of our interest rate spread and
net interest margin caused by the flat or inverted interest rate yield curve
environment during recent periods. Our net interest rate spread for the fiscal
years 2005, 2006 and 2007 was 2.11%, 1.74% and 1.42%, respectively, while our
net interest margin for the fiscal years 2005, 2006 and 2007 was 2.51%, 2.25%
and 2.03%, respectively.
Several years ago market interest rates were at historically low
levels. Between June 2004 and June 2006, the U.S. Federal Reserve steadily
increased its target federal funds rate, raising it 17 times, from 1.00% to
5.25%. While the federal funds rate and other short-term market interest rates,
which we use as a guide to our deposit pricing, increased, intermediate and
long-term market interest rates, which we use as a guide to our loan pricing,
did not increase proportionately. This led to a "flattening" of the market yield
curve, which even "inverted" at times as short-term rates exceeded long-term
rates over an intermediate maturity horizon. The relatively flat yield curve has
hurt our net interest rate spread and net interest margin because the interest
rates we pay on our deposits have repriced upwards faster than the interest
rates that we earn on our loans and investments. It has also affected the amount
of lending we have done as we intentionally reduced our mortgage lending since
the yield curve did not, in our opinion, allow us to be properly compensated for
the interest rate risk on longer-term loans. In a normal yield curve
environment, when interest rates rise, the cost of borrowing increases and loan
originations tend to decrease. In September, October and December of 2007, the
U.S. Federal Reserve lowered its target federal funds rate three times, to
4.25%, however, the yield curve continued to be relatively flat. On January 22,
2008, the U.S. Federal Reserve lowered its target federal funds rate by 75 basis
points to 3.50%, and then on January 30, 2008 lowered it again by 50 basis
points to 3.00%. The U.S. Federal Reserve stated in January 2008 that the rate
cuts were made in response to: (1) a weakening of the economic outlook and
increasing downside risks to growth; (2) the continued deterioration of broader
financial market conditions despite the easing of strains in short-term funding
markets and further tightening of credit for businesses and households; and (3)
a deepening of the housing contraction as well as some softening in labor
markets.
Changes in interest rates can also affect the average life of loans and
investment securities. A reduction in interest rates generally results in
increased prepayments of loans and mortgage-backed securities, as borrowers
refinance their debt in order to reduce their borrowing cost. This causes
reinvestment risk, because we generally are not able to reinvest prepayments at
rates that are comparable to the rates we earned on the prepaid loans or
securities.
12
Our return on average assets (ROA) and return on average equity (ROE), which are
measures of our profitability, have fallen in recent years as our net income has
declined as a result of interest rate spread and margin compression as well as
the relatively high rates we pay on deposits, the high cost of our FHLB
advances, and our relatively low levels of noninterest income. There is no
guarantee that we will be successful in reversing this trend of lower net
income.
Net income for the year ended June 30, 2007 was 21% lower than the year
ended June 30, 2006, and net income for the year ended June 30, 2006 was
approximately 13% lower than net income for the year ended June 30, 2005. Our
ROA for the fiscal years 2005, 2006 and 2007 was 0.88%, 0.75% and 0.60%,
respectively, while our ROE for the fiscal years 2005, 2006 and 2007 was 7.66%,
6.21% and 4.67%, respectively.
The decreases in net income in recent years resulted primarily from the
continued compression of net interest income as a result of the rate
environment. Our net interest income has been negatively affected by high
borrowings expense, although we expect our refinancing of approximately $25.0
million of those advances in December 2007 will improve our net interest margin
going forward. Our net interest income has also been negatively affected by
offering deposit rates toward the high end of current market ranges. The other
part of our strategy to compete for deposits was by charging lower fees,
however, this has negatively impacted our noninterest income and thus our
profitability. We have not in the past focused on fee generation, and we
currently have no plans to seek fee income generation through the offering of
complementary services or acquisition of fee producing subsidiaries such as
title insurance or third-party securities sales.
We intend to embark on a proactive growth strategy and increase our total assets
and loan portfolio. This represents a fundamental change in our operating
philosophy and there is no guarantee that we will be successful in implementing
this change.
We have in the past intentionally reduced mortgage lending when the
yield curve did not, in our opinion, allow us to be properly compensated for the
interest rate risk on longer-term loans as a result of the flat or inverted
yield curve's impact on the pricing of short-term assets relative to long term
assets. Our preference was to sacrifice growth in order to avoid interest rate
risk exposure. The result has been that our total assets and loan portfolio have
been relatively flat for some time. In an effort to improve our profitability,
we now anticipate fundamentally changing our approach, and we will seek to grow
our total assets and loan portfolio. We plan to hire additional staff to achieve
the growth in loans, including business development officers, lenders, credit
analysts and loan processors. We intend to hire additional personnel and
management support outside the lending department as well. We also intend to
open up to three de novo branches over the next five years. There is no
guarantee that we will be able to realize our growth plans or that we will be
successful in managing our growth.
At September 30, 2007, approximately 28% of our total loan portfolio consisted
of multi-family and nonresidential mortgage loans, land loans and construction
loans. The repayment risk related to these types of loans is considered to be
greater than the risk related to one to four family residential loans. Part of
our business plan is to increase our origination of multi-family and
nonresidential mortgage loans.
Unlike single-family or one to four family residential mortgage loans,
which generally are made on the basis of the borrower's ability to make
repayment from his or her employment and other income, and which are secured by
real property with values that tend to be more easily ascertainable,
multi-family and nonresidential mortgage loans tend to be based on the
borrower's ability to make repayment from the cash flow of the borrowers'
business, which may include rental income. The repayment of construction loans
and land loans for residential and commercial land acquisition and development,
including loans to
13
builders and developers, is dependent, in part, on the success of the ultimate
construction project. In addition, these types of loans generally result in
larger balances to single borrowers, or related groups of borrowers, than one to
four family loans.
A significant amount of our one to four family residential lending consists of
"investor loans" (defined as loans on non-owner occupied properties), and this
may expose us to increased lending risks.
At September 30, 2007, we had approximately $57.2 million of loans on
non-owner occupied one to four family residences ("investor loans"),
representing approximately 30% of total loans. This $57.2 million of one to four
family investor loans includes $50.3 million of first mortgages, $1.4 million of
second mortgages and $5.6 million of construction loans. Loans on one to four
family residences are generally considered to have less credit risk than other
types of real estate lending, but a property being non-owner occupied puts the
loan on that property into the category of "investor loans." These loans are
generally considered to involve a higher degree of credit risk than financing of
owner occupied properties. The interest rates on these loans are priced to
reflect the additional credit risk, however, any late payments or the failure to
repay such loans would hurt our earnings.
The market for stock of financial institutions has been unusually volatile
recently, and our stock price may decline when trading commences.
We cannot guarantee that if you purchase shares in the offering you
will be able to sell them at or above the $10.00 purchase price. After the
shares of our common stock begin trading, the trading price of the common stock
will be determined by the marketplace, and will be influenced not only by our
operating results but by many factors outside of our control, including
prevailing interest rates, investor perceptions and general industry, political
and economic conditions. Publicly traded stocks, including stocks of financial
institutions, have recently experienced substantial market price volatility. We
might experience market fluctuations that are not directly related to our
operating performance but are influenced by the market's perception of the
health of the financial industry and, in particular, the market's assessment of
the credit quality conditions, including default and foreclosure rates.
If we do not achieve profitability on new branches, the new branches may hurt
our earnings.
We intend to expand our branch network by opening up to three new offices
over approximately the next five years. The success of our expansion strategy,
however, is contingent upon numerous factors, such as our ability to select
suitable locations for branches, real estate acquisition costs, competition,
interest rates, managerial resources, our ability to hire and retain qualified
personnel, the effectiveness of our marketing strategy and our ability to
attract deposits. The opening of new offices may not increase the volume of our
loans and deposits as quickly or to the degree that we hope, and opening new
offices will increase our operating expenses. On average, de novo branches do
not become profitable until three to four years after opening. We estimate our
fixed asset expenses (including furniture, fixtures and equipment and leasehold
improvements) for each new office could be between approximately $650,000 and
$800,000. We currently expect to lease rather than own the additional branches.
The projected time line and the estimated dollar amounts involved in opening de
novo branches could differ significantly from actual results, however. There is
no guarantee that we will successfully manage the costs and implementation risks
associated with our branching strategy.
The loss of senior management could hurt our operations.
We rely heavily on our president, Mr. Charles Corcoran, and on our chief
lending officer, Mr. James D. Douglas. The loss of Mr. Corcoran or Mr. Douglas
could have an adverse effect on us because, as a
14
small community bank, these key officers have more responsibility than would be
typical at a larger financial institution with more employees. In addition, as a
small community bank, we have fewer management-level personnel who are in a
position to assume the responsibilities of our senior executive officers. The
Board may consider entering into employment agreements with Mr. Corcoran and Mr.
Douglas at a later date.
Strong competition within our industry and market area may limit our growth and
profitability.
Competition in the banking and financial services industry is intense.
Many of our competitors have substantially greater resources and lending limits
than we do. We will soon install ATM machines at two of our offices and launch
our online banking program, but there are still services available from larger
banks that we do not or cannot provide. Price competition for loans has in
recent years caused us to originate fewer loans. Additionally, competition in
the market for hiring experienced lenders and other highly qualified bank
officers is also a challenge, which may restrict our ability to grow.
Our business is geographically concentrated in and around Bucks County,
Pennsylvania, and a downturn in economic conditions in this market area could
have an adverse impact on our profitability.
We primarily originate loans to and gather deposits from retail
customers in our market area. We focus on the 90-mile radius surrounding our
offices. Any decline in the economy of this market could have an adverse impact
on our earnings. Adverse economic changes may also have a negative effect on the
ability of our borrowers to make timely repayments of their loans. Additionally,
because we have a significant amount of real estate loans, decreases in local
real estate values could adversely affect the value of property used as
collateral. If we are required to liquidate a significant amount of collateral
during a period of reduced real estate values to satisfy the debt, our earnings
and capital could be adversely affected. According to data collected by the
National Association of Realtors, the median sales price of existing family
homes in our market area fell by approximately 5% in late 2006 and was $224,000
and $222,000 during the fourth quarter of 2006 and first quarter of 2007, as
compared to $236,000 during the third quarter of 2006, but recovered during
mid-2007 to $243,000 for both the second and third quarter of 2007.
There is a potential for loss on a sizable land loan in our portfolio.
In 2003 we originated a land loan in the amount of $3.0 million secured
by a tract of land in Wildwood, New Jersey. We have concerns about the financial
condition of the borrower on this loan. The outstanding balance of this loan as
of December 31, 2007 was $3.0 million. Monthly payments were current as of
December 31, 2007, however payments are being received not from the borrower but
from the borrower's new business partner, who could cease payment at any time as
he is not a party to the loan agreement and has no legal obligation to make
payments on this loan. The most recent appraisal we have on this property was
prepared in 2004, and although that "as is" appraisal for this undeveloped site
was greater than the outstanding balance of the loan, we have designated the
loan as special mention in light of the uncertainty related to the development
of the property. The issues that could impede the development include zoning,
wetlands preservation, site improvements and environmental cleanup.
If we experience loan losses in excess of our allowance, our earnings will be
adversely affected.
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the value and marketability of the collateral for the loan. Management
maintains an allowance for loan losses based upon historical experience, an
evaluation of economic
15
conditions and regular reviews of delinquencies and loan portfolio quality. If
management's assumptions and judgments about the ultimate collectibility of the
loan portfolio prove to be incorrect and the allowance for loan losses is
inadequate to absorb future losses or if we are required to make material
additions to the allowance, our earnings and capital could be significantly and
adversely affected.
Recently, there have been concerns on a national level with regard to a
slowdown in the housing market and a credit quality crisis marked by significant
loan losses in addition to increasing rates of non-performing loans, defaults
and foreclosures. There is also growing concern about the economy in general. To
date, we have not directly experienced any adverse affects with regard to credit
quality as our non-performing assets have continued to be low and we have not
observed any trends in delinquencies. No assurances can be given however that
our credit quality will remain unaffected particularly if the slowdown in the
housing market, the credit crisis or concerns about the economy persists or
worsens.
There may be a limited market for our common stock, which may lower our stock
price.
Our common stock will trade on the OTC Bulletin Board, but there is no
guarantee that an active, regular trading market for our common stock will
develop because the size of our offering is not large enough to result in a
liquid trading market. The limited trading market could also result in a wider
spread between the bid and ask price for the stock, meaning the highest price
being offered for shares for sale at any particular time may be further from the
lowest price being offered by buyers for the stock at that moment than if the
stock were more actively traded (the difference between the bid and ask price
being the "spread" for the stock). This could make it more difficult to sell a
large number of shares at one time and could mean the sale of a large number of
shares at one time could depress the market price.
Our return on equity is currently low and will decrease after this offering.
This could negatively impact the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. We expect that it will take a significant period of time to
prudently invest this capital. For the year ended June 30, 2007, our return on
average equity, which is the ratio of our earnings divided by our average equity
capital, was 4.67%. After the offering, our estimated ratio of pro forma
earnings divided by pro forma stockholders' equity is expected to be
approximately 3.50% at the midpoint of the offering range. Because the stock
market values a company based in part on its return on equity, our low return on
equity could negatively affect the trading price of our stock.
Additional compensation and benefit expenses following the offering will
negatively impact our profitability.
Following the offering, we will recognize additional annual employee
compensation and benefit expenses stemming from equity-based compensation to
employees, officers and directors under new benefit plans, including the William
Penn Bank, FSB Employee Stock Ownership Plan. The actual amount of the new
stock-related compensation and benefit expenses is unknown at this point because
applicable accounting standards require that they be based on the fair market
value of the shares of common stock at specific points in the future; however,
we expect them to be material.
New expenses that we will incur as a public company will affect our earnings.
Following the offering, our noninterest expense will increase as a
result of the financial accounting, legal and various other additional
noninterest expenses usually associated with operating as a public company,
particularly as a result of the requirements of the Sarbanes-Oxley Act of 2002.
In
16
addition, the Bank's senior management will be required to devote a significant
amount of time to such matters, diverting their full attention from regular
operations.
The implementation of stock-based benefit plans may dilute your ownership
interest in William Penn Bancorp.
We intend to adopt a stock option plan and a restricted stock plan
following the stock offering. These stock benefit plans will be funded through
either open market purchases or from the issuance of authorized but unissued
shares. Stockholders would experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options and awards made under
the restricted stock plan. The use of newly issued shares of stock to fund the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.9%. The use of newly
issued shares of stock to fund exercises of options granted under the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.7%.
The contribution of shares to the charitable foundation will dilute your
ownership interests and adversely affect net income in fiscal 2008.
We intend to establish a charitable foundation in connection with the
offering. We will contribute to the foundation approximately 2% of the total
outstanding shares of William Penn Bancorp common stock and $150,000 in cash.
This contribution of shares and cash will have an adverse effect on our net
income for the quarter and year in which we make the contribution. The after-tax
expense of the contribution will reduce net income in our 2008 fiscal year by
approximately $636,000, assuming the offering is completed at the midpoint.
Persons purchasing shares in the offering will have their ownership and voting
interests in William Penn Bancorp diluted by approximately 6.7% due to the
issuance of shares of common stock to the charitable foundation.
If our contribution to the charitable foundation is determined not to be tax
deductible our net income would be reduced.
We believe that the contribution to the charitable foundation will be
deductible for federal income tax purposes. However, we cannot assure you that
the Internal Revenue Service will grant tax-exempt status to the charitable
foundation. If the contribution were determined not to be deductible, we would
not receive any tax benefit from the contribution. In addition, even if the
contribution is tax deductible, we may not have sufficient profits to be able to
use the deduction fully.
Persons who purchase stock in the offering will own a minority of William Penn
Bancorp's common stock and will not be able to exercise voting control over most
matters put to a vote of stockholders, including any proposal regarding the
acquisition of William Penn Bancorp.
William Penn, MHC will own 70% of William Penn Bancorp's common stock
after the offering. The MHC's Board of Directors will be comprised of the same
persons as William Penn Bancorp's Board of Directors and will generally be able
to exercise voting control over matters put to a vote of stockholders of William
Penn Bancorp, such as a vote on a sale or merger of William Penn Bancorp or
other transaction in which stockholders could receive a premium for their shares
and the election of directors of William Penn Bancorp. There are certain matters
which require separate approval by the minority shareholders and thus are
determined by the minority shareholders: (1) the approval of stock benefit plans
and (2) the conversion of William Penn, MHC to stock form. William Penn, MHC
cannot determine the outcome of those particular proposals.
17
Office of Thrift Supervision policy on remutualization transactions could
prevent acquisition of William Penn Bancorp which may adversely affect our stock
price.
Current Office of Thrift Supervision regulations permit a mutual holding
company to be acquired by a mutual institution in what is commonly called a
"remutualization" transaction. In the past, remutualization transactions
resulted in minority stockholders receiving a significant premium for their
shares. However, in 2003 the Office of Thrift Supervision issued a policy
statement indicating that it views remutualization transactions as raising
significant issues concerning disparate treatment of minority stockholders and
mutual members of the target entity and raising issues concerning the effect on
the mutual members of the acquiring entity. Under certain circumstances, the
Office of Thrift Supervision intends to give these issues special scrutiny and
reject applications providing for the remutualization of a mutual holding
company unless the applicant can clearly demonstrate that the Office of Thrift
Supervision's concerns are not warranted in the particular case. Should the
Office of Thrift Supervision prohibit or further restrict these transactions in
the future, our per share stock price may be adversely affected. For further
information, see Restrictions on Acquisition of William Penn Bancorp--Statutory
and Regulatory Restrictions on Acquisition.
We operate in a highly regulated environment and may be adversely affected by
changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Such regulation and supervision govern the activities in which an institution
and its holding companies may engage and are intended primarily for the
protection of the insurance fund and depositors. Regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on the operation of an
institution, the classification of assets by the institution and the adequacy of
an institution's allowance for loan losses. Any change in such regulation and
oversight, whether in the form of regulatory policy, regulations, or
legislation, including changes in the regulations governing mutual holding
companies, could have a material impact on our operations.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
o general economic conditions, either nationally or in our market
area, that are worse than expected;
18
o changes in the interest rate environment that reduce our interest
margins or reduce the fair value of financial instruments;
o our ability to enter into new markets and/or expand product
offerings successfully and take advantage of growth
opportunities;
o increased competitive pressures among financial services
companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our
business;
o adverse changes in the securities markets;
o our ability to successfully manage our growth; and
o changes in accounting policies and practices, as may be adopted
by the bank regulatory agencies, the Financial Accounting
Standards Board or the Public Company Accounting Oversight Board.
Any of the forward-looking statements that we make in this prospectus
and in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Consequently, no
forward-looking statement can be guaranteed.
USE OF PROCEEDS
We are conducting this stock offering principally to raise capital to
support our anticipated future growth. The actual net proceeds will depend on
the expenses incurred by us in connection with the offering and the total number
of shares of stock issued in the offering, which depends on the independent
valuation and market considerations. Although the actual net proceeds from the
sale of the common stock cannot be determined until the offering is completed,
we estimate that net proceeds from the sale of common stock will be between $9.6
million and $13.2 million, or $15.2 million at the adjusted maximum. The net
proceeds may vary significantly because total expenses of the stock offering may
be significantly more or less than those estimated. Payments for shares made
through withdrawals from existing deposit accounts at William Penn Bank will not
result in the receipt of new funds for investment but will result in a reduction
of William Penn Bank's deposits and interest expense as funds are transferred
from interest-bearing certificates or other deposit accounts.
William Penn Bancorp intends to use proceeds from the offering as
follows:
Maximum
Minimum Midpoint Maximum As Adjusted
----------------------- -------------------------- ------------------------ -----------------------
Percent Percent Percent Percent
of Net of Net of Net of Net
Amount Proceeds Amount Proceeds Amount Proceeds Amount Proceeds
--------- ---------- ----------- ----------- --------- ----------- ---------- ---------
(Dollars in Thousands)
Estimated net proceeds $ 9,634 $ 11,401 $ 13,169 $ 15,202
Less:
50% to Bank 4,817 50.0% 5,701 50.0% 6,585 50.0% 7,601 50.0%
Loan to ESOP 873 9.1% 1,028 9.0% 1,182 9.0% 1,359 8.9%
Cash contribution to
Foundation 150 1.6% 150 1.3% 150 1.1% 150 1.0%
Capitalization of MHC 100 1.0% 100 0.9% 100 0.8% 100 0.7%
------- ------- ------- -------
Proceeds retained by
William Penn Bancorp $ 3,694 38.3% $ 4,422 38.8% $ 5,152 39.1% $ 5,992 39.4%
======= ======= ======= =======
19
William Penn Bank will receive at least 50% of the net proceeds from
the offering as a capital contribution. The proceeds will provide the
opportunity for the Bank to significantly grow its assets and maintain its
status as a well-capitalized financial institution under applicable banking
regulations. The purpose of the offering is principally to raise capital to
support the Bank's anticipated future growth. As discussed under Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview and Business Strategy, the Bank intends to fundamentally change in its
operating philosophy by proactively seeking to grow its assets and increase its
loan portfolio. The offering proceeds will provide funding for loan
originations. We plan to hire additional staff to achieve the growth in loans,
including business development officers, lenders, credit analysts and loan
processors. We intend to hire additional personnel and management support
outside the lending department as well. Pending deployment of the offering
proceeds into the Bank's loan portfolio, the offering proceeds will be invested
in short term investments including, but not limited to, federal funds, U.S.
Treasury bills, bonds issued by the Federal Home Loan Banks and securities
issued by U.S. government agencies and government-sponsored entities, such as
Freddie Mac, Ginnie Mae and Fannie Mae.
The offering proceeds may also be used by William Penn Bank to finance
the opening of new offices; we intend to expand our branch network by opening up
to three new offices over approximately the next five years. We estimate our
fixed asset expenses (including furniture, fixtures and equipment and leasehold
improvements) for each new office could be between approximately $650,000 and
$800,000, so the amount of proceeds used for opening new offices could be as
much as approximately $2.4 million. We currently expect to lease rather than own
the additional branches. The projected time line and the estimated dollar
amounts involved in opening de novo branches could differ significantly from
actual results, however.
We will lend a portion of the offering proceeds to the William Penn
Bank, FSB Employee Stock Ownership Plan to enable it to buy up to 8% of the
aggregate shares sold in the offering plus contributed to the foundation. If it
does not buy the full amount of its intended common stock purchase in the
offering, it may purchase shares of common stock in the open market after the
stock offering. If the purchase price of the common stock is higher than $10 per
share, the amount of proceeds required for the purchase by the William Penn
Bank, FSB Employee Stock Ownership Plan will increase.
The balance of the offering proceeds will be retained by William Penn
Bancorp and deposited with or loaned to William Penn Bank, providing funds to
support the Bank's operations. William Penn Bancorp will use the offering
proceeds it retains for general corporate purposes, which may include
repurchasing shares of its common stock and paying cash dividends.
OUR POLICY REGARDING DIVIDENDS
We have not yet determined what our dividend policy will be, and we
have no plans or understandings as to the amount or timing of cash dividends
that William Penn Bancorp may pay after the offering. Future declarations of
dividends by the Board of Directors will depend on a number of factors,
including investment opportunities, growth objectives, financial condition,
profitability, tax considerations, minimum capital requirements, regulatory
limitations, stock market characteristics and general economic conditions.
The timing, frequency and amount of dividends will be determined by the
Board. There can be no assurance that dividends will in fact be paid on the
stock or that, if paid, dividends will not be reduced or eliminated in future
periods.
William Penn Bancorp's ability to pay dividends may also depend on the
receipt of dividends from William Penn Bank, which is subject to a variety of
regulatory limitations on the payment of
20
dividends. See Regulation - Regulation of William Penn Bank - Dividend and Other
Capital Distribution Limitations. It is expected that, if and when William Penn
Bancorp adopts a dividend policy, William Penn Bank will declare dividends to it
in amounts necessary to allow it to pay dividends to its shareholders. In
determining whether to pay dividends to William Penn Bancorp, William Penn
Bank's Board of Directors will consider a number of factors, including: (i) the
Bank's results of operations and financial condition; (ii) full compliance with
regulatory capital requirements and dividend restrictions; (iii) tax
considerations; and (iv) general economic conditions. Furthermore, as a
condition to the Office of Thrift Supervision giving its authorization to
conduct the stock offering, we have agreed that we will not initiate any action
within one year of completion of the stock offering involving the payment of a
special distribution or return of capital to stockholders of William Penn
Bancorp.
If William Penn Bancorp pays dividends to its stockholders, it is
anticipated that dividends payable to William Penn, MHC would be waived. We must
notify the Office of Thrift Supervision of any proposed dividend waiver by
William Penn, MHC. The Office of Thrift Supervision reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to any such
waiver if: (i) the waiver would not be detrimental to the safe and sound
operations of the subsidiary savings association and (ii) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members.
MARKET FOR THE STOCK
There is not, at this time, any market for William Penn Bancorp's
stock. We expect that our common stock will trade on the OTC Bulletin Board.
Keefe, Bruyette & Woods, Inc. has advised us that it intends to make a market in
our common stock following the offering, but it is under no obligation to do so.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of our stock
at any particular time may be limited. Under such circumstances, you could have
difficulty selling your shares of common stock. We cannot assure you that an
active and liquid trading market for the shares of common stock will develop or,
if developed, will be maintained. Nor can we assure you that, if you purchase
shares of common stock in the offering, you will be able to sell them at a price
equal to or above $10.00 per share. Therefore, purchasers of our common stock
should have a long-term investment intent and should recognize that there may be
a limited trading market in our common stock. This may make it difficult to sell
our common stock after the offering and may have an adverse affect on the price
at which the common stock may be sold.
21
CAPITALIZATION
Set forth below is the historical capitalization as of September 30,
2007 of William Penn Bank and the pro forma capitalization of William Penn
Bancorp as of September 30, 2007. The minimum, midpoint, maximum and maximum, as
adjusted, pro forma capitalization amounts assume the sale of 1,024,740 shares,
1,203,125 shares, 1,381,511 shares and 1,586,655 shares, respectively, at an
offering price of $10.00 per share.
William Penn Bancorp, Inc.,
Pro Forma Capitalization at
September 30, 2007(1)
William Penn Bank, --------------------------------------------------------
Historical Capitalization at Maximum,
September 30, 2007 Minimum Midpoint Maximum as adjusted
------------------ ----------- ----------- ------------- ------------
(In thousands)
Deposits(2) $ 157,687 $ 157,687 $ 157,687 $ 157,687 $ 157,687
Borrowings 71,000 71,000 71,000 71,000 71,000
---------------- ----------- ----------- ------------- ------------
Total deposits and borrowings $ 228,687 $ 228,687 $ 228,687 $ 228,687 $ 228,687
================ =========== =========== ============= ============
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, no shares outstanding $ -- $ -- $ -- $ -- $ --
Common stock, $0.10 par value,
49,000,000 shares authorized, assuming
shares outstanding as shown(3) -- 364 428 492 566
Additional paid-in capital (3) -- 9,939 11,787 13,632 15,756
Retained earnings 34,690 34,690 34,690 34,690 34,690
Accumulated other comprehensive loss (174) (174) (174) (174) (174)
Less:
Capital contribution to MHC(4) -- (100) (100) (100) (100)
Less:
Expense of stock contribution to foundation -- (670) (813) (955) (1,119)
Expense of cash contribution to foundation -- (150) (150) (150) (150)
Plus:
Tax benefit of contribution to foundation(5) -- 279 327 376 431
Less:
Common stock acquired by ESOP(6) -- (873) (1,028) (1,182) (1,359)
Common stock acquired by restricted stock plan(7) -- (713) (839) (965) (1,110)
--------------- ------------ ------------- -------------- --------------
Total stockholders' equity $ 34,516 $ 42,592 $ 44,128 $ 45,664 $ 47,431
=============== ========== =========== ============= ============
____________________
(1) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plan that may be adopted by William Penn
Bancorp and presented for approval by the stockholders after the offering.
An amount equal to 4.9% of the total number of shares outstanding after the
offering, including shares held by William Penn, MHC, would be reserved for
issuance upon the exercise of options to be granted under the stock option
plan following the stock offering. See Management - Future Stock Benefit
Plans - Stock Option Plan.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Withdrawals to purchase common stock will
reduce pro forma deposits by the amounts of the withdrawals.
(3) Pro forma data includes all shares to be outstanding upon completion of the
stock offering, including shares held by William Penn, MHC and shares held
by the charitable foundation. Total outstanding shares upon completion of
the
22
offering will be 3,639,063, 4,281,250, 4,923,437 and 5,661,953, at the
minimum, midpoint, maximum and adjusted maximum, respectively.
(4) Pro forma data reflects a reduction of $100,000 to the initial
capitalization of William Penn Bancorp for the initial capitalization of
William Penn, MHC.
(5) Represents the tax effect of the contribution to the charitable foundation
based on a 34% tax rate. The realization of the deferred tax benefit is
limited annually to a maximum deduction for charitable foundations equal to
10% of William Penn Bancorp's annual taxable income, subject to our ability
to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made.
(6) Assumes that 8% of the aggregate shares sold in the offering plus
contributed to the foundation will be purchased by the William Penn Bank,
FSB Employee Stock Ownership Plan (the "ESOP"), and that the funds used to
acquire those shares will be borrowed from William Penn Bancorp, concurrent
with the offering. For an estimate of the impact of the loan on earnings,
see Pro Forma Data. William Penn Bank intends to make scheduled
discretionary contributions to the ESOP sufficient to enable it to service
and repay its debt over a ten year period. The amount of shares to be
acquired by the ESOP is reflected as a reduction of stockholders' equity.
See Management - Future Stock Benefit Plans - Employee Stock Ownership
Plan. If the ESOP is unable to purchase stock in the stock offering due to
an oversubscription in the offering by Eligible Account Holders having
first priority, and the purchase price in the open market is greater than
the original $10.00 price per share, there will be a corresponding
reduction in stockholders' equity.
(7) Assumes that an amount equal to 1.96% of the total number of shares
outstanding after the offering, including shares held by William Penn, MHC
and the charitable foundation, is purchased by the restricted stock plan
following the stock offering. The stock purchased by the restricted stock
plan is reflected as a reduction of stockholders' equity. See footnote (2)
to the tables under Pro Forma Data.
PRO FORMA DATA
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. The net proceeds of the offering are currently
estimated to be between $9.6 million and $13.2 million ($15.2 million at the
adjusted maximum), based on the following assumptions:
o Shares sold in the offering will be sold in either the subscription
offering or the community offering, with no shares being sold in a
syndicated community offering; and
o Expenses of the offering, including the fees and expenses of Keefe,
Bruyette & Woods, are estimated to be between approximately $613,000
at the minimum and $646,000 at the maximum ($665,000 at the adjusted
maximum).
The following tables set forth the pro forma net income for the
twelve-month period ended June 30, 2007 and the three-month period ended
September 30, 2007 and pro forma stockholders' equity as of June 30, 2007 and
September 30, 2007. In preparing these tables, we have made the following
assumptions:
o Pro forma net income has been calculated assuming the stock had been
sold at the beginning of the periods and the net proceeds had been
invested at an average yield of 4.91% for the twelve-month period
ended June 30, 2007 and at an annualized average yield of 4.05% for
the three-month period ended September 30, 2007, which represents the
yield on a one-year U.S. Treasury bill as of June 30, 2007 and
September 30, 2007, respectively. That yield is used for the pro forma
calculations rather than an arithmetic average of the average yield on
interest-earning assets and the average rate paid on deposits because
we believe that the one-year U.S. Treasury bill rate is a more
accurate estimate of the rate that would be obtained on the investment
of net proceeds from the offering. The pro forma after-tax yield
(based upon a 34% tax rate) on the net
23
proceeds is assumed to be 3.24% for the twelve-month period ended June
30, 2007 and 2.67% for the three-month period ended September 30,
2007.
o We assumed that 8.0% of the aggregate shares sold in the offering and
contributed to the charitable foundation were purchased in the
offering by the William Penn Bank, FSB Employee Stock Ownership Plan
(the "ESOP") at a price of $10.00 per share using funds borrowed from
William Penn Bancorp. We assumed that William Penn Bank would make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the loan. We have assumed a
10-year amortization period for the loan. The stock acquired by the
ESOP is reflected as a reduction of stockholders' equity. See
Management - Future Stock Benefit Plans - Employee Stock Ownership
Plan.
o We assumed that the stock option plan had been approved by
stockholders of William Penn Bancorp and that William Penn Bancorp had
reserved for future issuance upon the exercise of options to be
granted under the plan an amount of stock equal to 4.9% of the total
number of shares outstanding after the offering, including shares held
by William Penn, MHC and the charitable foundation. We assumed that
options for all shares reserved under the plan were granted to plan
participants at the beginning of the periods and that 25% of the
options granted were non-qualified options for income tax purposes. We
assumed that the options would vest at a rate of 20% per year and that
compensation expense would be recognized on a straight-line basis over
the five-year vesting period. See Management - Future Stock Benefit
Plans - Stock Option Plan.
o We assumed that the restricted stock plan had been approved by
stockholders of William Penn Bancorp and that the restricted stock
plan had acquired an amount of stock equal to 1.96% of the total
number of shares outstanding after the offering, including shares held
by William Penn, MHC, at the beginning of the periods presented
through open market purchases at a price of $10.00 per share using
funds contributed to the restricted stock plan by William Penn Bank.
We assumed that all shares held by the plan were granted to plan
participants at the beginning of the periods, that the shares would
vest at a rate of 20% per year and that compensation expense will be
recognized on a straight-line basis over the 5-year vesting period.
See Management - Future Stock Benefit Plans - Restricted Stock Plan.
o We assumed that no withdrawals were made from deposit accounts to
purchase shares in the offering.
Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
stock, as adjusted in the pro forma earnings per share to give effect to the
purchase of shares by the William Penn Bank, FSB Employee Stock Ownership Plan.
Pro forma stockholders' equity amounts have been calculated as if the
stock had been sold at the end of the periods and no effect has been given to
the assumed earnings effect of the transaction.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if William Penn Bancorp were liquidated. It
does not give effect to the impact of the bad debt reserve in the event of
liquidation. The pro forma data does not predict how much we will earn in the
future. You should not use the following information to predict future results
of operations or as a basis for projections of market value of the stock
following the stock offering.
24
William Penn Bancorp, Inc.
Pro Forma
At or For the Twelve Months Ended June 30, 2007
----------------------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted
---------------- ------------- ------------- -------------
1,024,740 1,203,125 1,381,511 1,586,655
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
Per share per share per share per share
---------------- ------------- ------------- -------------
(Dollars in thousands,
Except per share amounts)
Gross proceeds $ 10,247 $ 12,031 $ 13,815 $ 15,867
Less expenses (613) (630) (646) (665)
--------------------------------- --------------------------------
Estimated net proceeds $ 9,634 $ 11,401 $ 13,169 $ 15,202
Less: cash contribution to foundation (150) (150) (150) (150)
Less: common stock purchased by ESOP (873) (1,028) (1,182) (1,359)
Less: common stock purchased by restricted stock plan (713) (839) (965) (1,110)
--------------------------------- --------------------------------
Estimated net cash proceeds $ 7,898 $ 9,384 $ 10,869 $ 12,583
================ ============== ============== ==============
Consolidated net income:
- ------------------------
Historical $ 1,560 $ 1,560 $ 1,560 $ 1,560
Pro forma income on net proceeds 256 304 352 408
Less: loss of income from MHC capitalization (3) (3) (3) (3)
Less: loss of income from foundation contribution (5) (5) (5) (5)
Pro forma ESOP adjustment(1) (58) (68) (78) (90)
Pro forma restricted stock plan adjustment(2) (94) (111) (127) (147)
Pro forma stock option plan adjustment(3) (126) (148) (170) (196)
--------------------------------- --------------------------------
Pro forma net income $ 1,530 $ 1,529 $ 1,529 $ 1,527
================ ============== ============== ==============
Per share net income:
- ---------------------
Historical $ 0.44 $ 0.37 $ 0.32 $ 0.28
Pro forma income on net proceeds 0.07 0.07 0.07 0.07
Pro forma ESOP adjustment(1) (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment(2) (0.03) (0.03) (0.03) (0.03)
Pro forma stock option plan adjustment(3) (0.04) (0.04) (0.04) (0.04)
--------------------------------- --------------------------------
Pro forma net income per share(4) $ 0.42 $ 0.35 $ 0.30 $ 0.26
================ ============== ============== ==============
Offering price as a multiple of pro forma earnings per share 23.81x 28.57x 33.33x 38.46x
Number of shares outstanding for pro forma
net income per share calculations 3,560,460 4,188,775 4,817,090 5,539,655
25
William Penn Bancorp, Inc.
Pro Forma
At or For the Twelve Months Ended June 30, 2007
-------------------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted
------------ ------------ ------------- -------------
1,024,740 1,203,125 1,381,511 1,586,655
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
----------- ------------ ------------- ------------
Stockholders' Equity:
- ---------------------
Historical $ 34,058 $ 34,058 $ 34,058 $ 34,058
Estimated net proceeds 9,634 11,401 13,169 15,202
Plus: shares issued to foundation 670 813 955 1,119
Less: shares issued to foundation (670) (813) (955) (1,119)
Less: capitalization of MHC (100) (100) (100) (100)
Less: cash contribution to foundation (150) (150) (150) (150)
Plus: tax benefit of contribution to foundation 279 327 376 431
Less: common stock acquired by ESOP (873) (1,028) (1,182) (1,359)
Less: common stock acquired by restricted stock plan (713) (839) (965) (1,110)
----------- ------------ ------------- ------------
Pro forma stockholders' equity $ 42,135 $ 43,669 $ 45,206 $ 46,972
=========== ============ ============= ============
Book Value Per Share:
- ---------------------
Historical $ 9.36 $ 7.96 $ 6.92 $ 6.02
Estimated net proceeds 2.65 2.66 2.67 2.68
Plus: shares issued to foundation 0.18 0.19 0.19 0.20
Less: shares issued to foundation (0.18) (0.19) (0.19) (0.20)
Less: capitalization of MHC (0.03) (0.02) (0.02) (0.02)
Less: cash contribution to foundation (0.04) (0.04) (0.03) (0.03)
Plus: tax benefit of contribution to foundation 0.08 0.08 0.08 0.08
Less: common stock acquired by ESOP (0.24) (0.24) (0.24) (0.24)
Less: common stock acquired by restricted stock plan (0.20) (0.20) (0.20) (0.20)
----------- ------------ ------------- ------------
Pro forma book value per share $ 11.58 $ 10.20 $ 9.18 $ 8.29
=========== ============ ============= ============
Offering price as a % of pro forma book value per share 86.36% 98.04% 108.93% 120.63%
Number of shares outstanding for pro forma book value
per share calculations 3,639,063 4,281,250 4,923,437 5,661,953
__________________
(1) The expense of William Penn Bank's contribution to its Employee Stock
Ownership Plan (ESOP) is based on an assumed average fair value of $10.00
per share. If the fair market value is different than $10.00 per share at
the time the shares are released to ESOP participants, the related expense
recognized will be different. A higher fair market value will result in
higher compensation expense for the Bank.
(2) Assumes that the restricted stock plan is approved by stockholders of
William Penn Bancorp and that the restricted stock plan acquires an amount
of stock equal to 1.96% of the total number of shares outstanding after the
offering, including shares held by William Penn, MHC, at the beginning of
the period through open market purchases at a price of $10.00 per share
using funds contributed to the restricted stock plan by William Penn Bank.
Assumes also that all
26
shares held by the plan were granted to plan participants at the beginning
of the periods, that the shares vest at a rate of 20% per year and that
compensation expense will be recognized on a straight-line basis over the
5-year vesting period. The issuance of authorized but unissued shares of
stock to the restricted stock plan instead of open market purchases would
dilute the voting interests of stockholders that purchased shares in the
offering by approximately 1.9%. If the actual cost of the shares acquired
by the restricted stock plan is different than $10.00 per share, the
expense recognized will be different. There can be no assurance that
stockholder approval of the restricted stock plan will be obtained or that
the actual purchase price of the shares will be equal to $10.00 per share.
See Management - Future Stock Benefit Plans - Restricted Stock Plan.
(3) The pro forma net income assumes that the options granted under the stock
option plan have a value of $3.86 per option, which was determined using
the Black-Scholes-Merton option pricing formula using the following
assumptions: (i) the trading price on date of grant was $10.00 per share;
(ii) exercise price is equal to the trading price on the date of grant;
(iii) dividend yield of 0%; (iv) vesting period of five years and expected
life of 10 years; (v) expected volatility of 12.27%; and (vi) risk-free
interest rate of 4.59%. Because there is currently no market for William
Penn Bancorp's common stock, the assumed expected volatility is based on
the SNL Financial MHC index. If the fair market value per share on the date
of grant is different than $10.00, or if the assumptions used in the option
pricing formula are different from those used in preparing this pro forma
data, the value of the options and the related expense recognized will be
different. There can be no assurance that the actual fair market value per
share on the date of grant, and correspondingly the exercise price of the
options, will be $10.00 per share. The issuance of authorized but unissued
shares of stock instead of open market purchases to fund exercises of
options granted under the stock option plan would dilute the voting
interests of stockholders that purchased shares in the offering by
approximately 4.7%. See Management - Future Stock Benefit Plans - Stock
Option Plan.
(4) For purposes of calculating earnings per share, only the shares committed
to be released under the William Penn Bank, FSB Employee Stock Ownership
Plan (the "ESOP") were considered outstanding. For purposes of calculating
book value per share, all shares under the ESOP were considered
outstanding. We have also assumed that no options granted under the stock
option plan were exercised during the period and that the trading price of
William Penn Bancorp common stock at the end of the period was $10.00 per
share. Under this assumption, using the treasury stock method, no
additional shares of stock were considered to be outstanding for purposes
of calculating earnings per share or book value per share. No impact is
shown to the pro forma net income per share for either (1) the loss of
income from the capitalization of the mutual holding company or (2) the
loss of income from the contribution to the foundation because the effect
of those items on a per share basis is de minimus.
27
William Penn Bancorp, Inc.
Pro Forma
At or For the Three Months Ended September 30, 2007
--------------------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted
------------ ------------- ------------- -------------
1,024,740 1,203,125 1,381,511 1,586,655
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
----------- ------------- ------------- -------------
(Dollars in thousands,
Except per share amounts)
Gross proceeds $ 10,247 $ 12,031 $ 13,815 $ 15,867
Less expenses (613) (630) (646) (665)
----------- ------------- ------------- -------------
Estimated net proceeds $ 9,634 $ 11,401 $ 13,169 $ 15,202
Less: cash contribution to foundation (150) (150) (150) (150)
Less: common stock purchased by ESOP (873) (1,028) (1,182) (1,359)
Less: common stock purchased by restricted stock plan (713) (839) (965) (1,110)
----------- ------------- ------------- -------------
Estimated net cash proceeds $ 7,898 $ 9,384 $ 10,869 $ 12,583
=========== ============= ============= =============
Consolidated net income:
- ------------------------
Historical $ 458 $ 458 $ 458 $ 458
Pro forma income on net proceeds 53 63 73 84
Less: loss of income from MHC capitalization (1) (1) (1) (1)
Less: loss of income from foundation contribution (1) (1) (1) (1)
Pro forma ESOP adjustment(1) (15) (17) (20) (23)
Pro forma restricted stock plan adjustment(2) (24) (28) (32) (37)
Pro forma stock option plan adjustment(3) (32) (37) (43) (49)
----------- ------------- ------------- -------------
Pro forma net income $ 438 $ 437 $ 434 $ 431
============ ============== ============== ==============
Per share net income:
- ---------------------
Historical $ 0.13 $ 0.11 $ 0.10 $ 0.08
Pro forma income on net proceeds 0.01 0.02 0.02 0.02
Pro forma ESOP adjustment(1) 0.00 0.00 0.00 0.00
Pro forma restricted stock plan adjustment(2) (0.01) (0.01) (0.01) (0.01)
Pro forma stock option plan adjustment(3) (0.01) (0.01) (0.01) (0.01)
----------- ------------- ------------- -------------
Pro forma net income per share(4) $ 0.12 $ 0.11 $ 0.10 $ 0.08
============ ============== ============== ==============
Offering price as a multiple of pro forma earnings per share 20.83x 22.73x 25.00x 31.25x
Number of shares outstanding for pro forma net income
per share calculations 3,553,909 4,181,069 4,808,228 5,529,464
28
William Penn Bancorp, Inc.
Pro Forma
At or For the Three Months Ended September 30, 2007
-------------------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted
------------ ------------ ------------- -------------
1,024,740 1,203,125 1,381,511 1,586,655
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
----------- ------------ ------------- ------------
Stockholders' Equity:
- ---------------------
Historical $ 34,516 $ 34,516 $ 34,516 $ 34,516
Estimated net proceeds 9,634 11,401 13,169 15,202
Plus: shares issued to foundation 670 813 955 1,119
Less: shares issued to foundation (670) (813) (955) (1,119)
Less: capitalization of MHC (100) (100) (100) (100)
Less: cash contribution to foundation (150) (150) (150) (150)
Plus: tax benefit of contribution to foundation 279 327 376 431
Less: common stock acquired by ESOP (873) (1,028) (1,182) (1,359)
Less: common stock acquired by restricted stock plan (713) (839) (965) (1,110)
----------- ------------ ------------- ------------
Pro forma stockholders' equity $ 42,593 $ 44,127 $ 45,664 $ 47,430
=========== ============ ============= ============
Book Value Per Share:
- ---------------------
Historical $ 9.48 $ 8.06 $ 7.01 $ 6.10
Estimated net proceeds 2.65 2.66 2.67 2.68
Plus: shares issued to foundation 0.18 0.19 0.19 0.20
Less: shares issued to foundation (0.18) (0.19) (0.19) (0.20)
Less: capitalization of MHC (0.03) (0.02) (0.02) (0.02)
Less: cash contribution to foundation (0.04) (0.04) (0.04) (0.03)
Plus: tax benefit of contribution to foundation 0.08 0.08 0.08 0.08
Less: common stock acquired by ESOP (0.24) (0.24) (0.24) (0.24)
Less: common stock acquired by restricted stock plan (0.20) (0.20) (0.20) (0.20)
----------- ------------ ------------- ------------
Pro forma book value per share $ 11.70 $ 10.30 $ 9.27 $ 8.37
=========== ============ ============= ============
Offering price as a % of pro forma book value per share 85.47% 97.09% 107.87% 119.47%
Number of shares outstanding for pro forma book value
per share calculations 3,639,063 4,281,250 4,923,437 5,661,953
__________________
(1) The expense of William Penn Bank's contribution to its Employee Stock
Ownership Plan (ESOP) is based on an assumed average fair value of $10.00
per share. If the fair market value is different than $10.00 per share at
the time the shares are released to ESOP participants, the related expense
recognized will be different. A higher fair market value will result in
higher compensation expense for the Bank.
(2) Assumes that the restricted stock plan is approved by stockholders of
William Penn Bancorp and that the restricted stock plan acquires an amount
of stock equal to 1.96% of the total number of shares outstanding after the
offering, including shares held by William Penn, MHC, at the beginning of
the period through open market purchases at a price of $10.00 per share
using funds contributed to the restricted stock plan by William Penn Bank.
Assumes also that all
29
shares held by the plan were granted to plan participants at the beginning
of the periods, that the shares vest at a rate of 20% per year and that
compensation expense will be recognized on a straight-line basis over the
5-year vesting period. The issuance of authorized but unissued shares of
stock to the restricted stock plan instead of open market purchases would
dilute the voting interests of stockholders that purchased shares in the
offering by approximately 1.9%. If the actual cost of the shares acquired
by the restricted stock plan is different than $10.00 per share, the
expense recognized will be different. There can be no assurance that
stockholder approval of the restricted stock plan will be obtained or that
the actual purchase price of the shares will be equal to $10.00 per share.
See Management - Future Stock Benefit Plans - Restricted Stock Plan.
(3) The pro forma net income assumes that the options granted under the stock
option plan have a value of $3.86 per option, which was determined using
the Black-Scholes-Merton option pricing formula using the following
assumptions: (i) the trading price on date of grant was $10.00 per share;
(ii) exercise price is equal to the trading price on the date of grant;
(iii) dividend yield of 0%; (iv) vesting period of five years and expected
life of 10 years; (v) expected volatility of 12.27%; and (vi) risk-free
interest rate of 4.59%. Because there is currently no market for William
Penn Bancorp's common stock, the assumed expected volatility is based on
the SNL Financial MHC index. If the fair market value per share on the date
of grant is different than $10.00, or if the assumptions used in the option
pricing formula are different from those used in preparing this pro forma
data, the value of the options and the related expense recognized will be
different. There can be no assurance that the actual fair market value per
share on the date of grant, and correspondingly the exercise price of the
options, will be $10.00 per share. The issuance of authorized but unissued
shares of stock instead of open market purchases to fund exercises of
options granted under the stock option plan would dilute the voting
interests of stockholders that purchased shares in the offering by
approximately 4.7%. See Management - Future Stock Benefit Plans - Stock
Option Plan.
(4) For purposes of calculating earnings per share, only the shares committed
to be released under the William Penn Bank, FSB Employee Stock Ownership
Plan (the "ESOP") were considered outstanding. For purposes of calculating
book value per share, all shares under the ESOP were considered
outstanding. We have also assumed that no options granted under the stock
option plan were exercised during the period and that the trading price of
William Penn Bancorp common stock at the end of the period was $10.00 per
share. Under this assumption, using the treasury stock method, no
additional shares of stock were considered to be outstanding for purposes
of calculating earnings per share or book value per share. No impact is
shown to the pro forma net income per share for either (1) the loss of
income from the capitalization of the mutual holding company or (2) the
loss of income from the contribution to the foundation because the effect
of those items on a per share basis is de minimus.
30
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE FOUNDATION
As reflected in the table below, if the charitable foundation is not
established and funded as part of the offering, RP Financial LC estimates that
the pro forma valuation of William Penn Bancorp would be greater. At the
minimum, midpoint, maximum and adjusted maximum of the valuation range, the pro
forma valuation of William Penn Bancorp is $36.4 million, $42.8 million, $49.2
million and $56.6 million with the charitable foundation, as compared to $36.8
million, $43.3 million, $49.8 million and $57.3 million, respectively, without
the charitable foundation. There is no assurance that in the event the
charitable foundation were not formed, the appraisal prepared at that time would
conclude that the pro forma market value of William Penn Bancorp would be the
same as that estimated in the table below. Any appraisal prepared at that time
would be based on the facts and circumstances existing at that time, including,
among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios at or for the three-month period ended
September 30, 2007, assuming the offering was completed at September 30, 2007,
with and without the charitable foundation.
Pro Forma Valuation of William Penn Bancorp, Inc. At or For the Three Months Ended September 30, 2007
-----------------------------------------------------------------------------------------------------
At the Maximum
At the Minimum At the Midpoint At the Maximum as Adjusted
of Estimated of Estimated of Estimated of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
----------------------- ---------------------- ----------------------- -----------------------
With Without With Without With Without With Without
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Estimated Offering Amount $ 10,247 $ 11,050 $ 12,031 $ 13,000 $13,815 $ 14,950 $15,867 $ 17,193
Pro Forma Market Capitalization
(Offering and Foundation) $ 10,917 $ 11,050 $ 12,844 $ 13,000 $14,770 $ 14,950 $16,986 $ 17,193
Estimated Full Value $ 36,391 $ 36,833 $ 42,812 $ 43,333 $49,234 $ 49,833 $56,620 $ 57,308
Pro Forma Total Assets $274,784 $275,431 $276,320 $277,080 $277,856 $278,728 $279,623 $280,625
Pro Forma Total Liabilities $232,192 $232,192 $232,192 $232,192 $232,192 $232,192 $232,192 $232,192
Pro Forma Stockholders' Equity $ 42,593 $ 43,239 $ 44,127 $ 44,888 $45,664 $ 46,536 $47,430 $ 48,433
Pro Forma Net Income
(3 months ended 9/30/07) $ 438 $ 446 $ 437 $ 445 $ 434 $ 443 $ 431 $ 442
Pro Forma Stockholders'
Equity per Share $ 11.70 $ 11.73 $ 10.30 $ 10.36 $ 9.27 $ 9.34 $ 8.37 $ 8.44
Pro Forma Net Income per Share
(3 months ended 9/30/07) $ 0.12 $ 0.13 $ 0.11 $ 0.11 $ 0.10 $ 0.09 $ 0.08 $ 0.08
Pro Forma Pricing Ratios
Offering price as a % of Pro Forma
Stockholders' Equity % per Share 85.47 % 85.25% 97.09 % 96.53% 107.87 % 107.07% 119.47% 118.48%
Offering Price to Pro Forma
Net Income per Share 20.83x 19.23x 22.73x 22.73x 25.00 x 27.78x 31.25x 31.25x
Pro Forma Financial Ratios
Return on Assets 0.16 % 0.16% 0.16 % 0.16% 0.16 % 0.16% 0.15% 0.16%
Return on Equity 1.03 % 1.03% 0.99 % 0.99% 0.95 % 0.95% 0.91% 0.91%
Stockholders' Equity as a
% of Total Assets 15.50 % 15.70% 15.97 % 16.20% 16.43 % 16.70% 16.96% 17.26%
31
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents William Penn Bank's historical and pro
forma capital position relative to its regulatory capital requirements as of
September 30, 2007. The minimum, midpoint, maximum and maximum, as adjusted, pro
forma capital levels assume the sale of 1,024,740 shares, 1,203,125 shares,
1,381,511 shares and 1,586,655 shares, respectively, at an offering price of
$10.00 per share. Pro forma capital levels assume receipt by the Bank of 50% of
the net proceeds at all points of the offering range. However, such additional
amount as may be necessary will be contributed to the Bank so that the ratio of
its tangible capital to its total assets upon completion of the offering is at
least 10%. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see Use of Proceeds, Capitalization and Pro Forma
Data. For a discussion of the capital standards applicable to William Penn Bank,
see Regulation - Regulation of William Penn Bank - Regulatory Capital
Requirements.
William Penn Bank
William Penn Bank Capital Compliance, Pro Forma, at September 30, 2007
Capital Compliance, Historical, -------------------------------------------------------------------------------------
At September 30, 2007 Minimum Midpoint Maximum Maximum, as adjusted
--------------------- ------------------- ------------------- ------------------- --------------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1)
-------- --------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
GAAP Capital $34,516 12.94% $38,460 14.21% $39,189 14.44% $39,919 14.67% $40,758 14.93%
Tangible Capital(2) $34,690 13.00% $38,634 14.27 $39,363 14.50% $40,093 14.73% $40,932 14.99%
Tangible Capital
Requirement 4,003 1.50% 4,062 1.50% 4,073 1.50% 4,084 1.50% 4,096 1.50%
-------- -------------------- --------------------- --------------------- --------------------- ----------
Excess $30,687 11.50% $34,572 12.77% $35,290 13.00% $36,009 13.23% $36,836 13.49%
======== ==================== ===================== ===================== ===================== ==========
Core or Tier 1 Capital(2) $34,690 13.00% $38,634 14.27 $39,363 14.50% $40,093 14.73% $40,932 14.99%
Core or Tier 1 Capital
Requirement 10,654 4.00% 10,831 4.00% 10,860 4.00% 10,890 4.00% 10,923 4.00%
-------- -------------------- --------------------- --------------------- --------------------- ----------
Excess $24,036 9.00% $27,803 10.27% $28,503 10.50% $29,203 10.73% $30,009 10.99%
======== ==================== ===================== ===================== ===================== ==========
Risk-Based Capital(2) (3) $35,598 23.85% $39,542 26.36% $40,271 26.82% $41,001 27.28% $41,840 27.80%
Risk-Based Capital
Requirement 11,939 8.00% 12,002 8.00% 12,014 8.00% 12,025 8.00% 12,039 8.00%
-------- -------------------- --------------------- --------------------- --------------------- ----------
Excess $23,659 15.85% $27,540 18.36% $28,257 18.82% $28,976 19.28% $29,801 19.80%
======== ==================== ===================== ===================== ===================== ==========
Reconciliation of capital infused into William Penn Bank:
Net proceeds infused $ 4,817 $ 5,701 $ 6,585 $ 7,601
Less: common stock acquired by ESOP (873) (1,028) (1,182) (1,359)
------- ------- ------- -------
Pro forma increase in GAAP and
regulatory capital $ 3,944 $ 4,673 $ 5,403 $ 6,242
======= ======= ======= =======
_________________
(1) Tangible Capital levels and Core or Tier 1 Risk-Based capital levels are
shown as a percentage of total adjusted assets. Risk-based capital is shown
as a percentage of risk-weighted assets.
(2) Generally accepted accounting principles, referred to as "GAAP," capital
includes $174,000 of accumulated other comprehensive loss, which is
excluded in Tangible Capital and Core or Tier 1 Capital. The difference
between Core or Tier 1 Capital and Risk-Based Capital is attributable to
the addition of general loan loss reserves of $1.3 million and the
deduction of $415,000 for equity investments and other assets required to
be deducted.
(3) Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
32
RECENT DEVELOPMENTS
The following financial information and other data should be read
together with the consolidated financial statements and the notes thereto
beginning on page F-1 of this document. The data at and for the three and six
months ended December 31, 2007 and 2006 is unaudited, however, in the opinion of
management, all adjustments, consisting of normal recurring adjustments, that
are necessary for a fair presentation of the interim periods have been
reflected. The results of operations for the three and six months ended December
31, 2007 are not necessarily indicative of the results of operations that may be
expected for the entire year ending June 30, 2008 or any other period.
At At
December 31, June 30,
2007 2007
--------------------------------------
(In Thousands)
Assets $ 268,937 $ 268,830
Loans receivable, net 183,557 180,204
Cash and amounts due from banks and 16,238 17,647
interest-bearing time deposits
Securities available for sale 12 25
Securities held to maturity 59,236 61,637
Deposits 160,086 158,940
FHLB borrowings 71,000 71,000
Equity 33,987 34,058
For the Three For the Six
Months Ended Months Ended
December 31, December 31,
------------------ ------------------
2007 2006 2007 2006
------- ------- ------- -------
(In Thousands)
Summary of Operations:
Interest income $ 4,050 $ 3,753 $ 8,132 $ 7,549
Interest expense 2,623 2,490 5,303 4,936
------- ------- ------- -------
Net interest income 1,427 1,263 2,829 2,613
Provision for loan losses - 41 20 81
------- ------- ------- -------
Net interest income after provision 1,427 1,222 2,809 2,532
for loan losses
Noninterest income 73 92 132 148
Noninterest expense 2,319 715 3,067 1,472
------- ------- ------- -------
(Loss) income before income taxes (819) 599 (126) 1,208
Income tax (benefit) expense (290) 151 (55) 358
------- ------- ------- -------
Net (loss) income $ (529) $ 448 $ (71) $ 850
======= ======= ======= =======
33
At or For the At or For the
Three Months Six Months
Ended Ended
December 31,(1) December 31,(1)
---------------------- ---------------------------
2007 2006 2007 2006
--------- ----------- ------------ ------------
Performance Ratios:
Return on average assets (net income (loss)
divided by average total assets) (2) (0.79)% 0.70 % (0.05)% 0.66 %
Return on average equity (net income (loss)
divided by average equity) (2) (6.41) 5.39 (0.41) 5.15
Net interest rate spread (2) 1.54 1.38 1.55 1.45
Net interest margin on average
interest-earnings assets (2) 2.16 1.99 2.14 2.05
Average interest-earning assets to
average interest-bearing liabilities (2) 115.53 115.60 114.84 115.53
Efficiency ratio (noninterest expense
divided by the sum of net interest
income and noninterest income) 154.60 52.77 103.58 53.31
Noninterest expense to average assets (2) 3.45 1.11 2.28 1.14
Asset Quality Ratios:
Non-performing loans to total loans 0.41 0.35 0.41 0.35
Non-performing assets to total assets 0.28 0.24 0.28 0.24
Net charge-offs to average
loans outstanding (2) - (0.003) - (0.003)
Allowance for loan losses to total loans 1.00 0.98 1.00 0.98
Allowance for loan losses to
non-performing loans 246.36 283.31 246.36 283.31
Capital Ratios:
Average equity to average
assets (average equity divided
by average total assets) (2) 12.82 12.89 12.77 12.75
Equity to assets at period end 12.64 12.73 12.64 12.73
Number of Full Service Offices: 3 3 3 3
________________
(1) Ratios are annualized where appropriate.
(2) Average balances are derived from month end balances. Management does not
believe that the use of month end balances rather than daily balances has
caused any material differences in the information presented.
Comparison of Financial Condition at December 31, 2007 and June 30, 2007
Our total assets were $269.0 million at December 31, 2007, representing
a slight increase over $268.8 million at June 30, 2007, primarily due to a $3.4
million increase in loans receivable, net to $183.6 million at December 31, 2007
from $180.2 million at June 30, 2007. The increase in loans was offset by a $1.4
million or 8.0% decrease in cash and amounts due from banks and a $2.4 million
or 3.9% decrease in securities held to maturity to $59.2 million from $61.6
million. There was a $1.1 million increase in deposits to $160.1 million from
$158.9 million, and FHLB borrowings remained unchanged at $71.0 million.
34
Equity fell by $71,000 to $34.0 million at December 31, 2007, from
$34.1 million at June 30, 2007. The decrease was the result of the Bank's
decision to refinance a portion of its FHLB advances in December 2007. In
connection with that refinancing, we incurred significant prepayment costs; the
prepayment penalty was a charge to earnings during the quarter ended December
31, 2007 and amounted to $1.5 million. The resulting net loss incurred for the
quarter was responsible for the decrease in equity.
Comparison of Operating Results for the Three and Six Months Ended December 31,
2007 and 2006
General. For the three months ended December 31, 2007 there was a net
loss of $529,000. The net loss was the result of the prepayment penalty for the
refinancing of FHLB advances during the quarter. The prepayment penalty, net of
the tax effect, was $1.0 million. For the six months ended December 31, 2007,
there was a net loss of $71,000. For the three and six months ended December 31,
2006, net income totaled $448,000 and $850,000, respectively.
The interest rate ^spread and margin for the six months ended December
31, 2007 were 1.55% and 2.14% as compared to 1.45% and 2.05% for the six months
ended December 31, 2006. Average interest-earning assets rose to $264.3 million
for the 2007 period as compared to $255.1 million for the 2006 period. Average
interest-bearing liabilities were $230.2 million for the 2007 period compared to
$220.8 million for 2006 period.
Interest Income. Total interest income increased $297,000 to $4.1
million for the three months ended December 31, 2007, from $3.8 million for the
three months ended December 31, 2006. Interest income on loans receivable was
$3.0 million for the three months ended December 31, 2007 compared to $2.9
million for the same period in 2006. Interest income on securities improved by
$156,000 to total $839,000 compared to $683,000 in the prior year period.
For the six months ended December 31, 2007, total interest income
increased $583,000 to $8.1 million, from $7.5 million for the six months ended
December 31, 2006. Interest income on loans receivable was $262,000 higher, $6.0
million for the six months ended December 31, 2007 compared to $5.7 million for
the same period in 2006. Interest income on securities improved by $233,000 to
total $1.7 million compared to $1.4 million in the prior year period.
Interest Expense. Total interest expense increased $133,000 to $2.7
million for the three months ended December 31, 2007 as compared to $2.5 million
for the same period in 2006. The increase resulted primarily from an increase in
deposit expense to $1.7 million from $1.5 million. Expense on borrowings was
$972,000 compared to $970,000.
For the six months ended December 31, 2007, total interest expense
increased $367,000 to $5.3 million as compared to $4.9 million for the same
period in 2006. The increase resulted primarily from a $309,000 increase in
deposit expense to $3.3 million from $3.0 million. Expense on borrowings was
$2.0 million compared to $1.9 million.
Provision for Loan Losses. We charge to operations provisions for loan
losses at a level required to reflect credit losses in the loan portfolio that
are both probable and reasonable to estimate. Management, in determining the
allowance for loan losses, considers the losses inherent in the loan portfolio
and changes in the nature and volume of our loan activities, along with general
economic and real estate market conditions. We utilize a two-tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of our loan portfolio. We establish a specific loan loss allowance for
an impaired loan based on delinquency status, size of loan, type of collateral
and/or appraisal of the
35
underlying collateral and financial condition of the borrower. We base general
loan loss allowances upon a combination of factors including, but not limited
to, actual loan loss experience, composition of the loan portfolio, current
economic conditions and management's judgment.
There was no provision for loan losses made during the three months
ended December 31, 2007 compared to $41,000 in the three months ended December
31, 2006. For the six months ended December 31, 2007 the provision totaled
$20,000 compared to $81,000 for the prior year period. Non-performing loans were
0.41% of total loans at December 31, 2007, as compared to 0.49% of total loans
at September 30, 2007 and 1.13% of total loans at June 30, 2007. The decrease in
non-performing loans between June 30, 2007 and December 31, 2007 is attributable
to a single loan relationship of approximately $1.2 million being brought
current.
Noninterest Income. Noninterest income was $73,000 for the three months
ended December 31, 2007 compared to $92,000 for same period in 2006. The
decrease was due to $7,000 of gains on sales of securities in the 2006 period
and none in the 2007 period and an $11,000 decline in other noninterest income.
Service fee income was $39,000 and $40,000 for the three months ended December
31, 2007 and 2006, respectively.
For the six months ended December 31, 2007, noninterest income was
$132,000 compared to $148,000 for same period in 2006 caused by a $3,000 decline
in service fee income. Other noninterest income was $67,000 and $79,000 for the
six months ended December 31, 2007 and 2006, respectively.
Noninterest Expense. Noninterest expense was significantly impacted
during the three months ended December 31, 2007 by the $1.5 million prepayment
penalty for refinancing FHLB advances and was $2.3 million compared to $715,000
for the same period in 2006. Without the penalty, noninterest expense would have
been $795,000 for the 2007 period. All components of noninterest expense were
higher in the 2007 period.
For the six months ended December 31, 2007, noninterest expense was
$3.1 million compared to $1.5 million for the same period in 2006. The 2007
period was significantly impacted by the $1.5 million prepayment penalty for
refinancing FHLB advances. Without the penalty, noninterest expense would have
been $1.5 million for the 2007 period. Salaries and employee benefits expense
fell by $2,000 for the 2007 period while occupancy and equipment expense and
other noninterest expense rose by $31,000 and $42,000, respectively.
Provision for Income Taxes. For the three and six months ended December
31, 2007 there was an income tax benefit of $290,000 and $55,000 as compared to
income tax expense of $151,000 and $358,000 for the same periods in 2006. The
benefit for the 2007 periods was the result of the net loss for those periods
caused by the FHLB prepayment penalty.
36
SELECTED FINANCIAL AND OTHER DATA
The following financial information and other data should be read
together with the consolidated financial statements and the notes thereto
beginning on page F-1 of this document. The data at and for the three months
ended September 30, 2007 and 2006 is unaudited, however, in the opinion of
management, all adjustments, consisting of normal recurring adjustments, that
are necessary for a fair presentation of the interim periods have been
reflected. The results of operations for the three months ended September 30,
2007 are not necessarily indicative of the results of operations that may be
expected for the entire year ending June 30, 2008 or any other period.
At At June 30,
September 30, -------------------------------
2007 2007 2006 2005
-------- -------- -------- --------
(In Thousands)
Assets $266,808 $268,830 $262,349 $261,162
Loans receivable, net 179,655 180,204 181,012 182,964
Cash and amounts due from banks and 17,299 17,647 10,277 10,835
interest-bearing time deposits
Securities available for sale 117 25 1,615 1,337
Securities held to maturity 60,327 61,637 60,600 57,455
Deposits 157,687 158,940 159,329 159,158
FHLB borrowings 71,000 71,000 66,000 67,000
Equity 34,516 34,058 32,672 30,704
For the Three
Months Ended
September 30, For the Year Ended June 30,
---------------------- ---------------------------------------
2007 2006 2007 2006 2005
---------- ---------- ------------ ----------- ------------
(In Thousands)
Summary of Operations:
Interest income $ 4,082 $ 3,796 $ 15,352 $ 14,782 $ 13,550
Interest expense 2,680 2,446 10,113 8,969 7,197
---------- ---------- ------------ ----------- ------------
Net interest income 1,402 1,350 5,239 5,813 6,353
Provision for loan losses 20 40 156 186 149
---------- ---------- ------------ ----------- ------------
Net interest income after provision 1,382 1,310 5,083 5,627 6,204
for loan losses
Noninterest income 59 56 267 143 91
Noninterest expense 748 757 3,042 2,837 2,787
---------- ---------- ------------ ----------- ------------
Income before income taxes 693 609 2,308 2,933 3,508
Provision for income taxes 235 207 748 967 1,244
---------- ---------- ------------ ----------- ------------
Net income $ 458 $ 402 $ 1,560 $ 1,966 $ 2,264
========== ========== ============ =========== ============
37
At or For the
Three Months
Ended At or For the Year
September 30,(1) Ended June 30,
------------------ ---------------------------------------
2007 2006 2007 2006 2005
------- --------- ----------- ----------- -----------
Performance Ratios:
Return on average assets (net income
divided by average total assets)(2) 0.68% 0.62% 0.60% 0.75% 0.88%
Return on average equity (net income
divided by average equity) (2) 5.35 4.90 4.67 6.21 7.66
Net interest rate spread(2) 1.48 1.51 2.11 1.74 1.42
Net interest margin on average
interest-earnings assets(2) 2.12 2.08 2.51 2.25 2.03
Average interest-earning assets to
average interest-bearing
liabilities(2) 116.13 115.91 116.13 114.67 114.08
Efficiency ratio (noninterest expense
divided by the sum of net interest
income and noninterest income) 51.20 53.84 55.25 47.63 43.25
Noninterest expense to average assets(2) 1.11 1.17 1.16 1.08 1.08
Asset Quality Ratios:
Non-performing loans to total loans 0.49 0.21 1.13 0.22 0.48
Non-performing assets to total assets 0.33 0.15 0.77 0.15 0.34
Net charge-offs to average
loans outstanding(2) - - (0.005) 0.006 (0.001)
Allowance for loan losses to total loans 1.02 0.95 1.00 0.91 0.81
Allowance for loan losses to
non-performing loans 209.46 447.78 89.15 416.67 168.35
Capital Ratios:
Average equity to average
assets (average equity divided
by average total assets) (2) 12.75 12.74 12.75 12.08 11.49
Equity to assets at period end 12.94 12.87 12.67 12.45 11.76
Number of Full Service Offices: 3 3 3 3 3
________________
(1) Ratios for the three-month periods are annualized where appropriate.
(2) Average balances are derived from month end balances. Management does not
believe that the use of month end balances rather than daily balances has
caused any material differences in the information presented.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects William Penn Bank's consolidated
financial statements and other relevant statistical data and is intended to
enhance your understanding of our financial condition and results of operations.
You should read the information in this section in conjunction with William Penn
Bank's consolidated financial statements and accompanying notes thereto
beginning on page F-1 of this document, and the other statistical data provided
in this prospectus.
Overview and Business Strategy
Our primary business is attracting retail deposits from the general
public and using those deposits, together with funds generated from operations,
principal repayments on securities and loans, and borrowed funds, for our
lending and investing activities. Our results of operations depend mainly on our
net interest income, which is the difference between the interest income earned
on our loan and investment portfolios and interest expense paid on our deposits
and borrowed funds. Net interest income is a function of the average balances of
loans and investments versus deposits and borrowed funds outstanding in any one
period and the yields earned on those loans and investments and the cost of
those deposits and borrowed funds.
Our net interest income has suffered in recent years as the result of
the continued compression of our interest rate spread and net interest margin
caused by the flat or inverted interest rate yield curve environment during
recent periods. Additionally, our net interest margin has been negatively
impacted by the high interest expense associated with the large volume of high
cost, long-term, convertible borrowings on our balance sheet. At September 30,
2007 we had $71.0 million of Federal Home Loan Bank (FHLB) advances with a
weighted average cost of 5.57%. As a strategy to lock in rates on funding
beginning in the late 1990s we took long term advances to protect against rising
rates. However, following the implementation of this strategy interest rates,
instead of rising, fell to historic lows. As a result, these borrowings have
been a drain on our profitability and we determined in early December 2007 to
undertake a refinancing of these advances. We refinanced $25.0 million of
advances with a weighted average rate of 5.87% and took replacement advances
totaling $30.0 million with a weighted average rate of 3.84%. In connection with
that refinancing, we incurred significant prepayment costs; the prepayment
penalty was a charge to earnings during the quarter ended December 31, 2007 and
amounted to $1.5 million. We undertook the refinancing in spite of the large
charge in order to improve our margin going forward. The expected reduction in
our interest expense on an annual basis as a result of the refinancing equates
to approximately $348,000.
The borrowing of the FHLB advances in an effort to lock in rates was
consistent with what has been our general operating philosophy: to avoid
interest rate risk exposure. The flat to inverted yield curve of recent years
supported our conscious decision to reduce our mortgage lending. We preferred to
purchase investments since the competitiveness of the lending market did not
permit us to be properly compensated for the risk on fixed rate longer-term
loans. The result has been that our total assets and loan portfolio have been
relatively flat for some time. It will be a fundamental change in the philosophy
of the Bank to now actively pursue a growth strategy.
Our profitability has also been negatively impacted by the relatively
high rates we pay on deposits, the high cost of our FHLB advances, as discussed
above, and our relatively low levels of noninterest income. Our strategy has
been to cultivate a loyal customer base by providing personalized service, and
we have generally competed on the deposit side by offering higher rates and
lower fees and on the loan side by underwriting loans that we believe to be high
quality, sound credits but that may not, for a variety of reasons, be eligible
for re-sale in the secondary mortgage market. A significant amount of
39
our loan originations are "investor loans" on non-owner occupied properties. As
of September 30, 2007, $50.3 million of the loans within our $117.1 million
portfolio of one to four family mortgage loans were investor loans.
We expect our deposit levels to react favorably to our January 2008
launch of an internet banking platform with on-line bill pay and our
installation of ATM machines at our Richboro and Morrisville offices (projected
to occur in the quarter ending March 31, 2008).
We have generally sought to originate adjustable rate loans and fixed
rate loans with terms of 20 years or less. We have avoided originating fixed
rate 30-year conventional mortgage loans because of the interest rate risk
associated with such loans, and accordingly we generally originate such loans
only for resale. The competitive market for loans has made it difficult to do
any substantial volume of origination of 30-year fixed rate conventional rate
loans for resale, but we have recently begun participating in the Federal Home
Loan Bank's Mortgage Partnership Finance Program (MPF) and we anticipate this
will enable us to more profitably compete with the larger institutions that
dominate the resale market. We intend also to increase our origination of
multi-family and nonresidential mortgage loans and expect to continue to be
predominantly a portfolio lender. We plan to hire additional staff to achieve
the growth in loans, including business development officers, lenders, credit
analysts and loan processors. We intend to hire additional personnel and
management support outside the lending department as well.
We will attempt to grow and improve our profitability by:
o diversifying our loan and deposit activities to increase our
commercial business with commercial deposits and commercial
real estate loans;
o increasing the origination of multi-family and
nonresidential real estate loans;
o building our core banking business through internal growth
as well as expanding our branch network;
o developing a sales culture by training and encouraging our
branch personnel to promote our existing products and
services to our customers; and
o maintaining high asset quality.
Anticipated Loss for the Fiscal Year Ending June 30, 2008
As discussed above, we incurred a prepayment penalty during the quarter
ended December 31, 2007 of $1.5 million in connection with the refinancing of
our FHLB advances. The after-tax expense related to the penalty is approximately
$1.0 million. We also expect to have an additional compensation expense in the
quarter ending March 31, 2008 in connection with the termination of our defined
benefit pension plan effective on January 20, 2008. While no future benefits
will be accrued under the plan following its termination, we will be required to
make a significant one-time charge to fully fund the plan. We currently expect
that pension expense will be approximately $322,000 (on an after-tax basis the
expense amounts to $213,000). We will also have a significant expense related to
the establishment of a charitable foundation in connection with the offering. We
will contribute to the foundation approximately 2% of the total outstanding
shares of William Penn Bancorp common stock and $150,000 in cash. This
contribution of shares and cash will have an adverse effect on our net income
for the quarter and year in which we make the contribution. The after-tax
expense of the contribution will reduce net income in our 2008 fiscal year by
approximately $636,000.
40
The combination of these expenses (the prepayment penalty on FHLB
advances, the cost of bringing the pension plan into fully funded status to
qualify the plan for termination and the expense of the contribution to the
charitable foundation) is expected to result in our incurring a net loss for the
fiscal year ending June 30, 2008.
Anticipated Increase in Operating Expenses
Our results of operations are significantly affected by noninterest
expense, which includes compensation and benefits expense, occupancy and
equipment expense and other general and administrative expenses such as data
processing, professional fees and marketing/advertising costs.
After the stock offering, additional annual employee compensation and
benefit expenses stemming from the shares granted to employees, officers and
directors under new benefit plans will increase this category of expense. We
will recognize expense for our employee stock ownership plan when shares are
committed to be released to participants' accounts and will recognize expenses
for restricted stock awards over the vesting period of awards made to
recipients. In addition, we will be required to recognize compensation expense
related to stock options outstanding based upon the fair value of such awards at
the date of grant over the period that such awards are earned. Our decision to
terminate the pension plan as of January 2008 was made in order to mitigate
benefit costs in anticipation of these stock related compensation expenses.
We also expect that noninterest expense will be higher going forward as
a result of the accounting, legal and various other additional noninterest
expenses associated with operating as a public company, particularly as a result
of the requirements of the Sarbanes-Oxley Act of 2002. We will have public
company expenses that we have not had previously such as periodic reporting,
annual meetings, retention of a transfer agent and professional fees.
Furthermore, noninterest expense in the future will be impacted by our
plan to expand our branch network; we currently intend to open up to three new
offices over approximately the next five years. We also expect higher
compensation and benefits expenses going forward as the result of our plans to
expand the size of our lending department plus hire additional branch personnel
and management staff.
Critical Accounting Policies
Our accounting policies are integral to understanding the results
reported and our significant policies are described in Note 2 to our
consolidated financial statements beginning on page F-1 of this document. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and revenues and expenses for the periods then ended. Actual results
could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for loan losses, the valuation allowance for deferred tax assets
and other-than-temporary impairment of securities.
Allowance for Loan Losses. The allowance for loan losses is maintained
by management at a level which represents their evaluation of known and inherent
losses in the loan portfolio at the consolidated balance sheet date that are
both probable and reasonable to estimate. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent losses in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions, and
other relevant factors. This evaluation is inherently subjective as it requires
material
41
estimates that may be susceptible to significant change, including the amounts
and timing of future cash flows expected to be received on impaired loans.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as doubtful, substandard, or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers nonclassified loans and is based on
historical loss experience adjusted for qualitative factors.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions for loan losses may be necessary.
For example, our evaluation of the allowance includes consideration of current
economic conditions, and a change in economic conditions could reduce the
ability of our borrowers to make timely repayments of their loans. This could
result in increased delinquencies and increased non-performing loans, and thus a
need to make increased provisions to the allowance for loan losses, which would
require us to record a charge against income during the period the provision is
made, resulting in a reduction of our earnings. A change in economic conditions
could also adversely affect the value of the properties collateralizing our real
estate loans, resulting in increased charge-offs against the allowance and
reduced recoveries of loans previously charged-off, and thus a need to make
increased provisions to the allowance for loan losses. Furthermore, a change in
the composition of our loan portfolio or growth of our loan portfolio could
result in the need for additional provisions.
Other-than-Temporary Investment Security Impairment. Securities are
evaluated periodically to determine whether a decline in their value is
other-than-temporary. Management utilizes criteria such as the magnitude and
duration of the decline, in addition to the reasons underlying the decline, to
determine whether the loss in value is other-than-temporary. The term
"other-than-temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospect for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other-than-temporary, the value of
the security is reduced and a corresponding charge to earnings is recognized.
Comparison of Financial Condition at September 30, 2007 and June 30, 2007
Our total assets decreased by $2.0 million to $266.8 million at
September 30, 2007 from $268.8 million at June 30, 2007. There was a $1.2
million decrease in deposits to $157.7 million from $158.9 million, primarily
as a result of withdrawal from NOW accounts of $1.3 million as balances held at
the Bank in such accounts by title companies fluctuated. There was a $1.3
million decrease in securities held to maturity to $60.3 million from $61.6
million. Four securities with an aggregate balance of approximately $5.0 million
were called and the proceeds were not reinvested in the portfolio. Loans
receivable, net decreased by $549,000.
Equity increased $458,000 to $34.5 million at September 30, 2007, from
$34.1 million at June 30, 2007 as the result of net income for the quarter.
Comparison of Operating Results for the Three Months Ended September 30, 2007
and 2006
General. Net income for the three months ended September 30, 2007 was
$458,000, an increase of $56,000 or approximately 14% from $402,000 for the
three months ended September 30, 2006. The increase in net income resulted
primarily from an increase in net interest income. The interest rate spread
decreased marginally to 1.48% from 1.51% while the net interest margin moved by
four basis points to
42
2.12% for the three months ended September 30, 2007 compared with 2.08% for the
three months ended September 30, 2006. There was a 26 basis point increase in
the yield on average interest-earning assets to 6.18% for the three months ended
September 30, 2007, from 5.92% for the three months ended September 30, 2006.
There was a corresponding 29 basis point increase in the cost of average
interest-bearing liabilities to 4.70% for the three months ended September 30,
2007, from 4.41% for the three months ended September 30, 2006.
Interest Income. Total interest income increased $286,000 to $4.1
million for the three months ended September 30, 2007, from $3.8 million for the
three months ended September 30, 2006. Average interest-earning assets increased
to $264.1 million for the three months ended September 30, 2007, from $255.7
million for the three months ended September 30, 2006, while the yield improved
to 6.18% from 5.92%.
Interest income on loans receivable was $3.0 million for the three
months ended September 30, 2007 and was $118,000 higher than the same period in
2006 as a result of a 26 basis point improvement in the yield. Interest income
on securities improved by $77,000 to total $839,000 compared to $762,000 in the
prior year period as a result of both a 40 basis point improvement in the yield
and a $1.1 million increase in the average balance. Interest on other
interest-earning assets grew along with an increase in the average balance
thereof, primarily as the result of increased FHLB borrowings and a
corresponding increase in FHLB stock.
Interest Expense. Total interest expense increased $233,000 to $2.7
million for the three months ended September 30, 2007 as compared to the same
period in 2006. The increase resulted primarily from an increase in deposit
expense as the average balance of interest-bearing deposits rose by $1.7 million
to $157.3 million for the 2007 period and the average cost rose by 41 basis
points. Expense on borrowings rose slightly as a result of an increase in
average balances of FHLB advances of $5.0 million from September 30, 2006 to
September 30, 2007 offset by a slight decline in the average cost of borrowings
to 5.69% from 5.78%. The interest paid on borrowings for the 2007 period was
$1.0 million compared to deposit expense of $1.7 million. The weighted average
cost of borrowings outstanding as of September 30, 2007 was 5.57% while the
weighted average cost of deposits was 4.20%. It has been the Bank's practice
consistently to offer deposit rates toward the high end of current market
ranges. The Bank expects to have lower borrowing expense going forward as a
result of the refinancing of certain of the Bank's FHLB advances during the
quarter ending December 31, 2007, as discussed above under Overview and Business
Strategy.
Provision for Loan Losses. We charge to operations provisions for loan
losses at a level required to reflect credit losses in the loan portfolio that
are both probable and reasonable to estimate. Management, in determining the
allowance for loan losses, considers the losses inherent in the loan portfolio
and changes in the nature and volume of our loan activities, along with general
economic and real estate market conditions. We utilize a two-tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of our loan portfolio. We establish a specific loan loss allowance for
an impaired loan based on delinquency status, size of loan, type of collateral
and/or appraisal of the underlying collateral and financial condition of the
borrower. We base general loan loss allowances upon a combination of factors
including, but not limited to, actual loan loss experience, composition of the
loan portfolio, current economic conditions and management's judgment.
There was a $20,000 provision for loan losses made during the three
months ended September 30, 2007 compared to $40,000 in the prior year period.
Non-performing loans were $888,000, or 0.49%, of total loans at September 30,
2007, as compared to $2.1 million, or 1.13%, of total loans at June 30, 2007 and
$402,000 or 0.12% of total loans at June 30, 2006. The decrease in
non-performing loans during the
43
period ended September 30, 2007 is attributable to a single loan relationship of
approximately $1.2 million being brought current.
Noninterest Income. Noninterest income was $59,000 for the three months
ended September 30, 2007 compared to $56,000 for same period in 2006.
Traditionally, noninterest income has not been a significant area of our
operations as we have not in the past focused on fee generation. We hold the
bulk of our securities portfolio as held to maturity so gains or losses on the
sales of securities is not expected to be a large item in noninterest income. We
currently have no plans to seek fee income generation through the offering of
complementary services or acquisition of fee producing subsidiaries such as
title insurance or third-party securities sales.
Noninterest Expense. Noninterest expense decreased slightly to $748,000
for the three months ended September 30, 2007, from $757,000 for the same period
in 2006.
Provision for Income Taxes. The provision for income taxes was $235,000
for the three months ended September 30, 2007 compared to $207,000 for the same
period in 2006, reflecting an increase in income. The effective tax rate for
both periods was 34%.
Comparison of Financial Condition at June 30, 2007 and June 30, 2006
Our total assets increased by $6.5 million to $268.8 million at June
30, 2007 from $262.3 million at June 30, 2006, primarily due to a $5.0 million
increase in borrowings and a $1.4 million increase in equity. The increase in
borrowings was the result of a $5.0 FHLB advance taken by the Bank in December
2006 in anticipation of funding loan originations during 2007, however, loan
originations fell short of the Bank's expectations. Cash and amounts due from
banks rose by $6.8 million to $14.2 million as management let liquidity build in
preparation for the scheduled maturity of borrowings. Available for sale
securities dropped from $1.6 million at June 30, 2006 to $25,000 at June 30,
2007 as the result of sales of securities exceeding purchases during the year.
Securities held to maturity rose by $1.0 million to $61.6 million at June 30,
2007. Loans receivable, net were $180.2 million at June 30, 2007 compared to
$181.0 million at June 30, 2006. Deposits decreased slightly during the year
ended June 30, 2007 to $158.9 million from $159.3 million at the prior fiscal
year end.
Equity increased $1.4 million to $34.1 million at June 30, 2007 as the
result of net income for the year of $1.6 million, offset by a $174,000 charge
to equity to reflect the funded status of the Bank's pension plan in connection
with the adoption of Statement of Financial Accounting Standards No. 158.
Comparison of Operating Results for the Year Ended June 30, 2007 and 2006
General. Net income for the year ended June 30, 2007 was $1.6 million
compared to $2.0 million for the year ended June 30, 2006. This roughly 20%
decrease in net income resulted primarily from the continued compression of net
interest income as a result of the rate environment. Our net interest income as
discussed above under Overview and Business Strategy has been negatively
affected by the high cost borrowings we have on our balance sheet as a result of
our strategy in earlier years to lock in rates on funding to protect against a
rise in interest rates. We expect our recent refinancing of approximately $25.0
million of those advances will improve our net interest margin going forward.
Our net interest margin for the year ended June 30, 2007 was 2.03%
compared to 2.25% for the year ended June 30, 2006. The net interest spread
shrunk to 1.42% from 1.74%. There was a 22 basis point increase in the yield on
average interest-earning assets to 5.95% for the year ended June 30, 2007, from
5.73% for the year ended June 30, 2006. The improvement in yields however was
more than offset by corresponding increases in deposit and borrowing costs as
rates increased. The average cost of interest-
44
bearing liabilities rose to 4.53% for the year ended June 30, 2007, from 3.99%
for the year ended June 30, 2006.
Interest Income. Total interest income increased $570,000 to $15.4
million for the year ended June 30, 2007, from $14.8 million for the year ended
June 30, 2006. This resulted from an improvement in yields. Average
interest-earning assets were level.
Interest income on loans receivable was $11.5 million for the year
ended June 30, 2007 compared to $11.6 million for the year ended June 30, 2006.
There was a decrease of fourteen basis points in the yield as well as a $1.6
million decrease in the average balance of loans receivable. Interest income on
securities was $3.0 million compared to $2.6 million for the year ended June 30,
2006 primarily as a result of a 63 basis point improvement in the yield thereon.
Interest on other interest-earning assets grew along with an increase in the
average balance thereof, primarily as the result of the increase in cash and
amounts due from banks in connection with planning for the scheduled maturity of
FHLB advances.
Interest Expense. Total interest expense increased $1.1 million to
$10.1 million for the year ended June 30, 2007. The increase resulted primarily
from an increase of the same amount in deposit expense as the average cost of
deposits rose by 77 basis points, more than offsetting a decline in the average
balance of interest-bearing deposits to $154.5 million for the year ended June
30, 2007 from $157.3 million the prior year. Expense on borrowings was nearly
level as the average cost of borrowings declined by a nominal three basis point
change and the average balance of advances rose by $1.1 million, less than a 2%
change from the prior year. The weighted average cost of borrowings outstanding
as of June 30, 2007 was 5.57% while the weighted average cost of deposits was
4.21%. It has been the Bank's practice to consistently offer deposit rates
toward the high end of current market ranges. The Bank expects to have lower
borrowing expense going forward as a result of the refinancing of certain of the
Bank's FHLB advances during the quarter ending December 31, 2007, as discussed
above under Overview and Business Strategy.
Provision for Loan Losses. We charge to operations provisions for loan
losses at a level required to reflect credit losses in the loan portfolio that
are both probable and reasonable to estimate. Management, in determining the
allowance for loan losses, considers the losses inherent in the loan portfolio
and changes in the nature and volume of our loan activities, along with general
economic and real estate market conditions. We utilize a two-tier approach: (1)
identification of impaired loans and establishment of specific loss allowances
on such loans; and (2) establishment of general valuation allowances on the
remainder of our loan portfolio. We establish a specific loan loss allowance for
an impaired loan based on delinquency status, size of loan, type of collateral
and/or appraisal of the underlying collateral and financial condition of the
borrower. We base general loan loss allowances upon a combination of factors
including, but not limited to, actual loan loss experience, composition of the
loan portfolio, current economic conditions and management's judgment.
There was a $156,000 provision for loan losses made during the year
ended June 30, 2007 compared to $186,000 in the year ended June 30, 2006. The
allowance as a percentage of total loans was 1.01% at June 30, 2007 as compared
to 0.92% at June 30, 2006.
Noninterest Income. Noninterest income was $267,000 for the year ended
June 30, 2007 compared to $143,000 for year ended June 30, 2006. The increase in
other income is primarily attributable to an increase in rental income
associated with one of the Bank's properties. Traditionally noninterest income
has not been a significant area of our operations as we have not in the past
focused on fee generation. We hold the bulk of our securities portfolio as held
to maturity so gains or losses on the sales of securities is not expected to be
a large item in noninterest expense. We have no plans to seek fee income
generation through the offering of complementary services or acquisition of fee
producing
45
subsidiaries such as title insurance or third-party securities sales. We do not
at present hold any bank owned life insurance.
Noninterest Expense. Noninterest expense increased by $205,000, a 7.2%
rise, and totaled $3.0 million for the year ended June 30, 2007. Our efficiency
ratio for 2007 although higher than 2006 was still very favorable at 55.25%. The
largest component of noninterest expense is salaries and employee benefits which
increased to $1.9 million for 2007 from $1.7 million for 2006. The increase in
salaries and employee benefits is a result of normal salary increases, combined
with the increase cost of maintaining employee benefits. Occupancy and equipment
expense and other noninterest expense also rose slightly during 2007 to $631,000
from $616,000 and to $560,000 from $548,000, respectively.
Provision for Income Taxes. The provision for income taxes was $748,000
for the year ended June 30, 2007 compared to $967,000 for the year ended June
30, 2006 reflecting lower income for 2007. The effective tax rate was 32.4% and
33.0% for the years ended June 30, 2007 and 2006, respectively.
46
Average Balance Sheets. The following table sets forth certain
information at September 30, 2007 and for the three months ended September 30,
2007 and 2006. The average yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month end balances.
Management does not believe that the use of month end balances rather than daily
balances has caused any material differences in the information presented.
For the Three Months Ended September 30,
At September 30, -------------------------------------------------------------
2007 2007 2006
------------------- -------------------------------- ---------------------------
Yield/ Average Average Average Average
Balance Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $181,515 6.56% $181,638 $2,995 6.60% $181,447 $2,877 6.34%
Securities(2) 60,444 5.23 63,060 839 5.32 61,937 762 4.92
Other interest-earning assets(3) 20,389 5.16 19,394 248 5.11 12,285 157 5.11
--------- --------- ------- --------- -------
Total interest-earning assets 262,348 5.93 264,092 4,082 6.18 255,669 3,796 5.92
------- -------
Noninterest-earning assets 4,460 4,313 3,855
--------- --------- ---------
Total assets $266,808 $268,405 $259,524
========= ========= =========
Interest-bearing liabilities:
NOW accounts $ 12,269 1.50 $ 12,604 46 1.46 $ 13,626 47 1.38
Money market accounts 37,801 4.04 38,044 400 4.21 32,964 324 3.93
Savings and club accounts 12,998 2.99 13,436 99 2.95 13,873 87 2.51
Certificates of deposit 93,262 4.79 93,235 1,125 4.83 95,150 1,034 4.35
--------- --------- ------- --------- -------
Total deposits 156,330 4.20 157,319 1,670 4.25 155,613 1,492 3.84
Federal Home Loan Bank advances 71,000 5.57 71,000 1,010 5.69 66,000 954 5.78
--------- --------- ------- --------- -------
Total interest-bearing liabilities 227,330 4.63 228,319 2,680 4.70 222,613 2,446 4.41
------- -------
Noninterest-bearing demand accounts 1,357 1,466 1,228
Noninterest-bearing liabilities 3,605 4,451 3,875
--------- --------- --------
Total liabilities 232,292 234,236 226,716
Stockholders' equity 34,516 34,169 32,808
--------- --------- ---------
Total liabilities and stockholders' equity $266,808 $268,405 $259,524
========= ========= =========
Net interest income $1,402 $1,350
======= =======
Interest rate spread(4) 1.30% 1.48% 1.51%
======== ============= =======
Net yield on interest-earning assets(5) 2.12% 2.08%
============= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities 115.67% 115.37%
========= =========
_________________
(1) Non-accruing loans have been included in loans receivable and the effect of
such inclusion was not material. Allowance for loan losses has been
included in noninterest-earning assets. Interest income on loans includes
net amortized revenues (costs) on loans.
(2) Includes both available for sale and held to maturity securities. For
available for sale securities, fair value adjustments have been included in
the average balance of noninterest-earning assets.
(3) Includes interest-bearing deposits at other banks, federal funds purchased
and Federal Home Loan Bank of Pittsburgh capital stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
47
The following table sets forth certain information at June 30, 2007 and
for the years ended June 30, 2007, 2006 and 2005. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month end balances. Management does not believe that the use of
month end balances rather than daily balances has caused any material
differences in the information presented.
For the Year Ended June 30,
At June 30, ------------------------------------------------------------------------------
2007 2007 2006 2005
------------------ ------------------------- ----------------------- --------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ---- ------- -------- ---- ------- ------------- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $181,501 6.29% $181,447 $11,517 6.35% $184,607 $11,614 6.29% $182,946 $11,133 6.09%
Securities(2) 61,662 5.21 60,949 3,020 4.95 60,338 2,608 4.32 58,172 2,122 3.65
Other interest-earning assets(3) 20,844 5.33 15,721 815 5.18 13,005 560 4.31 12,335 295 2.39
--------- --------- -------- --------- -------- --------- --------
Total interest-earning assets 264,007 5.96 258,117 15,352 5.95 257,950 14,782 5.73 253,453 13,550 5.35
-------- -------- --------
Noninterest-earning assets 4,823 3,971 3,995 3,889
--------- ----------- --------- ---------
Total assets $268,830 $262,088 $261,945 $257,342
========= ========= ========= =========
Interest-bearing liabilities:
NOW accounts $ 12,920 1.45 $ 12,930 187 1.45 $ 14,402 179 1.24 $ 16,166 141 0.87
Money market accounts 37,516 4.25 34,579 1,412 4.08 30,790 969 3.15 32,892 514 1.56
Savings and club accounts 13,993 2.96 13,728 382 2.78 14,686 337 2.29 16,005 198 1.24
Certificates of deposit 92,756 4.77 93,261 4,220 4.52 97,457 3,616 3.71 94,733 2,631 2.78
--------- --------- -------- --------- -------- --------- --------
Total deposits 157,185 4.21 154,498 6,201 4.01 157,335 5,101 3.24 159,796 3,484 2.18
Federal Home Loan Bank advances 71,000 5.57 68,692 3,912 5.69 67,616 3,868 5.72 62,384 3,713 5.95
--------- --------- -------- --------- -------- --------- --------
Total interest-bearing
liabilities 228,185 4.63 223,190 10,113 4.53 224,951 8,969 3.99 222,180 7,197 3.24
Noninterest-bearing
demand accounts 1,755 1,487 1,301 1,758
Noninterest-bearing
liabilities 4,832 4,006 4,055 3,844
--------- --------- --------- ---------
Total liabilities 234,772 228,683 230,307 227,782
Stockholders' equity 34,058 33,405 31,638 29,560
--------- --------- --------- ---------
Total liabilities and
stockholders' equity $268,830 $262,088 $261,946 $257,342
========= ========= ========= =========
Net interest income $ 5,239 $ 5,813 $ 6,353
======== ======== ========
Interest rate spread(4) 1.33% 1.42% 1.74% 2.11%
====== ======= ======= =======
Net yield on interest-
earning assets(5) 2.03% 2.25% 2.51%
======= ======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 116.13% 114.67% 114.08%
======== ======== ========
- -----------------
(1) Non-accruing loans have been included in loans receivable and the effect of
such inclusion was not material. Allowance for loan losses has been
included in noninterest-earning assets. Interest income on loans includes
net amortized revenues (costs) on loans.
(2) Includes both available for sale and held to maturity securities. For
available for sale securities, fair value adjustments have been included in
the average balance of noninterest-earning assets.
(3) Includes interest-bearing deposits at other banks, federal funds purchased
and Federal Home Loan Bank of Pittsburgh capital stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
48
Rate/Volume Analysis. The following table reflects the sensitivity of
our interest income and interest expense to changes in volume and in prevailing
interest rates during the periods indicated. The table presents the: (1) changes
in volume (change in volume multiplied by old rate); (2) changes in rate (change
in rate multiplied by old volume); and (3) the net changes in rate/volume
(change in rate multiplied by the change in volume). The net change attributable
to the combined impact of volume and rate has been allocated proportionally to
the absolute dollar amounts of change in each.
Three Months Ended
September 30, Year Ended June 30, Year Ended June 30,
---------------------------- ---------------------------- ----------------------------
2007 vs. 2006 2007 vs. 2006 2006 vs. 2005
---------------------------- ---------------------------- ----------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
---------------------------- ---------------------------- ----------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- ------- ------- ------- -------
(In Thousands)
Interest and dividend income:
Loans $ 3 $ 115 $ 118 $ (200) $ 102 $ (97) $ 86 $ 395 $ 481
Securities 13 64 77 26 386 412 82 404 486
Other interest-earning assets 91 - 91 129 126 255 17 248 265
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets $ 107 $ 179 $ 286 $ (45) $ 615 $ 570 $ 185 $ 1,047 $ 1,232
======= ======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
NOW accounts $ (13) $ 12 $ (1) $ (19) $ 27 $ 8 $ (16) $ 54 $ 38
Money market accounts 52 24 76 130 313 443 (35) 490 455
Savings and club accounts (17) 29 12 (23) 68 45 (17) 156 139
Certificates of deposit (126) 217 91 (162) 766 604 78 907 985
Advances from Federal Home Loan Bank 145 (89) 56 61 (17) 44 303 (148) 155
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 41 $ 193 $ 234 $ (13) $ 1,157 $ 1,144 $ 313 $ 1,459 $ 1,772
======= ======= ======= ======= ======= ======= ======= ======= =======
Change in net interest income $ 66 $ (14) $ 52 $ (32) $ (542) $ (574) $ (128) $ (419) $ (540)
======= ======= ======= ======= ======= ======= ======= ======= =======
49
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and
liabilities are sensitive to changes in interest rates, a significant form of
market risk for us is interest rate risk, or changes in interest rates.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
Several years ago market interest rates were at historically low
levels. However, beginning in June 2004, the U.S. Federal Reserve steadily
increased its target federal funds rate, raising it significantly. While the
federal funds rate and other short-term market interest rates, which we use as a
guide to our deposit pricing, have increased, intermediate- and long-term market
interest rates, which we use as a guide to our loan pricing, have not increased
proportionately. This has led to a "flattening" of the market yield curve, which
has even "inverted" recently as short-term rates have exceeded long-term rates
over an intermediate maturity horizon. The relatively flat yield curve has hurt
our net interest rate spread and net interest margin because the interest rates
we pay on our deposits have repriced upwards faster than the interest rates that
we earn on our loans and investments.
Quantitative Analysis. The following tables present William Penn Bank's
net portfolio value as of September 30, 2007. The net portfolio values shown in
these tables were calculated by the Office of Thrift Supervision, based on
information provided by William Penn Bank. The -300 basis points scenario is not
shown due to the relatively low prevailing interest rate environment.
Interest Rate Sensitivity of Net Portfolio Value (NPV)
At September 30, 2007
---------------------------------------------------------------------------------------
Net Portfolio Value Net Portfolio Value
(In Thousands) as % of Present Value of Assets
------------------------------ -----------------------------------------------------
Changes in $ Amount $ Change Net Portfolio
Basis Point
Rates % Change Value Ratio Change
- --------------- -------------- ------------ ----------- ----------------- ---------------
-200 bp 45,464 4,862 +12% 15.99% +119 bp
-100 bp 43,506 2,904 +7% 15.55% +76 bp
- 50 bp 42,165 1,563 +4% 15.21% +42 bp
0 bp 40,602 14.79%
+50 bp 38,355 -2,247 -6% 14.14% -65 bp
+100 bp 36,126 -4,476 -11% 13.48% -131 bp
+200 bp 31,264 -9,338 -23% 11.95% -284 bp
+300 bp 25,952 -14,650 -36% 10.17% -462 bp
Risk Measure for a Given Rate Shock
September 30, 2007 June 30, 2007 September 30, 2006
--------------------------- --------------------- ------------------------
Pre-Shock NPV Ratio
NPV as % of PVA Assets 14.79% 14.60% 14.30%
Post Shock NPV Ratio 11.95% 11.37% 12.01%
Sensitivity Measure
Decline in NPV Ratio 284 bp 322 bp 229 bp
TB 13a Level Risk Minimal Minimal Minimal
50
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rate on certain types of assets and liabilities, such as
demand deposits and savings accounts, may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets, such as adjustable
rate mortgages, generally have features that limit changes in interest rates on
a short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making the calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Notwithstanding the discussion above, the quantitative interest rate
analysis presented above indicates that a rapid increase in interest rates would
adversely affect our net portfolio value and earnings.
Liquidity, Commitments and Capital Resources
The Bank must be capable of meeting its customer obligations at all
times. Potential liquidity demands include funding loan commitments, cash
withdrawals from deposit accounts and other funding needs as they present
themselves. Accordingly, liquidity is measured by our ability to have sufficient
cash reserves on hand, at a reasonable cost and/or with minimum losses.
The Asset and Liability Management Committee of the Board of Directors
sets limits and controls to guide senior management's managing of our overall
liquidity position and risk. This Committee, along with senior management, is
responsible for ensuring that our liquidity needs are being met on both a daily
and long term basis.
Our approach to managing day-to-day liquidity is measured through our
daily calculation of investable funds and/or borrowing needs to ensure adequate
liquidity. In addition, we constantly evaluate our short-term and long-term
liquidity risk and strategy based on current market conditions, outside
investment and/or borrowing opportunities, short and long-term economic trends,
and anticipated short and long-term liquidity requirements. The Bank's loan and
deposit rates may be adjusted as another means of managing short and long-term
liquidity needs. We do not at present participate in derivatives or other types
of hedging instruments to meet liquidity demands.
Regulatory Capital Compliance
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain its status as a
well-capitalized institution in accordance with regulatory standards. As of
September 30, 2007, the Bank exceeded all applicable regulatory capital
requirements and was well capitalized. See Note 13 to the consolidated financial
statements beginning at page F-1 for more information about the Bank's
regulatory capital compliance.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in
the normal course of our business of investing in loans and securities as well
as in the normal course of maintaining and improving William Penn Bank's
facilities. These financial instruments include significant purchase
commitments,
51
such as commitments related to capital expenditure plans and commitments to
purchase investment securities or mortgage-backed securities, and commitments to
extend credit to meet the financing needs of our customers. At September 30,
2007, we had no significant off-balance sheet commitments other than commitments
to extend credit totaling $26.0 million.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those instruments. We
use the same credit policies in making commitments and conditional obligations
as we do for on-balance-sheet instruments. Since a number of commitments
typically expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. For additional information
regarding the Bank's outstanding lending commitments at June 30, 2007, see Note
11 to the consolidated financial statements beginning on page F-1.
Impact of Inflation
The financial statements included in this document have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels
of interest rates, is in the area of noninterest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation ("FIN") 48,
"Accounting for Uncertainty in Income Taxes." This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes." This Interpretation prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This Interpretation
is effective for fiscal years beginning after December 15, 2006. The Bank is
evaluating the impact the adoption of FIN 48 will have on its consolidated
financial position and results of operations.
In May 2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1
"Definition of Settlement in FASB Interpretation No. 48" (FSP FIN 48-1). FSP FIN
48-1 provides guidance on how to determine
52
whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to
January 1, 2007. The Bank is evaluating the impact the adoption of FIN 48 will
have on its consolidated financial position and results of operations.
In September 2006, the FASB issued FASB Statement ("SFAS") No. 157,
"Fair Value Measurements," which defines fair value, establishes a framework for
measuring fair value under GAAP, and expands disclosures about fair value
measurements. FASB Statement No. 157 applies to other accounting pronouncements
that require or permit fair value measurements. The new guidance is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. The Bank is evaluating
the impact, if any, of the adoption of SFAS No. 157 on its consolidated
financial position and results of operations.
In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1,
"Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88,
and No 106 and to the Related Staff Implementation Guides." This FSP makes
conforming amendments to other FASB statements and staff implementation guides
and provides technical corrections to SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans." The conforming
amendments in this FSP shall be applied upon adoption of SFAS No. 158. The
adoption of FSP FAS 158-1 did not have a material impact on the Bank's
consolidated financial statements or disclosures.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for the Bank July 1, 2008. The Bank is evaluating the impact that the
adoption of SFAS No. 159 will have on its consolidated financial statements.
BUSINESS OF WILLIAM PENN, MHC
The formation of William Penn, MHC as a federal mutual holding company
subject to regulation by the Office of Thrift Supervision will be effective upon
the completion of the reorganization and offering. So long as William Penn, MHC
is in existence, it will own a majority of the outstanding common stock of
William Penn Bancorp. If William Penn, MHC converted to a full stock company in
what is referred to as a "second-step conversion," it would cease to exist. The
Board of Directors has no current plans to undertake a second-step transaction.
The primary business activity of William Penn, MHC will be to own a
majority of William Penn Bancorp's common stock. William Penn, MHC, however,
will be authorized to engage in any other business activities that are
permissible for mutual holding companies under federal law, including investing
in loans and securities. William Penn, MHC will not maintain offices separate
from those of William Penn Bank or employ any persons other than certain William
Penn Bank officers. Officers of William Penn, MHC will not be separately
compensated for their service.
BUSINESS OF WILLIAM PENN BANCORP, INC.
William Penn Bancorp is being formed as a federal mutual holding
company subsidiary subject to regulation by the Office of Thrift Supervision for
the purpose of being a holding company for William Penn Bank. Its primary
activity will be holding all of the stock of the Bank, and it will not maintain
offices separate from those of the Bank or employ any persons other than certain
of the Bank's officers, who will not be separately compensated for their service
to William Penn Bancorp.
53
BUSINESS OF WILLIAM PENN BANK, FSB
General
William Penn Bank is a federal savings bank. Its deposits are insured
by the Federal Deposit Insurance Corporation (FDIC) and its primary regulator is
the Office of Thrift Supervision. The Bank maintains a website at
www.willpenn.com.
Market Area. Our business of attracting deposits and making loans is
primarily conducted within our market area of Bucks County, Pennsylvania and the
surrounding counties. We focus on the 90-mile radius surrounding our offices.
Bucks County was historically dependent on the steel industry. The local economy
has changed and is now diverse, without any particular concentration of
industry. Much of the areas in which we conduct business can be characterized as
outlying commuter suburbs for the Philadelphia as well as the greater New York
City area job markets.
As part of our business planning, we have examined the specific
demographic conditions of the areas immediately surrounding each of our three
offices. This examination showed that our Levittown market has lower levels of
education, a lower percentage of white-collar workers, lower average household
income and fewer overall households than average Bucks County levels. The
Levittown market has approximately 4,200 households and is projected to
experience a modest decline in households and population through 2011. The
predominant age bracket for this market area is 45 to 54 years old. Examination
of our Morrisville market revealed higher levels of education and white-collar
workers but lower average household income and fewer overall households than
average Bucks County levels. The Morrisville market has approximately 5,800
households and is projected to experience a modest decline in households and
population through 2011. The predominant age bracket for this market area is 35
to 44 years old. Our Richboro market was determined to have higher levels of
education, white-collar workers, household income as well as more overall
households than average Bucks County levels. The Richboro market has
approximately 4,200 households and is projected to experience slight growth in
households and population through 2011. The predominant age bracket for this
market area is 45 to 54 years old. The Levittown and Morrisville market areas
are believed to have small potential as retail deposit and loan markets with
below average propensities for most deposit and loan products while the Richboro
market area is believed to have average potential as a retail deposit and loan
market with above average propensities for most deposit and loan products. Each
of the three market areas has a higher number of businesses per square mile than
the Bucks County average, with the different concentrations in Levittown,
Morrisville and Richboro being construction, personal services and the health
industry, respectively.
Competition. We operate in a market area with a high concentration of
banking and financial institutions, and we face substantial competition in
attracting deposits and in originating loans, from both regional and large
institutions as well as other smaller institutions like ourselves. Our larger
competitors have the advantage of significantly greater financial and managerial
resources and lending limits, but we feel we compete well on the level of
personal attention we provide to customers.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions, and credit unions located in our primary market area. We
also compete with mortgage banking and finance companies for real estate loans,
and we face competition for funds from investment products such as mutual funds,
short-term money funds and corporate and government securities.
As part of our business planning, we have examined the specific
competitive conditions of the areas immediately surrounding each of our three
offices. This examination showed that based on deposit
54
information as of June 30, 2006, the most recent market information available,
our market share of the deposits within the primary market areas surrounding our
Levittown, Morrisville and Richboro offices was approximately 26%, 24% and 13%,
respectively.
Lending Activities
Our loan portfolio is primarily comprised of one to four family
residential real estate loans. We are a reputation lender and feel we have built
a niche in our market area for providing financing on what we believe are high
quality credits that are, for various reasons, ineligible for resale in the
secondary market. For example, we originate a significant amount of mortgages on
non-owner occupied properties (which are generally referred to as "investor
loans"). At September 30, 2007, we had approximately $57.2 million of loans on
non-owner occupied one to four family residences ("investor loans"),
representing approximately 30% of total loans. This $57.2 million of one to four
family investor loans includes $50.3 million of first mortgages, $1.4 million of
second mortgages and $5.6 million of construction loans. Loans on one to four
family residences are generally considered to have less credit risk than other
types of real estate lending, but a property being non-owner occupied puts the
loan on that property into the category of "investor loans" and these loans are
generally considered to involve a higher degree of credit risk than the
financing of owner occupied properties.
As discussed under Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview and Business Strategy, as part of
our management of interest rate risk we generally seek to avoid originating
fixed rate 30-year loans unless we have a commitment for the resale of such
loans in the secondary market. Competitive conditions have limited our resale
ability and thus we continue at present to be predominantly a portfolio lender
focusing on adjustable rate loans and fixed-rate loans with terms of 20 years or
less.
We have in the past intentionally reduced mortgage lending because of
the yield curve's impact on the pricing of short-term assets relative to long
term assets. We now anticipate embarking on a proactive growth strategy. We
anticipate, however, that we will continue to limit our origination of fixed
rate 30-year loans unless we have a commitment for the resale of such loans in
the secondary market because that strategy remains a component of our management
of interest rate risk. We expect therefore to continue to focus on the
origination of adjustable rate loans and fixed-rate loans with terms of 20 years
or less. The mix of adjustable rate loans to fixed-rate loans will be dependent
on what is in demand by customers, and we plan to continue to retain loans with
terms of 20 years or less regardless of whether the loans are fixed or
adjustable rate. We intend to increase our origination of multi-family and
nonresidential mortgage loans going forward as we grow the overall loan
portfolio. Our multi-family and nonresidential real estate lending consists
primarily of mortgage loans for the acquisition or refinance of small apartment
buildings, service/retail and mixed-use properties, churches and non-profit
properties, professional facilities and other commercial real estate. We do not
anticipate changing the type of multi-family and nonresidential lending that we
have done in the past; our intention is do a greater volume of the same type of
lending. We do not at the present time originate non- real estate commercial
loans or lines of credit to businesses and we have no current intention of
expanding our lending activities into that type of commercial lending.
55
Loan Portfolio Composition. The following table analyzes the
composition of the Bank's portfolio by loan category at the dates indicated.
At At June 30,
September 30, --------------------------------------------------------------------------------------------
2007 2007 2006 2005 2004 2003
---------------- ---------------- ----------------- --------- ------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loans:
- -------------
Mortgage
One to four
family $117,081 61.67% $117,338 61.82% $117,335 62.41% $122,821 63.92% $126,122 65.20% $120,177 67.15%
Home equity
and second
mortgage 8,966 4.72 8,791 4.63 9,022 4.80 6,216 3.24 6,227 3.22 5,864 3.28
Multi-family 10,826 5.70 10,829 5.70 11,137 5.92 8,385 4.36 7,774 4.02 6,919 3.87
Nonresidential 26,783 14.11 27,397 14.43 25,298 13.46 26,943 14.02 24,695 12.77 22,477 12.58
Land 3,997 2.11 4,010 2.11 4,254 2.28 4,508 2.35 3,607 1.87 2,496 1.39
Construction 12,548 6.61 11,111 5.85 9,822 5.22 10,831 5.64 12,407 6.42 11,990 6.70
Consumer 2,130 1.12 2,762 1.46 3,613 1.92 5,383 2.80 5,715 2.96 4,304 2.40
Home equity
lines of
credit 7,105 3.74 7,162 3.77 7,096 3.77 6,591 3.43 6,232 3.22 3,904 2.18
Savings
account loans 419 0.22 428 0.23 422 0.22 457 0.24 612 0.32 837 0.47
--------- ------- --------- -------- --------- ------- --------- ------- --------- ------- --------- -------
Total loans 189,855 100.00% 189,828 100.00% 187,999 100.00% 192,135 100.00% 193,391 100.00% 178,968 100.00%
--------- ======= --------- ======== --------- ======= --------- ======= --------- ======= --------- =======
Less:
Loans in
process (7,302) (6,668) (4,081) (6,206) (8,586) (5,755)
Unearned loan
origination
fees (1,038) (1,116) (1,231) (1,465) (1,588) (1,672)
Allowance for
loan losses (1,860) (1,840) (1,675) (1,500) (1,350) (1,263)
--------- --------- --------- --------- --------- ---------
Total loans, net $179,655 $180,204 $181,012 $182,964 $181,867 $170,278
========= ========= ========= ========= ========= =========
56
Loan Maturity Schedule. The following tables sets forth the maturity of
the Bank's loan portfolio at September 30, 2007 and June 30, 2007. Demand loans,
loans having no stated maturity, and overdrafts are shown as due in one year or
less. These tables show contractual maturities and do not reflect repricing or
the effect of prepayments. Actual maturities may differ.
At September 30, 2007
----------------------------------------------------------------------------------------------------------
Consumer
Non- Loans and
Residential Home Equity Home Equity Savings
One to Four Construction and Multi- and Second Lines of Account
Family and Land Family Mortgage Credit Loans Total
-------------- -------------- --------------- --------------- -------------- ------------- -----------
(In Thousands)
Amounts Due:
Within 1 Year $ 1,143 $ 8,837 $ 4 $ 344 $ 418 $ 1,632 $ 12,378
-------------- -------------- --------------- --------------- -------------- ------------ ------------
After 1 year
1 to 3 years 385 657 408 459 - 374 2,283
3 to 5 years 2,945 - 343 944 - 543 4,775
5 to 10 years 18,874 - 4,638 2,462 180 - 26,154
10 to 15 years 33,472 - 15,149 4,583 6,507 - 59,711
Over 15 years 60,116 - 17,067 69 - - 77,252
-------------- -------------- --------------- --------------- -------------- ------------ ------------
Total due after one year 115,792 657 37,605 8,517 6,687 917 170,175
-------------- -------------- --------------- --------------- -------------- ------------ ------------
Loans in process 146 7,051 - 105 - - 7,302
-------------- -------------- --------------- --------------- -------------- ------------ ------------
Total $ 117,081 $ 16,545 $ 37,609 $ 8,966 $ 7,105 $ 2,549 $ 189,855
============== ============== =============== =============== ============== ============ ============
At June 30, 2007
----------------------------------------------------------------------------------------------------------
Consumer
Non- Loans and
Residential Home Equity Home Equity Savings
One to Four Construction and Multi- and Second Lines of Account
Family and Land Family Mortgage Credit Loans Total
-------------- -------------- --------------- --------------- -------------- ------------- -----------
(In Thousands)
Amounts Due:
Within 1 Year $ 1,157 $ 7,609 $ 722 $ 34 $ 345 $ 1,186 $ 11,053
-------------- -------------- --------------- --------------- -------------- ------------ ------------
After 1 year
1 to 3 years 521 1,210 466 383 59 1,425 4,044
3 to 5 years 2,099 - 354 1,010 - 579 4,042
5 to 10 years 19,683 - 4,537 2,510 142 - 26,872
10 to 15 years 36,542 - 14,924 4,614 6,616 - 62,696
Over 15 years 57,081 - 17,237 135 - - 74,453
-------------- -------------- --------------- --------------- -------------- ------------ ------------
Total due after one year 115,926 1,210 37,498 8,652 6,817 2,004 172,107
-------------- -------------- --------------- --------------- -------------- ------------ ------------
Loans in process 255 6,302 6 105 - - 6,668
-------------- -------------- --------------- --------------- -------------- ------------ ------------
Total $ 117,338 $ 15,121 $ 38,226 $ 8,791 $ 7,162 $ 3,190 $ 189,828
============== ============== =============== =============== ============== ============ ============
57
The following tables set forth the dollar amount of all loans at
September 30, 2007 and June 30, 2007 due after September 30, 2008 and whether
they have fixed interest rates or floating or adjustable interest rates.
At September 30, 2007
---------------------------------------
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In Thousands)
One to Four Family $ 70,566 $ 45,226 $115,792
Construction and Land - 657 657
Nonresidential and Multi-Family 23,635 13,970 37,605
Home Equity and Second Mortgage 8,517 - 8,517
Home Equity Lines of Credit - 6,687 6,687
Consumer Loans and Savings Account Loans 129 788 917
-------- -------- --------
Total $102,847 $ 67,328 $170,175
======== ======== ========
At June 30, 2007
---------------------------------------
Floating or
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In Thousands)
One to Four Family $ 72,724 $ 43,202 $115,926
Construction and Land - 1,210 1,210
Nonresidential and Multi-Family 23,422 14,076 37,498
Home Equity and Second Mortgage 8,652 - 8,652
Home Equity Lines of Credit - 6,817 6,817
Consumer Loans and Savings Account Loans 156 1,848 2,004
-------- -------- --------
Total $104,954 $ 67,153 $172,107
======== ======== ========
Residential Lending. Currently, our main lending activity consists of
the origination of residential real estate loans, including single-family homes
and residences housing up to four families. Our primary lending territory is
Bucks County and surrounding counties. All mortgage loans in excess of 80%
loan-to-value must have private mortgage insurance.
Our underwriting policies permit the origination of one to four family
first mortgage loans, for primary residence or vacation home, with a
loan-to-value of up to 95%. We also offer an affordable housing/first time home
buyer program, which uses the 95% loan-to-value limit but permits the borrower
to have equity in the real estate of only 3%. This program also provides that in
low to moderate income census tracts of our Community Reinvestment Act lending
area we can permit a 100% loan-to-value. We originate leasehold mortgages with a
loan-to-value of up to 70%. We offer mortgage loans on non-owner occupied, one
to four family properties (investor loans) with a 90% loan-to-value limit and no
more than a 20 year term if the rate is fixed.
58
We offer fixed-rate mortgages with terms of 10, 15, 20 or 30 years. We
originate adjustable rate mortgages, or ARMs, at rates based upon the constant
maturity yield of one year U.S. Treasury securities with up to 30 year terms. We
currently offer either one, three, five and seven year ARMs with rates resetting
on an annual basis, beginning either after the first, third, fifth or seventh
year. These loans have a two percent annual adjustment cap. The maximum rate
adjustment cap on the life of the 3/5/7 year ARMs is 6.0%. The maximum rate
adjustment cap on the life of the one-year ARMs is 7.0%.
Property appraisals on real estate securing one to four family
residential loans are made by state certified or licensed independent
appraisers.
Home Equity Lending. We offer home equity loans and home equity lines
of credit with loan-to-value amounts up to 80% for first liens, 75% for second
liens and 70% for properties with two or more intervening liens. Fixed-rate home
equity loans have a maximum term of 20 years. We offer an interest only home
equity loan with an 18-month term. Our home equity line of credit has a
five-year draw period during which the borrower may obtain advances on the line
of credit, followed by a ten year repayment period. The minimum periodic payment
on the home equity line of credit during the draw period may be interest only.
Lines of credit have a rate floor of the lower of the initial rate or 4.75% and
an adjustment cap of 18% over the life of the loan but no annual adjustment cap.
Adjustable rates on our home equity loans and lines of credit adjust monthly and
are based on the prime rate.
Automated Valuation Models (AVM) are used for home equity loans and
lines of credit in amounts of $100,000 or less or with loan-to-values of less
than 60%. Should the AVM not provide sufficient value to support the request, a
full appraisal may be requested by the borrower at the borrower's
expense.
Construction and Land Loans. We originate construction loans, land
acquisition loans and land development loans. Construction loans may be for
residential or nonresidential projects. Land loans are originated with a 70%
loan-to-value limit, land development loans have a 75% limit and construction
loans have an 80% limit on the appraised value of the completed project. The
construction phase may be no longer than 18 months. A land loan may have a 24
month interest only term or may be three year balloon loan with a 15 year
amortization schedule. Financing is available for owner occupied residences, and
we also provide financing to builders and real estate developers.
Construction and land acquisition and development loans are generally
considered to involve a higher degree of credit risk than residential mortgage
lending. If the estimate of construction cost proves to be inaccurate, we may be
compelled to advance additional funds to complete the construction with
repayment dependent, in part, on the success of the ultimate project rather than
the ability of a borrower or guarantor to repay the loan. If we are forced to
foreclose on a project prior to completion, there is no assurance that we will
be able to recover all of the unpaid portion of the loan. In addition, we may be
required to fund additional amounts to complete a project and may have to hold
the property for an indeterminate period of time. In addition, these loans may
result in larger balances to single borrowers, or related groups of borrowers,
and also generally require substantially greater evaluation and oversight
efforts.
Multi-family and Nonresidential (Commercial) Mortgages. Our
nonresidential real estate lending consists primarily of mortgage loans for the
acquisition or refinance of service/retail and mixed-use properties, churches
and non-profit properties, professional facilities and other commercial real
estate. The maximum loan-to-value ratio on all multi-family properties or on
office/professional properties under $200,000 is 75%. All other nonresidential
properties have a 70% limit. The maximum term on a fixed- rate loan is 20 years.
We offer a 30 year term on an adjustable rate loan.
59
We will provide multi-family and nonresidential financing for both
owner occupied properties and for investor properties. We do not at the present
time originate non- real estate commercial loans or lines of credit to
businesses.
Unlike single-family residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income, and which are secured by real property whose value
tends to be more easily ascertainable, multi-family and nonresidential real
estate loans typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business or rental income
produced by the property. As a result, the availability of funds for the
repayment of these loans may be substantially dependent on the success of the
business or rental property itself and the general economic environment. These
loans, therefore, have greater credit risk than one to four family residential
mortgages or consumer loans. In addition, these loans generally result in larger
balances to single borrowers, or related groups of borrowers, and also generally
require substantially greater evaluation and oversight efforts.
Consumer and Personal Lending. Our consumer lending products include
loans for new and used autos, savings account loans as well as secured and
unsecured personal loans and lines of credit.
Savings account loans have a rate equal to the account rate plus 2% and
there is no term limit on these loans. Secured personal loans may have terms up
to seven years, and unsecured personal loans may be up to three years. We accept
securities as collateral for secured personal loans.
Consumer lending is generally considered to involve a higher degree of
credit risk than residential mortgage lending. Consumer loan repayment is
dependent on the borrower's continuing financial stability and can be adversely
affected by job loss, divorce, illness or personal bankruptcy. The application
of various federal laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on consumer loans in the event
of a default.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. Accordingly, based on our financial condition as of September 30, 2007,
our loans to one borrower regulatory lending limit was approximately $5.2
million. Our largest borrower at that date had 45 loans outstanding with an
aggregate balance of $3.8 million, representing primarily mortgages on
single-family residential investment properties. The Board of Directors
evaluates the creditworthiness of large borrowers on a case-by-case basis, and
the Board is willing to lend up to the regulatory limit for what it determines
to be quality loans. The Bank's loans to one borrower regulatory lending limit
will be higher following the stock offering because the stock offering proceeds
will increase the Bank's capital.
Loan Approval Procedures and Authority. Lending policies and loan
approval limits are approved and adopted by the Board of Directors. Lending
authority is vested primarily in the Board of Directors and, to a lesser extent,
a loan committee comprised of senior officers may approve loans up to $150,000
if the loan is substantially in compliance with the applicable lending policy.
Prior Board approval is required for all loans in excess of $150,000 and the
Board generally ratifies all loans over $50,000 at its twice-monthly meetings.
Asset Quality
Loan Delinquencies and Collection Procedures. When a loan is 90 days
delinquent, the Board may determine to refer it to an attorney for repossession
or foreclosure. Reasonable attempts are made to collect from borrowers prior to
referral to an attorney for collection. In certain instances, we may modify
60
the loan or grant a limited moratorium on loan payments to enable the borrower
to reorganize his or her financial affairs, and we attempt to work with the
borrower to establish a repayment schedule to cure the delinquency.
With respect to mortgage loans, if a foreclosure action is taken and
the loan is not reinstated, paid in full or refinanced, the property is sold at
judicial sale at which we may be the buyer if there are no adequate offers to
satisfy the debt. Any property acquired as the result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold or
otherwise disposed of. When real estate owned is acquired, it is recorded at the
lower of the unpaid principal balance of the related loan or its fair market
value less estimated selling costs. The initial writedown of the property is
charged to the allowance for loan losses. Adjustments to the carrying value of
the property that result from subsequent declines in value are charged to
operations in the period in which the declines occur.
Loans are generally placed on non-accrual status when they are more
than 90 days delinquent, however loans may be placed on a non-accrual status at
any time if, in the opinion of management, the collection of additional interest
is doubtful. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
Non-Performing Assets. The following table provides information
regarding loans past due 90 days or more, all of which were accounted for on a
non-accrual basis.
At At June 30,
September 30, ---------------------------------------------------
2007 2007 2006 2005 2004 2003
------ ------ -------- ------ ------- --------
(Dollars in Thousands)
One to four family mortgage loans $ 333 $ 867 $ 402 $ 574 $ 183 $ 141
Multi-family mortgage loans 161 - - - - -
Nonresidential loans 149 841 - - - -
Construction loans 245 245 - 145 - -
Consumer loans - - - 34 - -
Home equity lines of credit - 111 - 138 - -
------ ------ -------- ------ ------- --------
Total non-performing loans $ 888 $2,064 $ 402 $ 891 $ 183 $ 141
====== ====== ======== ====== ======= ========
0.49% 1.13% 0.21% 0.48% 0.10% 0.08%
Total non-performing loans to total
loans
====== ====== ======== ====== ======= ========
Total non-performing loans to total assets 0.33% 0.77% 0.15% 0.34% 0.07% 0.05%
====== ====== ======== ====== ======= ========
Total non-performing assets to total assets 0.33% 0.77% 0.15% 0.34% 0.07% 0.05%
====== ====== ======== ====== ======= ========
We had no real estate owned or any other non-performing assets as of
any of the dates shown in the table above. We did not have any troubled debt
restructurings (wherein the borrower is granted a concession that we would not
otherwise consider under current market conditions) as of the dates shown in the
above table.
Classified Assets. Management, in compliance with federal guidelines,
has instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. It is our policy to review the
loan portfolio, in accordance with regulatory classification procedures, on at
least a quarterly basis. When a loan is classified as substandard or doubtful,
management is required to
61
evaluate the loan for impairment. When management classifies a portion of a loan
as loss, a reserve equal to 100% of the loss amount is required to be
established or the loan is to be charged-off.
An asset that does not currently expose the Bank to a sufficient degree
of risk to warrant an adverse classification, but which possesses credit
deficiencies or potential weaknesses that deserve management's close attention
is classified as "special mention."
An asset classified as "substandard" is inadequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. Assets so classified have well-defined weaknesses
and are characterized by the distinct possibility that the Bank will sustain
some loss if the deficiencies are not corrected. An asset classified as
"doubtful" has all the weaknesses inherent in a "substandard" asset with the
added characteristic that the weaknesses make collection or liquidation in full,
on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. The possibility of a loss on a doubtful asset is
high. That portion of an asset classified as "loss" is considered uncollectible
and of such little value that its continuance as an asset, without establishment
of a specific valuation or charge-off, is not warranted. This classification
does not necessarily mean that an asset has absolutely no recovery or salvage
value; but rather, it is not practical or desirable to defer writing off a
basically worthless asset even though partial recovery may be effected in the
future.
As of September 30, 2007, our classified loans were as follows:
At
September 30,
2007
--------------
(In Thousands)
Special Mention $ 3,001
Substandard 1,336
Doubtful -
Loss -
---------
Total $ 4,337
=========
We had one $3.0 million classified loan that comprised the entire
amount shown in the above table as special mention as of September 30, 2007. For
additional information about this loan see Risk Factors - There is a potential
for loss on a sizable land loan in our portfolio.
Allowance for Loan Losses. The allowance for loan losses is established
through provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level by management
which represents the evaluation of known and inherent losses in the loan
portfolio at the consolidated balance sheet date that are both probable and
reasonable to estimate. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
losses in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, composition
of the loan portfolio, current economic conditions, and other relevant factors.
This evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change, including the amounts and timing of
future cash flows expected to be received on impaired loans.
62
The Bank's loan loss experience in recent periods has been low. Over
the last five fiscal years, the Bank had loan charge offs totaling $19,000 and
recoveries totaling $30,000. Provisions to the allowance in recent periods have
been more influenced by current economic conditions than by the Bank's recent
loss experience. The allowance has also been affected by management's decision
to raise the Bank's reserve on a land loan secured by a tract of land in
Wildwood, New Jersey due to the ongoing concerns about the financial condition
of the borrower on this loan. Monthly payments were current as of September 30,
2007, however payments are being received not from the borrower but from the
borrower's new business partner, who could cease payment at any time as he is
not a party to the loan agreement and has no legal obligation to make payments
on this loan. The most recent appraisal the Bank has on this property was
prepared in 2004, and although that "as is" appraisal for this undeveloped site
was greater than the outstanding balance of the loan, the Bank has designated
the loan as special mention in light of the uncertainty related to the
development of the property. The issues that could impede the development
include zoning, wetlands preservation, site improvements and environmental
cleanup. See the discussion titled "There is a potential for loss on a sizable
land loan in our portfolio" in Risk Factors, beginning on page 12.
The allowance consists of specific and general components. The specific
component related to loans that are classified as either doubtful, substandard,
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers nonclassified loans and is based on
historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately identify
individual consumer and residential mortgage loans for impairment disclosures,
unless such loans are the subject of a restructuring agreement.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions for loan losses may be necessary
in order to increase the level of the allowance for loan losses. For example,
our evaluation of the allowance includes consideration of current economic
conditions, and a change in economic conditions could reduce the ability of our
borrowers to make timely repayments of their loans. This could result in
increased delinquencies and increased non-performing loans, and thus a need to
make increased provisions to the allowance for loan losses, which would be a
charge to income during the period the provision is made, resulting in a
reduction to our earnings. A change in economic conditions could also adversely
affect the value of the properties collateralizing our real estate loans,
resulting in increased charge-offs against the allowance and reduced recoveries,
and thus a need to make
63
increased provisions to the allowance for loan losses. Furthermore, a change in
the composition of our loan portfolio or growth of our loan portfolio could
result in the need for additional provisions.
In addition, as an integral part of its regulatory examination process,
the Office of Thrift Supervision periodically reviews our loan and foreclosed
real estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. The Office of Thrift Supervision may
require the allowance for loan losses or the valuation allowance for foreclosed
real estate to be increased based on their review of information available at
the time of the examination, which would negatively affect our earnings.
64
The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated:
For the Three Months
Ended September 30, For the Year Ended June 30,
----------------------- ---------------------------------------------------------
2007 2006 2007 2006 2005 2004 2003
--------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Allowance balance (at beginning of period) $ 1,840 $ 1,675 $ 1,675 $ 1,500 $ 1,350 $ 1,263 $ 1,215
--------- --------- --------- --------- --------- --------- ---------
Provision for loan losses 20 40 156 186 149 95 28
--------- --------- --------- --------- --------- --------- ---------
Charge-offs:
One to four family mortgage loans - - - - - 10 -
Consumer loans - - - 13 4 6 -
--------- --------- --------- --------- --------- --------- ---------
Total charge offs - - - 13 4 16 -
--------- --------- --------- --------- --------- --------- ---------
Recoveries:
One to four family mortgage loans - - - - - 8 -
Construction loans - - - - - - 20
Consumer loans - - 9 2 5 - -
--------- --------- --------- --------- --------- --------- ---------
Total recoveries - - 9 2 5 8 20
--------- --------- --------- --------- --------- --------- ---------
Net (charge-offs) recoveries - - 9 (11) 1 (8) 20
--------- --------- --------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 1,860 $ 1,715 $ 1,840 $ 1,675 $ 1,500 $ 1,350 $ 1,263
========= ========= ========= ========= ========= ========= =========
Total loans outstanding $182,553 $181,275 $183,160 $183,918 $185,929 $184,805 $173,213
========= ========= ========= ========= ========= ========= =========
Average loans outstanding (1) $182,702 $182,656 $182,672 $185,954 $184,451 $ (1) $ (1)
========= ========= ========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding 1.02% 0.95% 1.00% 0.91% 0.81% 0.73% 0.73%
========= ========= ========= ========= ========= ========= =========
Allowance for loan losses to
non-performing loans 209.46% 447.78% 89.16% 416.67% 168.35% 737.70% 895.75%
========= ========= ========= ========= ========= ========= =========
(1) Average balances are derived from month end balances. Management does not
believe that the use of month end balances rather than daily balances has
caused any material differences in the information presented. The average
balance information for the years ended June 30, 2003 and 2004 has not been
calculated because management of the Bank has determined that to do so
results in an undue burden.
65
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation allocation applicable to the entire loan portfolio.
At June 30,
At September 30, -------------------------------------------------------------------------------------------------
2007 2007 2006 2005 2004 2003
------------------ ------------------- ------------------- ------------------- ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
At end of period allocated to:
Mortgage
One to four
family $ 247 61.67% $ 279 61.82% $ 264 62.41% $ 275 63.92% $ 263 65.20% $ 248 67.13%
Home equity
and second
mortgages 18 4.72 18 4.63 18 4.80 12 3.24 14 3.22 12 3.28
Multi-family 168 5.70 162 5.70 166 5.92 125 4.36 115 4.02 103 3.87
Nonresidential 437 14.11 503 14.43 376 13.46 385 14.02 368 12.77 332 12.58
Land 486 2.11 489 2.11 498 2.28 366 2.35 166 1.87 30 1.39
Construction 79 6.61 67 5.85 71 5.22 48 5.64 47 6.42 62 6.70
Consumer 71 1.12 89 1.46 108 1.92 268 2.80 298 2.96 302 2.40
Home equity lines
of credit 14 3.74 20 3.77 14 3.77 20 3.43 12 3.22 8 2.18
Loans on savings
accounts - 0.22 - 0.23 - 0.22 - 0.24 - 0.32 - 0.47
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allocated 1,520 1,627 1,515 1,499 1,283 1,097
allowance
Unallocated
allowance 340 213 160 1 67 166
------ ------ ------ ------ ------ ------
Total allowance $1,860 100.00% $1,840 100.00% $1,675 100.00% $1,500 100.00% $1,350 100.00% $1,263 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
66
Securities Portfolio
Our investment policy is designed to foster earnings and manage cash
flows within prudent interest rate risk and credit risk guidelines. Generally,
our investment policy is to invest funds in various categories of securities and
maturities based upon our liquidity needs, asset/liability management policies,
pledging requirements, investment quality, marketability and performance
objectives.
All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Prior to
investing, consideration is given to the interest rate environment, tax
considerations, market volatility, yield, settlement date and maturity of the
security, our liquidity position, and anticipated cash needs and sources. The
effect that the proposed security would have on our credit and interest rate
risk and risk-based capital is also considered.
Federally chartered savings banks have the authority to invest in
various types of liquid assets. The investments authorized under the Bank's
investment policy include U.S. government and government agency securities,
municipal securities (consisting of bond obligations of state and local
governments), mortgage-backed securities, collateralized mortgage obligations
and corporate bonds. On a short-term basis, our investment policy authorizes
investment in federal funds, certificates of deposit and money market
investments with insured institutions and with brokerage firms.
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires that securities be
categorized as "held to maturity," "trading securities" or "available-for-sale,"
based on management's intent as to the ultimate disposition of each security.
Statement No. 115 allows debt securities to be classified as "held to maturity"
and reported in financial statements at amortized cost only if the reporting
entity has the positive intent and ability to hold these securities to maturity.
Securities that might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, or other
similar factors cannot be classified as "held to maturity."
We do not currently use or maintain a trading account. Securities not
classified as "held to maturity" are classified as "available-for-sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and reported, net of deferred taxes, as a
separate component of stockholders' equity.
We do not currently participate in hedging programs, interest rate
caps, floors or swaps, or other activities involving the use of off-balance
sheet derivative financial instruments, however, we may in the future utilize
such instruments if we believe it would be beneficial for managing our interest
rate risk. Further, we do not purchase securities which are not rated investment
grade.
Actual maturities of the securities held by us may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties. Callable securities pose
reinvestment risk because we may not be able to reinvest the proceeds from
called securities at an equivalent or higher interest rate.
Mortgage-backed Securities and Collateralized Mortgage Obligations.
Mortgage-related securities represent a participation interest in a pool of one
to four family or multi-family mortgages. We primarily invest in mortgage-backed
securities secured by one to four family mortgages. Our mortgage-related
securities portfolio includes mortgage-backed securities issued by U.S.
government agencies or government-sponsored entities, such as Freddie Mac,
Ginnie Mae, and Fannie Mae, and collateralized mortgage obligations issued by
private, non-government, corporate issuers.
67
The mortgage originators use intermediaries (generally government
agencies and government-sponsored enterprises, but also a variety of private
corporate issuers) to pool and repackage the participation interests in the form
of securities, with investors such as us receiving the principal and interest
payments on the mortgages. Securities issued or sponsored by U.S. government
agencies and government-sponsored entities are guaranteed as to the payment of
principal and interest to investors. Privately issued non-government, corporate
issuers' securities typically offer rates above those paid on government agency
issued or sponsored securities, but present higher risk than government agency
issued or sponsored securities because they lack the guaranty of those agencies
and are generally less liquid investments.
Mortgage-backed securities are pass-through securities typically issued
with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with interest rates that are within a specific range
and have varying maturities. The life of a mortgage-backed security thus
approximates the life of the underlying mortgages. Mortgage-backed securities
generally yield less than the mortgage loans underlying the securities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates.
Collateralized mortgage obligations are mortgage-derivative products
that aggregate pools of mortgages and mortgage-backed securities and create
different classes of securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage-backed securities as opposed to pass through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and risk is shared pro rata by all securities holders, cash flows from
the mortgages and mortgage-backed securities underlying collateralized mortgage
obligations are paid in accordance with a predetermined priority to investors
holding various tranches of the securities or obligations.
68
The following tables set forth certain information regarding the
carrying values, weighted average yields and maturities of our investment and
mortgage-backed securities portfolio at September 30, 2007 and June 30, 2007.
These tables show contractual maturities and do not reflect repricing or the
effect of prepayments. Actual maturities may differ.
At September 30, 2007
------------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More Than Ten Years Total Securities
------------------- -------------------- ------------------- ---------------------- ---------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Fair
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Mutual funds $ 117 4.44% $ - -% $ - -% $ - -% $ 117 4.44% $ 117
U.S. Government
corporations
and agencies
securities 4,500 5.05 35,401 5.15 6,875 5.50 6,003 6.19 52,779 5.31 53,022
Mortgage-backed
securities 3 6.50 8 6.63 1,290 4.34 6,247 4.83 7,548 4.75 7,515
------- -------- ------- -------- -------- -------
Total $4,620 5.04 $35,409 5.15 $8,165 5.32 $12,250 5.50 $60,444 5.23 $60,654
======= ======== ======= ======== ======== =======
At June 30, 2007
------------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More Than Ten Years Total Securities
------------------- -------------------- ------------------- ---------------------- ---------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Fair
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Mutual funds $ 25 4.84% $ - -% $ - -% $ - -% $ 25 4.84% $ 25
U.S. Government
corporations
and agencies
securities 5,500 5.12 35,399 5.11 6,875 5.50 5,944 6.19 53,718 5.28 53,274
Mortgage-backed
securities 17 6.73 12 6.57 1,385 4.32 6,505 4.86 7,919 4.77 7,775
------- -------- ------- -------- -------- -------
Total $5,542 5.12 $35,411 5.11 $8,260 5.30 $12,449 5.50 $61,662 5.21 $61,074
======= ======== ======= ======== ======== =======
69
The following table sets forth the carrying value of our securities
portfolio at the dates indicated. Securities that are held-to-maturity are shown
at our amortized cost, and securities that are available-for-sale are shown at
their fair value.
At June 30,
At September 30, -----------------------------------------------
2007 2007 2006 2005 2004 2003
------- ------- ------- ------- ------- -------
(In Thousands)
Securities Available for Sale:
- ------------------------------
Mutual funds $ 117 $ 25 $ 1,615 $ 1,337 $ 5,190 $15,595
======= ======= ======= ======= ======= =======
Securities Held to Maturity:
U.S. Government corporations and agencies
securities $52,779 $53,718 $51,542 $43,102 $29,006 $ 4,105
Mortgage-backed securities 7,548 7,919 9,058 14,353 21,861 33,098
Corporate debt securities - - - - 302 707
------- ------- ------- ------- ------- -------
Total Held to Maturity $60,327 $61,637 $60,600 $57,455 $51,169 $37,910
======= ======= ======= ======= ======= =======
Sources of Funds
General. Deposits are our major source of funds for lending and other
investment purposes. We also have the ability to borrow funds from the Federal
Home Loan Bank to supplement deposits as a source of funds.
In addition, we derive funds from loan and mortgage-backed securities
principal repayments, and proceeds from the maturity and call of investment
securities. Loan and securities payments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
pricing strategies and money market conditions.
Deposits. Our current deposit products include checking and savings
accounts, certificates of deposit and fixed or variable rate individual
retirement accounts (IRAs). Deposit account terms vary, primarily as to the
required minimum balance amount, the amount of time, if any, that the funds must
remain on deposit and the applicable interest rate. The determination of deposit
and certificate interest rates is based upon a number of factors, including: (1)
need for funds based on loan demand, current maturities of deposits and other
cash flow needs; (2) a current survey of a selected group of competitors' rates
for similar products; (3) economic conditions; and (4) business plan
projections.
We traditionally have preferred to obtain deposits from within our
market area and have discouraged non-local deposits. We do not at this time
utilize the services of deposit brokers.
70
The following table sets forth the distribution of deposits at the bank
at the dates indicated and the weighted average nominal interest rates for each
period on each category of deposits presented.
At September 30,
---------------------------------------------------------------
2007 2006
-------------------------------- -----------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ----
(Dollars in Thousands)
Noninterest-bearing demand accounts $ 1,357 0.86% -% $ 1,128 0.73% -%
NOW accounts 12,269 7.78 1.50 13,427 8.68 1.46
Money market accounts 37,801 23.97 4.04 33,044 21.35 3.98
Savings and club accounts 12,998 8.24 2.99 13,289 8.59 2.55
Certificates of deposit 93,262 59.14 4.79 93,874 60.66 4.43
--------- -------- --------- --------
Total deposits $157,687 100.00% 4.20% $154,762 100.00% 3.91%
========= ======== ========= ========
At June 30,
-----------------------------------------------------------------------------------------
2007 2006 2005
-------------------------------- -------------------------------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in Thousands)
(Dollars in Thousands)
Noninterest-bearing demand
accounts $ 1,755 1.10% -% $ 1,239 0.78% -% $ 2,347 1.47% -%
NOW accounts 12,920 8.13 1.45 13,856 8.70 1.29 14,640 9.20 1.14
Money market accounts 37,516 23.60 4.25 32,770 20.57 3.97 30,375 19.08 2.16
Savings and club accounts 13,993 8.80 2.96 14,840 9.31 2.56 15,488 9.73 1.97
Certificates of deposit 92,756 58.36 4.77 96,624 60.64 4.18 96,308 60.51 3.17
--------- -------- --------- -------- -------- --------
Total deposits $158,940 100.00% 4.21% $159,329 100.00% 3.73% $159,158 100.00% 2.67%
========= ======== ========= ======== ======== ========
71
The inflow of certificates of deposit and the retention of such
deposits upon maturity are significantly influenced by general interest rates
and money market conditions, making certificates of deposit traditionally a more
volatile source of funding than core deposits. Our liquidity could be reduced if
a significant amount of certificates of deposit maturing within a short period
of time were not renewed. To the extent that such deposits do not remain with
us, they may need to be replaced with borrowings, which could increase our cost
of funds and negatively impact our net interest rate spread and our financial
condition.
The following table sets forth the time deposits at the Bank classified
by interest rate as of the dates indicated.
At At June 30,
September 30, -------------------------------------
2007 2007 2006 2005
------- ------- ------- -------
(In Thousands)
Interest Rate
0.00-1.99% $ - $ - $ - $ 72
2.00-2.99% 426 542 4,156 47,440
3.00-3.99% 5,198 5,988 26,753 32,210
4.00-4.99% 59,562 56,670 59,981 12,470
5.00-5.99% 26,828 28,335 3,522 1,797
6.00-6.99% - - 1,050 1,221
7.00-8.00% - - - -
8.00-8.99% 1,232 1,205 1,147 1,085
9.00-9.99% 16 16 15 13
------- ------- ------- -------
Total $93,262 $92,756 $96,624 $96,308
======= ======= ======= =======
As of September 30, 2007, the amount and maturities of our certificates of
deposit were as follows:
Amount Due
-------------------------------------------------------------------------------------------------
Within After 5
1 year 1-2 years 2-3 years 3-4 years 4-5 years years Total
------------- -------------- ------------- ----------- ------------ ---------- ---------------
(In Thousands)
2.00-2.99% $ 426 $ - $ - $ - $ - $ - $ 426
3.00-3.99% 545 3,521 1,132 - - - 5,198
4.00-4.99% 44,130 7,031 3,119 2,481 1,354 1,447 59,562
5.00-5.99% 22,500 455 552 310 2,756 255 26,828
6.00-6.99% - - - - - - -
7.00-7.99% - - - - - - -
8.00-8.99% - 1,232 - - - - 1,232
9.00-9.99% - - - - - 16 16
------------- -------------- ------------- ----------- ------------ ---------- ---------------
Total $ 67,601 $ 12,239 $ 4,803 $ 2,791 $ 4,110 $ 1,718 $ 93,262
============= ============== ============= =========== ============ ========== ===============
72
The following table sets forth the amount and maturities of time
deposits at the Bank at June 30, 2007.
Amount Due
--------------------------------------------------------------------------------------------------
Within After 5
1 year 1-2 years 2-3 years 3-4 years 4-5 years years Total
------------- -------------- ------------- ----------- ------------ ---------- ---------------
(In Thousands)
2.00-2.99% $ 542 $ 0 $ 0 $ - $ - $ - $ 542
3.00-3.99% 867 3,078 2,043 - - - 5,988
4.00-4.99% 41,142 7,152 3,062 2,976 979 1,354 56,670
5.00-5.99% 24,445 431 253 160 1,697 1,349 28,335
6.00-6.99% - - - - - - -
7.00-7.99% - - - - - - -
8.00-8.99% - - 1,205 - - - 1,205
9.00-9.99% - - - - - 16 16
------------- -------------- ------------- ----------- ------------ ---------- ---------------
Total $ 67,001 $ 10,661 $ 6,563 $ 3,136 $ 2,676 $ 2,719 $ 92,756
============= ============== ============= =========== ============ ========== ===============
As of September 30, 2007, our certificates of deposit of $100,000 or more
were scheduled to mature as follows:
At September 30,
2007
-------
(In Thousands)
Maturity Period
Within three months $ 9,239
Three through six months 7,289
Six through twelve months 6,567
Over twelve months 10,103
-------
$33,198
=======
The following table shows the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of June 30, 2007.
At June 30,
2007
----
(In Thousands)
Maturity Period
Within three months $11,163
Three through six months 5,220
Six through twelve months 5,548
Over twelve months 10,251
-------
$32,182
=======
Borrowings. We periodically borrow funds from the Federal Home Loan
Bank to supplement deposits as a source of funds. As of September 30, 2007, our
borrowings totaled $71.0 million and had a weighted average cost of 5.57%. As a
strategy to lock in rates on funding beginning in the late 1990s we took long
term advances to protect against rising rates. Rates, however, fell to historic
lows instead of rising. These borrowings have been a drain on our profitability
and we determined in early December
73
2007 to undertake a refinancing of these advances, as we expect the improvement
in our net interest margin resulting from the refinancing will make it worth
incurring a significant penalty for the pre-payment of the advances. The penalty
was a $1.5 million charge to earnings during the quarter ended December 31,
2007. We pre-paid $25.0 million of advances with a weighted average rate of
5.87% and took replacement advances totaling $30.0 million with a weighted
average rate of 3.84%.
The following table sets forth certain information regarding our
borrowed funds.
At or for the Three
Months Ended
September 30, At or For the Year Ended June 30,
------------------ ---------------------------------
2007 2006 2007 2006 2005
------- ------- ------- ------- -------
(Dollars in Thousands)
Federal Home Loan Bank Advances:
Average balance outstanding $71,000 $66,000 $68,692 $67,616 $62,384
Maximum amount outstanding at any 71,000 66,000 71,000 69,000 67,000
month-end during the period
Balance outstanding at end of period 71,000 66,000 71,000 66,000 67,000
Weighted average interest rate during the period 5.69% 5.78% 5.69% 5.72% 5.95%
Weighted average interest rate at end of period 5.57% 5.66% 5.61% 5.65% 5.90%
Additional information regarding our borrowings is included in Note 8
to our consolidated financial statements beginning on page F-1.
Subsidiaries
We have one subsidiary: WPSLA Investment Corporation, incorporated
under Delaware law in 2000 to hold securities. At September 30, 2007, this
subsidiary held securities with a carrying value of approximately $28.1 million,
representing nearly half of our total securities portfolio of $60.3 million at
that date.
Employees
At September 30, 2007, we had a total of 29 full-time employees and
three part-time employees. We consider our relations with them to be good, and
our employees are not represented by any collective bargaining group.
Premises and Equipment
As of September 30, 2007, our investment in premises and equipment, net
of depreciation and amortization, totaled $1.9 million. We currently have three
full-service offices, as shown in the table below.
Year Facility Leased or Net Book Value at
Office Location Opened Owned September 30, 2007
- --------------- --------------- ---------------- ---------------------
(In thousands)
Levittown 1967 Owned $ 41
Morrisville 1973 Owned $ 100
Richboro 1984 Owned $ 233
74
We also own a five-acre tract of land in Levittown, Pennsylvania with a net
book value as of September 30, 2007 of approximately $859,000. There are
presently two buildings on this property. Our loan servicing department occupies
part of one building with the other part of that building leased to a physicians
group surgical center. The second building is vacant at present and could be
renovated to become either a bank operations center or a new full-service office
location. Alternatively, we have also received the necessary approvals to
construct a new building on the vacant land on this site to serve as a new
full-service office location.
We also own two adjacent single-family residential properties in
Furlong, Pennsylvania (within Bucks County) with a book value as of September
30, 2007 of approximately $288,000. We are currently holding these properties as
a potential future office site.
Legal Proceedings
William Penn Bank, from time to time, is a party to routine litigation
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which it holds security interests,
claims involving the making and servicing of real property loans, and other
issues incident to its business. There were no lawsuits pending or known to be
contemplated against William Penn Bank as of September 30, 2007 that were
expected to have a material effect on operations or income.
REGULATION
We operate in a highly regulated industry. This regulation establishes
a comprehensive framework of activities in which a savings and loan holding
company and federal savings bank may engage and is intended primarily for the
protection of the deposit insurance fund and consumers. Set forth below is a
brief description of certain laws that relate to the regulation of William Penn
Bank and William Penn Bancorp. The description does not purport to be complete
and is qualified in its entirety by reference to applicable laws and
regulations.
Regulatory authorities have extensive discretion in connection with
their supervisory and enforcement activities, including the imposition of
restrictions on the operation of an institution and its holding company, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, or legislation, including changes
in the regulations governing mutual holding companies, could have a material
adverse impact on William Penn Bancorp, William Penn Bank, and their operations.
The adoption of regulations or the enactment of laws that restrict the
operations of William Penn Bank and/or William Penn Bancorp or impose burdensome
requirements upon one or both of them could reduce their profitability and could
impair the value of William Penn Bank's franchise, resulting in negative effects
on the trading price of William Penn Bancorp common stock.
Regulation of William Penn Bank
General. As a federally chartered, Federal Deposit Insurance
Corporation-insured savings bank, William Penn Bank is subject to extensive
regulation by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. This regulatory structure gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies regarding the
classification of assets and the level of the allowance for loan losses. The
activities of federal savings banks are subject to extensive regulation,
including restrictions or requirements with respect to loans to one borrower,
the percentage of non-mortgage loans or investments to total assets, capital
distributions, permissible investments and lending activities, liquidity,
transactions
75
with affiliates and community reinvestment. Federal savings banks are also
subject to reserve requirements imposed by the Federal Reserve System. A federal
savings bank's relationship with its depositors and borrowers is regulated by
both state and federal law, especially in such matters as the ownership of
savings accounts and the form and content of the bank's mortgage documents.
William Penn Bank must file reports with the Office of Thrift
Supervision concerning its activities and financial condition, and must obtain
regulatory approvals prior to entering into certain transactions, such as
mergers with or acquisitions of other financial institutions. The Office of
Thrift Supervision regularly examines William Penn Bank and prepares reports to
the Bank's Board of Directors on deficiencies, if any, found in its operations.
The Office of Thrift Supervision has substantial discretion to impose
enforcement action on an institution that fails to comply with applicable
regulatory requirements, particularly with respect to its capital requirements.
In addition, the Federal Deposit Insurance Corporation has the authority to
recommend to the Director of the Office of Thrift Supervision that enforcement
action be taken with respect to a particular federal savings bank and, if action
is not taken by the Director, the Federal Deposit Insurance Corporation has
authority to take such action under certain circumstances.
Insurance of Deposit Accounts. The Federal Deposit Insurance
Corporation ("FDIC") insures the Bank's deposits to applicable limits. Despite
the FDIC's authority to assess premiums under a risk-based system for such
deposit insurance, most insured depository institutions have not been required
to pay premiums for the last ten years. The Federal Deposit Insurance Reform Act
of 2005 (the "Reform Act") resulted in significant changes to the federal
deposit insurance program: (i) effective March 31, 2006, the Bank Insurance Fund
and the Savings Association Insurance Fund were merged into a new combined fund,
called the Deposit Insurance Fund; (ii) the current $100,000 deposit insurance
coverage will be indexed for inflation (with adjustments every five years,
commencing January 1, 2011); and (iii) deposit insurance coverage for retirement
accounts was increased to $250,000 per participant subject to adjustment for
inflation. In addition, the Reform Act gave the FDIC greater latitude in setting
the assessment rates for insured depository institutions, which could be used to
impose minimum assessments.
As authorized, the FDIC sets the reserve ratio for the Deposit
Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits.
If the Deposit Insurance Fund's reserves exceed the designated reserve ratio,
the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%,
a portion of the excess as a dividend to insured depository institutions based
on the percentage of insured deposits held on December 31, 1996 adjusted for
subsequently paid premiums. Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future assessments based
on the amount of their assessable deposits on that date.
Pursuant to the Reform Act, the FDIC has determined to maintain the
designated reserve ratio at 1.25%. The FDIC has also adopted a new risk-based
premium system that provides for quarterly assessments based on an insured
institution's ranking in one of four risk categories based on their examination
ratings and capital ratios. Beginning in 2007, well-capitalized institutions
with the CAMELS ratings of 1 or 2 will be grouped in Risk Category I and will be
assessed for deposit insurance at an annual rate of between five and seven basis
points. The assessment rate for an individual institution is determined
according to a formula based on a weighted average of the institution's
individual CAMEL component ratings plus either five financial ratios or the
average ratings of its long-term debt. Assessments for institutions in Risk
Categories II, III and IV will be at annual rates of 10, 28 and 43 basis points,
respectively.
76
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. These assessments will continue
until the FICO bonds mature in 2017.
Regulatory Capital Requirements. Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2)
"Tier 1" or "core" capital equal to at least 4% (3% if the institution has
received the highest possible rating on its most recent examination) of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. In assessing an institution's capital adequacy, the Office of Thrift
Supervision takes into consideration not only these numeric factors but also
qualitative factors, and has the authority to establish higher capital
requirements for individual institutions where necessary.
At September 30, 2007, William Penn Bank was in compliance with the
minimum capital standards and qualified as "well capitalized." For William Penn
Bank's compliance with these regulatory capital standards, see Historical and
Pro Forma Capital Compliance as well as Note 13 to the consolidated financial
statements.
The Office of Thrift Supervision may require any savings institution
that has a risk-based capital ratio of less than 8%, a ratio of Tier 1 capital
to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
adjusted assets of less than 4% (3% if the institution has received the highest
rating on its most recent examination) to take certain action to increase its
capital ratios. If the savings institution's capital is significantly below the
minimum required levels of capital or if it is unsuccessful in increasing its
capital ratios, the institution's activities may be restricted.
For purposes of the capital regulations, tangible capital is defined as
core capital less all intangible assets except for certain mortgage servicing
rights. Tier 1 or core capital is defined as common stockholders' equity,
non-cumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of consolidated subsidiaries, and certain
non-withdrawable accounts and pledged deposits of mutual savings banks. William
Penn Bank does not have any non-withdrawable accounts or pledged deposits. Tier
1 and core capital are reduced by an institution's intangible assets, with
limited exceptions for certain mortgage and non-mortgage servicing rights and
purchased credit card relationships. Both core and tangible capital are further
reduced by an amount equal to the savings institution's debt and equity
investments in "non-includable" subsidiaries engaged in activities not
permissible for national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The components of supplementary
capital include, among other items, cumulative perpetual preferred stock,
perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, the portion of the allowance for loan losses
not designated for specific loan losses and up to 45% of unrealized gains on
equity securities. The portion of the allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100% of core
capital. For purposes of determining total capital, a savings institution's
assets are reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by the amount of the
institution's equity investments (other than those deducted from core and
tangible capital).
77
A savings institution's risk-based capital requirement is measured
against risk-weighted assets, which equal the sum of each on-balance-sheet asset
and the credit-equivalent amount of each off-balance-sheet item after being
multiplied by an assigned risk weight. These risk weights range from 0% for cash
to 100% for delinquent loans, property acquired through foreclosure, commercial
loans, and certain other assets.
Dividend and Other Capital Distribution Limitations. A savings
institution, like William Penn Bank, that is a subsidiary of a savings and loan
holding company must file an application or a notice with the Office of Thrift
Supervision at least thirty days before making a capital distribution, such as
paying a dividend to William Penn Bancorp. The Office of Thrift Supervision
imposes various restrictions or requirements on the ability of savings
institutions to make capital distributions, including cash dividends. A savings
institution must file an application for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the
applications processing rules of the Office of Thrift Supervision; (ii) the
total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings institution's net income for that year to date plus the
institution's retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the Office of Thrift Supervision or
applicable regulations. If an application is not required, then a notice must be
filed. The Office of Thrift Supervision may disapprove a notice or deny an
application for a capital distribution if: (i) the savings institution would be
undercapitalized following the capital distribution; (ii) the proposed capital
distribution raises safety and soundness concerns; or (iii) the capital
distribution would violate a prohibition contained in any statute, regulation or
agreement.
Capital distributions by William Penn Bancorp, as a savings and loan
holding company, are not subject to the Office of Thrift Supervision capital
distribution rules. Because William Penn Bancorp will retain 50% of the net
proceeds of the stock offering, the possibility that William Penn Bank would
need to file an application rather than a notice for capital distributions in
the immediate future is not expected to affect the payment of cash dividends by
William Penn Bancorp to its stockholders or the amount of such dividends.
Safety and Soundness Standards. As required by statute, the federal
banking agencies have adopted guidelines establishing general standards relating
to internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. The guidelines require,
among other things, the implementation of appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. If it
is determined that a savings institution has failed to meet any standard
prescribed by the guidelines, the institution may be required to submit an
acceptable plan to achieve compliance with the standard.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender test or they become subject to the business activity
restrictions and branching rules applicable to national banks. To qualify as a
qualified thrift lender, a savings institution must either (i) be deemed a
"domestic building and loan association" under the Internal Revenue Code by
maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans and investments in
premises of the institution or (ii) satisfy the statutory qualified thrift
lender test set forth in the Home Owners' Loan Act by maintaining at least 65%
of its portfolio assets in qualified thrift investments (generally defined to
include residential mortgages and related equity investments, certain
mortgage-related securities, small business loans, student loans and credit card
loans). For purposes of the statutory qualified thrift lender test, portfolio
assets are defined as total assets minus goodwill and other intangible assets,
the value of property used by the institution in conducting its business, and
specified liquid assets up to 20% of total assets. A savings
78
institution must maintain its status as a qualified thrift lender on a monthly
basis in at least nine out of every twelve months. William Penn Bank met the
qualified thrift lender test as of September 30, 2007 and in each of the last
twelve months and, therefore, qualifies as a qualified thrift lender.
A savings bank that fails the qualified thrift lender test and does not
convert to a bank charter generally will be prohibited from: (1) engaging in any
new activity not permissible for a national bank, (2) paying dividends not
permissible under national bank regulations, and (3) establishing any new branch
office in a location not permissible for a national bank in the institution's
home state. In addition, if the institution does not requalify under the
qualified thrift lender test within three years after failing the test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from the
Federal Home Loan Bank as promptly as possible.
Community Reinvestment Act. Under the Community Reinvestment Act, every
insured depository institution, including William Penn Bank, has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The Community Reinvestment
Act requires the depository institution's record of meeting the credit needs of
its community to be assessed and taken into account in the evaluation of certain
applications by such institution, such as a merger or the establishment of a
branch office by William Penn Bank. An unsatisfactory Community Reinvestment Act
examination rating may be used as the basis for the denial of an application.
William Penn Bank received an "outstanding" rating in its most recent Community
Reinvestment Act examination.
Federal Home Loan Bank System. William Penn Bank is a member of the
Federal Home Loan Bank of Pittsburgh, which is one of twelve regional federal
home loan banks. Each federal home loan bank serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from funds
deposited by financial institutions and proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans to
members pursuant to policies and procedures established by its board of
directors. As a member, William Penn Bank is required to purchase and maintain
stock in the Federal Home Loan Bank of Pittsburgh.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid and could continue to do so in the future. In addition, these
requirements could result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members.
The USA Patriot Act. William Penn Bank is subject to regulations
implementing the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
Patriot Act. The USA Patriot Act gave the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA Patriot Act took measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
79
Among other requirements, Title III of the USA Patriot Act and the
related regulations imposed the following requirements with respect to financial
institutions:
o Establishment of anti-money laundering programs that included, at
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering
program.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts, including verifying the identity of customers within a
reasonable period of time.
o Establishment of appropriate, specific, and, where necessary,
enhanced due diligence policies, procedures, and controls
designed to detect and report money laundering.
o Prohibitions on establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign
banks that do not have a physical presence in any country), and
compliance with certain record keeping obligations with respect
to correspondent accounts of foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on applications under
the Federal Reserve Act and the Bank Merger Act.
Prompt Corrective Regulatory Action. The Office of Thrift Supervision
is required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
undercapitalization. Generally, a savings institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator within
specified time frames for an institution that is "critically undercapitalized."
The regulation also provides that a capital restoration plan must be filed with
the Office of Thrift Supervision within 45 days of the date a savings
institution is deemed to have received notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company in the amount of
up to the lessor of 5% of the savings association's total assets when it was
deemed to be undercapitalized or the amount necessary to achieve compliance with
applicable capital requirements. In addition, numerous mandatory supervisory
actions become immediately applicable to an undercapitalized institution,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The Office of
Thrift Supervision could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. Significantly and
critically undercapitalized institutions are subject to additional mandatory and
discretionary measures.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any entity that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the
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savings institution. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institution's capital and surplus.
Certain transactions with affiliates are required to be secured by collateral in
an amount and of a type specified by federal law. The purchase of low quality
assets from affiliates is generally prohibited. Transactions with affiliates
must generally be on terms and under circumstances that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company
to its executive officers and directors. However, the law contains a specific
exception for loans by the Bank to its executive officers and directors in
compliance with federal banking laws. Under such laws, the Bank's authority to
extend credit to executive officers, directors and 10% shareholders
("insiders"), as well as entities such persons control, is limited. The law
limits both the individual and aggregate amount of loans the Bank may make to
insiders based, in part, on the Bank's capital position and requires certain
Board approval procedures to be followed. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The Federal Deposit Insurance Corporation has the authority to recommend
to the Director of the Office of Thrift Supervision that enforcement action to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the Federal Deposit Insurance Corporation has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Regulation of William Penn Bancorp
General. William Penn Bancorp will be a savings and loan holding
company within the meaning of Section 10 of the Home Owners' Loan Act. It will
be required to file reports with the Office of Thrift Supervision and will be
subject to regulation and examination by the Office of Thrift Supervision.
William Penn Bancorp will need to obtain regulatory approval from the Office of
Thrift Supervision before engaging in certain transactions, such as mergers with
or acquisitions of other financial institutions. In addition, the Office of
Thrift Supervision will have enforcement authority over William Penn Bancorp and
any non-savings institution subsidiaries. This permits the Office of Thrift
Supervision to restrict or prohibit activities that it determines to be a
serious risk to William Penn Bank. This regulation is intended primarily for the
protection of the depositors and not for the benefit of stockholders of William
Penn Bancorp.
Activities Restrictions. As a savings and loan holding company and a
subsidiary holding company of a mutual holding company, William Penn Bancorp
will be subject to statutory and regulatory restrictions on its business
activities. The non-banking activities of William Penn Bancorp and its
non-savings institution subsidiaries will be restricted to certain activities
specified by Office of Thrift Supervision regulation, which include performing
services for and holding properties used by a savings
81
institution subsidiary, activities authorized for multiple savings and loan
holding companies as of March 5, 1987, and non-banking activities permissible
for bank holding companies pursuant to the Bank Holding Company Act of 1956 or
authorized for financial holding companies pursuant to the Gramm-Leach-Bliley
Act. Before engaging in any non-banking activity or acquiring a company engaged
in any such activities, William Penn Bancorp will have to obtain prior Office of
Thrift Supervision approval of such planned activity or acquisition.
Mergers and Acquisitions. William Penn Bancorp will be required to
obtain approval from the Office of Thrift Supervision before acquiring, directly
or indirectly, more than 5% of the voting stock of another savings institution
or savings and loan holding company or acquiring such an institution or holding
company by merger, consolidation or purchase of its assets. Federal law also
prohibits a savings and loan holding company from acquiring more than 5% of a
company engaged in activities other than those authorized for savings and loan
holding companies by federal law or acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating an application for William Penn Bancorp to acquire
control of a savings institution, the Office of Thrift Supervision would
consider the financial and managerial resources and future prospects of William
Penn Bancorp and the target institution, the effect of the acquisition on the
risk to the insurance funds, the convenience and the needs of the community and
competitive factors.
Waivers of Dividends by William Penn, MHC. William Penn, MHC will be
required to provide prior notice to the Office of Thrift Supervision of any
proposed waiver of its receipt of dividends from William Penn Bancorp. The
Office of Thrift Supervision reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the waiver
would not be detrimental to the safe and sound operations of the subsidiary
savings association and (ii) the mutual holding company's board of directors
determines that such waiver is consistent with such directors' fiduciary duties
to the mutual holding company's members. Subject to the non-objection of the
Office of Thrift Supervision, we anticipate that William Penn, MHC will waive
the receipt of any dividends paid by William Penn Bancorp.
Conversion of William Penn, MHC to Stock Form. Office of Thrift
Supervision regulations permit William Penn, MHC to convert from the mutual form
of organization to the capital stock form of organization, commonly referred to
as a second step conversion. In a second step conversion, a new holding company
would be formed as the successor to William Penn Bancorp, William Penn, MHC's
corporate existence would end, and certain depositors of William Penn Bank would
receive the right to subscribe for shares of the new holding company. In a
second step conversion, each share of common stock held by stockholders other
than William Penn, MHC would be automatically converted into shares of common
stock of the new holding company. The Board of Directors has no current plans
for a second step conversion and there are no assurances that such a transaction
will occur.
Acquisition of Control. Under the federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire "control" of
a savings and loan holding company or savings association. An acquisition of
"control" can occur upon the acquisition of 10% or more of the voting stock of a
savings and loan holding company or savings institution or as otherwise defined
by the Office of Thrift Supervision. Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice to
act, taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
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Federal Securities Laws
General. William Penn Bancorp has filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
for the registration of the common stock to be issued pursuant to the offering.
Upon completion of the offering, William Penn Bancorp common stock will continue
to be registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. William Penn Bancorp will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 implemented
various legislative reforms addressing, among other matters, corporate
governance, auditing and accounting, executive compensation, and enhanced and
timely disclosure of corporate information. As directed by Section 302(a) of
Sarbanes-Oxley Act and the implementing rules of the Securities and Exchange
Commission, William Penn Bancorp's principal executive officer and principal
financial officer will be required to certify that its quarterly and annual
reports do not contain any untrue statement of a material fact. The rules have
several requirements, including the establishment, maintenance and regular
evaluation of the effectiveness of our internal controls.
TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations. All thrift
institutions are now subject to the same provisions as banks with respect to
deductions for bad debts. Thrift institutions that are treated as "small banks"
(the average adjusted bases for all assets of such institution equals $500
million or less) under the Internal Revenue Code may account for bad debts by
using the experience method for determining additions to their bad debt reserve.
Thrift institutions that are not treated as small banks must now use the
specific charge-off method.
William Penn, MHC, William Penn Bancorp and William Penn Bank will file
a consolidated federal tax return. William Penn Bancorp will be permitted to
exclude from its income 100% of dividends received from William Penn Bank as a
member of the same affiliated group of corporations. A 70% dividends received
deduction generally applies with respect to dividends received from corporations
that are not members of such affiliated group.
William Penn Bank's federal tax return has not been audited by the
Internal Revenue Service in the last five fiscal years.
State Taxation
William Penn, MHC and William Penn Bancorp will file Pennsylvania
income tax returns and will be subject to a 9.9% state income tax that is
calculated based on federal taxable income, subject to certain adjustments.
William Penn Bank will continue to file Pennsylvania tax returns as before the
reorganization and offering. It is subject to an 11.5% state income tax that is
calculated based on federal taxable income, subject to certain adjustments.
For additional information, see Note 9 to the consolidated financial
statements beginning on page F-1.
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MANAGEMENT
Board of Directors
The initial Boards of Directors of William Penn Bancorp and William
Penn, MHC will be identical to the current Board of Directors of William Penn
Bank. The Board of Directors of William Penn Bank is presently composed of six
members who are elected for terms of three years, one-third of whom are elected
annually and all of whom are independent under the current listing standards of
the Nasdaq Stock Market, other than Charles Corcoran who serves as President.
Information regarding the directors is provided below. Unless otherwise stated,
each person has held his or her current occupation for the last five years.
Directors: Age Primary Occupation Since Expires
- ----------------------------- ------ ------------------------------------------------------------- ------------- ----------
William J. Feeney 64 Retired Police Chief, Richboro, PA 1985 2010
Owner, Occasions of Naples, Inc. (flowers and gifts)
Naples, Florida
Charles Corcoran 55 President of William Penn Bank 1989 2009
Craig Burton 59 Partner, Burton & Browse LLP, Certified Public Accountants 1993 2008
Doylestown, Pennsylvania
Glenn Davis 56 Owner and President, Davis Pontiac, Inc. (auto dealership) 1986 2008
Richboro, Pennsylvania
William B.K. Parry, Jr. 61 William B. Parry & Son, Ltd. (insurance brokers) 1986 2009
Langhorne, Pennsylvania
William F. Heefner, Esq. 85 Retired, Founding Partner, Curtin & Heefner LLP (law firm) 1960 2010
Morrisville, Pennsylvania
Senior Management
Charles Corcoran, age 55, is our President. He joined the Bank in 1979,
was elected to the Board of Directors in 1989 and became president in 1993. Mr.
Corcoran also serves as our principal financial officer.
James D. Douglas, age 55, is our Vice President and serves as the chief
lending officer. Mr. Douglas joined the Bank in 1978.
Terry L. Sager, age 46, is our Corporate Secretary. She is a certified
public accountant and currently serves as our principal accounting officer. She
is also responsible for human resources and employee benefits. Ms. Sager joined
the Bank in 1987.
Lillian Cruz, age 44, is our Savings, Electronic Data Processing and
Demand Deposit Accounts Coordinator. Ms. Cruz joined the Bank in 1995.
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Compensation of Executive Officers
The following table summarizes all compensation during fiscal 2007 to
our executive officers Charles Corcoran and James D. Douglas. There were no
other individuals whose total compensation exceeded $100,000 for the year ended
June 30, 2007.
All
Name Other
Salary Bonus Compensation(1) Total
- ------------------------------------------- ------------- ----------- ----------------- --------------
Charles Corcoran, President $ 126,500 $ - $ 8,731 $ 135,231
James D. Douglas, Vice President $ 106,000 $ 500 $ 7,470 $ 113,970
- --------------------
(1) For 2007, all other compensation included the following:
Name 401(k) Plan Health Excess Group
Employer Insurance Term Life
Contribution Auto Waiver Insurance
------------------------------- ------------- ------------ ----------------- -------------
Charles Corcoran $ 4,798 $ 3,512 $ - $ 421
James D. Douglas $ 4,397 $ - $ 2,800 $ 273
Deferred Compensation Plan. William Penn Bank maintains a deferred
compensation plan for officers, which permits participants in the plan to defer
a portion of their compensation. The Bank adopted this plan in 1984. The Bank
maintains such deferral accounts in cash or invests the amounts credited to a
participant's account in deposit accounts or certificates established by the
Bank, or in bonds, common and preferred stocks, common trust funds, mutual and
money market funds or in annuity contracts issued by an insurance company on the
life of the participant, and the participant's account is credited with the
earnings and dividends. Normal retirement age is 65. Upon normal retirement age,
death or disability, the participant will receive 120 monthly installments. If
the participant is terminated for other than attainment of age 65, death, or
disability, the amounts deferred shall continue to be invested and held until
the participant reaches age 65. If the participant dies before receiving the 120
monthly payments, the designated beneficiary shall receive the remaining value
in a lump sum within 60 days. Installment payments to be made to the participant
shall commence on the first day of the month next following the date of the
termination of the participant's employment.
Mr. Corcoran is the only officer participating in the deferred
compensation plan for officers. He did not, however, defer any of his salary for
the fiscal year ended June 30, 2007. The amounts credited to his account under
this plan for those years in which he does defer a portion of his salary earn
interest at a rate adjusted annually equal to the highest rate offered by the
Bank on its certificates of deposit as adjusted on December 31st of each year.
The current rate on earnings under the plan is 4.8%.
401(k) Defined Contribution Retirement Plan. We maintain a
tax-qualified defined contribution plan (the "401(k) Plan"), for all employees
of the Bank who have satisfied the plan's eligibility requirements. The Bank
adopted this plan in 1979. Participants become eligible to participate in the
plan on the first day of the calendar quarter that coincides with or next
follows their attainment of age 18 and completion of one year of service.
Eligible employees may contribute up to 20% of their compensation to the plan on
a pre-tax basis, subject to limitations imposed by the Internal Revenue Code of
1986, as amended. Under the plan, the Bank makes matching contributions equal to
25% of participants' elective deferrals, up to a maximum of 12% of annual
compensation. Participants are 100% vested in their salary deferrals as well as
the Bank's contributions.
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Participants have individual accounts under the plan and may direct the
investment of their accounts among a variety of investment funds. In connection
with the offering, the plan will add another investment alternative, the William
Penn Bancorp Stock Fund. The stock fund will permit participants to invest their
401(k) plan funds in William Penn Bancorp common stock. A participant who elects
to purchase common stock in the offering through the plan will receive the same
subscription priority, and be subject to the same individual purchase
limitations, as if the participant had elected to purchase the common stock
using other funds.
Pension Plan. William Penn Bank maintains a qualified noncontributory
defined benefit pension plan for employees. The Bank adopted this plan in 1972.
All employees who have worked for a period of one year of service are eligible
to accrue benefits under the pension plan. Annual contributions to the pension
plan are made in order to satisfy the actuarially determined minimum funding
requirements in accordance with the Employee Retirement Income Security Act of
1974, as amended.
Under the plan's pension formula, annual retirement income will be
equal to 47% of highest average pay, multiplied by a fraction based on actual
years of credited service divided by the years of credited service up to the
normal retirement date of age 65. The pension plan provides for early retirement
at age 55 with a reduced benefit. The accrued benefit is further pro-rated for
years of service less than 30 at age 65. This will apply to participants who
were hired after the attainment of age 35.
Average pay means the highest average of total annual pay during any
five consecutive calendar years within the last ten years. Credited service
means uninterrupted years and months of employment with William Penn during
which a participant receives pay for at least 1,000 hours of employment.
The following optional forms of payment are available:
(1) Joint and Survivor Options - Under these options an adjusted
monthly income is payable for life after retirement. Upon death, either 50%, 75%
or 100% of the income which was payable will be paid to a beneficiary (if then
living) until his or her death.
(2) Straight Life Annuity - The participant will receive a greater
lifetime income, but the payments will cease upon death.
(3) Guaranteed Payments - The participant will receive a reduced
lifetime income and guarantee the continuation of the monthly income to a
beneficiary should his or her death occur within 60 or 120 months, for the
remainder of such guaranteed period.
The Board of Directors has approved the termination of the pension plan
effective on January 20, 2008. No future benefits will be accrued under the plan
following its termination. See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview and Business Strategy for a
discussion of our current estimate of the one-time charge to fully fund the plan
that the Bank expects to record as a compensation expense for the quarter ending
March 31, 2008.
Employment Agreements. We do not currently have employment or
severance/change in control agreements with any of our employees. The Board of
Directors may, however, consider the implementation of agreements with key
personnel after the offering in order to ensure the Bank can retain such
individuals.
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Compensation of Directors
Directors currently are paid a fee of $1,100 per month as board fees.
There are two meetings each month. The Chairman receives an extra $150 per month
($1,800 annually). Fees for board meetings represent $13,200 of the total amount
shown below for each director other than Mr. Feeney, who currently serves as
Chairman. Directors receive $600 per month for attendance at meetings of the
Asset Liability Committee and/or the Asset Review Committee, both of which meet
monthly. Directors receive $600 for attendance at meetings of the Personnel
Committee, which meets annually, and $600 for attendance at meetings of the
Audit Committee, which meets quarterly. Each director's fiscal 2007 compensation
includes $10,200 of committee meeting fees.
Each director of the Bank will also serve on the Boards of Directors of
William Penn Bancorp and William Penn, MHC. At this time, however, no additional
compensation is expected to be paid for service on those Boards; the directors
will be compensated only by the Bank. Mr. Corcoran, who is the only director at
this time who is also an employee, is not compensated for serving as a director.
The following table shows all compensation to the Board of Directors
during fiscal 2007.
Fees Earned
or Paid
Name in Cash Total
------------------------------------------------------------
William J. Feeney $25,200 $25,200
Craig Burton $23,400 $23,400
Glenn Davis $23,400 $23,400
William F. Heefner $23,400 $23,400
William B. K. Parry, Jr. $23,400 $23,400
Deferred Compensation Plan for Directors. William Penn Bank has
established a deferred compensation plan for its directors. The Bank adopted
this plan in 1984. Under the deferred compensation plan, the director may defer
all or part of his annual compensation as a director. The principal amount of
compensation deferred together with the interest accrued on that amount will
earn a return at a rate equal to the highest rate offered on William Penn
certificates of deposit on December 31, adjusted annually. The earnings rate on
deferrals is currently 4.8%. The participant, or, in the even of his/her death,
his/her beneficiary, shall receive distributions beginning on the first day of
the first month after the earlier of (i) the participant's death or (ii) the
later of (1) the participant's ceasing for any reason (other than death) to be a
member of the Board of Directors of William Penn or (2) the participant reaching
age 70. The deferred compensation plan is payable either in (1) a lump sum
payment, (2) 120 equal monthly payments or (3) equal installments. In the event
of death, the payments will be made to a designated beneficiary. The participant
may request a withdrawal under the deferred compensation plan for a severe
hardship prior to age 70.
All amounts deferred by directors during the fiscal year ended June 30,
2007 are included within the fees earned or paid in cash for fiscal 2007 as
shown in the directors' compensation table above.
Directors Consultation and Retirement Plan. William Penn Bank's
Directors Consultation and Retirement Plan provides retirement benefits to the
directors of William Penn Bank. The Bank adopted this plan in 1998. The
retirement benefit is calculated as the average of the director's total monthly
compensation during the 60 calendar months prior to retirement, or $900 if
greater, times a percentage (if less then 10 years of service - 0%, 10 but less
than 15 years - 50%, and 15 or more years -100%).
The benefit is payable upon attainment of ten years of service as a
director. Such benefit is payable for 60 months. Upon the death of a participant
who is receiving benefit payments under the plan
87
prior to his or her death, the remaining number of benefit payments to be made
under the plan shall be paid to the beneficiary after the participant's death.
Upon the death of a participant who is not receiving benefit payments under the
plan prior to his or her death, the beneficiary shall receive 60 monthly
payments. If a beneficiary dies after the participant but prior to receiving all
payments under the plan, then the remaining payments will continue to be paid to
the beneficiary's estate in the form of a lump-sum payment.
Upon a change in control if the director suffers a termination of
service, then the director shall be presumed to have 15 years of service as of
such date of change in control and shall receive a lump sum payment equal to the
present value of the payment. Upon a disability, the director shall be presumed
to have 10 years of service and shall receive benefits on the first day of the
calendar month after the disability.
Future Stock Benefit Plans
Employee Stock Ownership Plan. The Bank intends to establish the
William Penn Bank, FSB Employee Stock Ownership Plan (the "ESOP") for the
exclusive benefit of participating employees of William Penn Bank, to be
implemented prior to the completion of the offering. Participating employees are
full-time employees who have completed at least one year of service and have
attained the age of 21. An application for a letter of determination as to the
tax-qualified status of the ESOP will be submitted to the Internal Revenue
Service. Although no assurances can be given, we expect that a favorable letter
of determination will be received.
The ESOP is to be funded by contributions made by William Penn Bank in
cash or William Penn Bancorp common stock. Benefits may be paid either in shares
of common stock or in cash. The ESOP will borrow funds with which to acquire up
to 8% of the aggregate shares sold in the offering plus contributed to the
foundation.
The ESOP may elect, in whole or in part, to fill its order through open
market purchases subsequent to the closing of the offering, subject to any
required regulatory approval. It intends to borrow funds from William Penn
Bancorp. The loan is expected to be a fixed rate loan with a term of ten years,
priced at an annual interest rate equal to the prime rate published in The Wall
Street Journal as of the date of the closing of the stock offering. Presently it
is anticipated that the ESOP will purchase up to 8% of the aggregate shares sold
in the offering plus contributed to the foundation. The loan will be secured by
the shares purchased and earnings of employee stock ownership plan assets.
Shares purchased with loan proceeds will be held in a suspense account for
allocation among participants as the loan is repaid. It is anticipated that all
contributions will be tax-deductible.
Contributions to the ESOP and shares released from the suspense account
will be allocated annually among participants on the basis of total taxable cash
compensation. All participants must have completed a year of service during the
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Employment service before the
adoption of the ESOP shall be credited for the purposes of vesting.
Contributions to the ESOP by William Penn Bank are discretionary and as a result
benefits payable under the ESOP cannot be estimated.
The Board of Directors has appointed the non-employee directors to a
committee that will administer the ESOP and serve as its trustees. The trustees
must vote all allocated shares as directed by plan participants. Unallocated
shares and allocated shares for which no timely direction is received will be
voted as directed by the Board of Directors or the ESOP committee, subject to
the trustees' fiduciary duties.
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Stock Option Plan. We intend to adopt a stock option plan for the
benefit of directors and officers after the passage of at least six months
following the completion of the offering. Up to 4.9% of the total number of
shares of common stock outstanding after the offering, including shares held by
William Penn, MHC and by the charitable foundation, will be reserved for
issuance under the stock option plan. No determinations have been made as to any
specific grants to be made under the stock option plan or the terms thereof.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers and directors with a
proprietary interest in William Penn Bancorp as an incentive to contribute to
our success and reward directors and officers for outstanding performance.
Although the terms of the stock option plan have not yet been determined, it is
expected that the stock option plan will provide for the grant of: (1) options
to purchase the common stock intended to qualify as incentive stock options
under the Internal Revenue Code (incentive stock options); and (2) options that
do not so qualify (non-incentive stock options). The exercise price of any
options will be not less than the fair market value of the common stock on the
date of grant. Any stock option plan would be in effect for up to 10 years
following the earlier of adoption by the Board of Directors or approval by the
stockholders. Options would expire no later than 10 years following the date
granted and would expire earlier if the option committee so determines or in the
event of termination of employment. Options would be granted based upon several
factors, including seniority, job duties and responsibilities and job
performance.
Restricted Stock Plan. We also intend to establish a restricted stock
plan to provide our officers and directors with a proprietary interest in
William Penn Bancorp after the passage of at least six months following the
completion of the offering. The restricted stock plan is expected to provide for
the award of common stock, subject to vesting restrictions, to eligible officers
and directors.
We expect to contribute funds to the restricted stock plan to acquire,
in the aggregate, up to 1.96% of the total number of shares of common stock
outstanding after the offering, including shares held by William Penn, MHC and
the charitable foundation. Shares used to fund the restricted stock plan may be
acquired through open market purchases or provided from authorized but unissued
shares. No determinations have been made as to the specific terms of the
restricted stock plan.
Dilution. While our intention is to fund the stock option plan and
restricted stock plan through open market purchases, stockholders will
experience a reduction or dilution in ownership interest if the plans are
instead funded with newly-issued shares.
The issuance of authorized but unissued shares of stock to the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.9%.
The issuance of authorized but unissued shares of stock to the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.7%.
Stockholder Approval of Stock Options and Restricted Stock. We will
submit the stock options plan and restricted stock plan to stockholders for
their approval, at which time we will provide stockholders with detailed
information about the plans and the required approval. Under recently approved
Office of Thrift Supervision regulations, the stock option plan and restricted
stock plan must be approved by a majority of the total votes actually cast by
our public stockholders - meaning all stockholders other than our mutual holding
company parent, William Penn, MHC, which will own 70% of our outstanding stock
upon completion of the offering and will continue to hold a majority of our
outstanding stock so long as we remain in mutual holding company form. The stock
option plan and restricted stock plan will comply with all applicable Office of
Thrift Supervision regulations in effect at the time the plans are adopted. If
the Office of Thrift Supervision regulations were to change in the future
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to eliminate the requirement to obtain the separate vote of the public
stockholders then William Penn, MHC would control the outcome of any vote.
Transactions with Related Persons
William Penn Bank originates loans and extends credit to its directors,
executive officers and their family members in the ordinary course of business
on substantially the same terms, including interest rate and collateral, as
those prevailing at the time for comparable transactions with parties not
related to William Penn Bank. Such loans do not involve more than the normal
risk of collectibility or present other unfavorable features.
The Bank has an employee loan program whereby employees, excluding
executive officers, may obtain a discounted interest rate on their home mortgage
loan compared to those prevailing at the time for comparable loans with persons
not related to William Penn Bank. The following information is furnished with
regard to a loan originated under this program to Terry L. Sager, the Bank's
corporate secretary and a member of the Bank's senior management team.
Largest
Principal
Amount Amount of Amount of
Outstanding Principal Interest
During Principal Amount Paid Paid Interest
Name Fiscal 2007 Outstanding During During Rate
of Employee at September 30, 2007 Fiscal 2007 Fiscal 2007 Payable
- ------------------- ------------------- ------------------------- --------------- -- ---------------- -- ----------
Terry L. Sager $170,000 $155,000 $12,000 $6,000 3.625%
THE REORGANIZATION AND OFFERING
The Board of Directors adopted the plan authorizing the reorganization
and stock offering on November 21, 2007, subject to the approval of the Office
of Thrift Supervision and approval of the Bank's members. We received
authorization from the Office of Thrift Supervision to conduct the stock
offering on February 11, 2008. Office of Thrift Supervision authorization does
not constitute a recommendation or endorsement of an investment in our stock by
the Office of Thrift Supervision.
General
William Penn Bancorp will sell its common stock to eligible depositors
and borrowers of William Penn Bank in a subscription offering and, if shares are
available, to the general public in a community offering and/or a syndicated
community offering. The stock offering will be accomplished in accordance with
the procedures set forth in the plan, the requirements of applicable laws and
regulations, and the policies of the Office of Thrift Supervision.
We are offering for sale between 1,024,740 shares at the minimum and
1,381,511 shares at the maximum of the offering range (1,586,655 shares at the
adjusted maximum. The minimum purchase is 25 shares of common stock (minimum
investment of $250). Our common stock is being offered at a fixed price of
$10.00 per share in the offering. Interest will be paid on subscription funds
from the date the payment is received until the offering is either completed or
terminated.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
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In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
pending completion or termination of the offering, subscription funds received
by us will be invested only in investments permissible under Rule 15c2-4.
Purposes of the Stock Offering
The proceeds from the sale of common stock of William Penn Bancorp will
provide William Penn Bank with new equity capital, which will support future
growth and expanded operations. While William Penn Bank currently exceeds all
regulatory capital requirements to be considered well capitalized, the sale of
stock, coupled with the accumulation of earnings, less dividends or other
reductions in capital, from year to year, provides a means for the orderly
preservation and expansion of William Penn Bank's capital base.
The offering will afford our directors, officers and employees the
opportunity to become stockholders, which we believe to be an effective
performance incentive and an effective means of attracting and retaining
qualified personnel. The offering also will provide our customers and local
community members with an opportunity to acquire our stock.
Conduct of the Offering
Subject to the limitations of the plan of reorganization and stock
issuance adopted by our Board of Directors, shares of common stock are being
offered in descending order of priority in the subscription offering to:
o Eligible Account Holders (depositors at the close of business on
September 30, 2006 with deposits of at least $50.00);
o the William Penn Bank, FSB Employee Stock Ownership Plan;
o Supplemental Eligible Account Holders (depositors at the close of
business on December 31, 2007 with deposits of at least $50.00);
and
o Other Members (all other depositors of William Penn Bank as of
January 31, 2008 and borrowers of William Penn Bank as of June 1,
2005 whose borrowings remained outstanding as of January 31,
2008).
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering. The
community offering, if any, may commence at any time during or subsequent to the
completion of the subscription offering. A syndicated community offering, if we
conduct one, would commence just prior to, or as soon as practicable after, the
termination of the subscription offering. In any community offering or
syndicated community offering, we will fill orders for our common stock in an
equitable manner as determined by the Board of Directors in order to achieve a
wide distribution of the stock.
Any shares sold above the maximum of the offering range may be sold to
the William Penn Bank, FSB Employee Stock Ownership Plan before satisfying
remaining unfilled orders of Eligible Account Holders to fill the plan's
subscription, or the plan may purchase some or all of the shares covered by its
subscription after the offering in the open market, subject to any required
regulatory approval.
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Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of
reorganization and stock issuance to the following persons in the following
order of priority:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase, subject to the overall limitations
described below under Limitations on Purchases of Common Stock, up to the
greater of (i) the maximum purchase limitation in the community offering (i.e.,
25,000 shares), (ii) one-tenth of 1% of the total shares of common stock offered
in the subscription and community offering, and (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of common stock offered in the subscription and community offering by
a fraction, of which the numerator is the total amount of the qualifying
deposits of the Eligible Account Holder and the denominator is the total amount
of all qualifying deposits of all Eligible Account Holders. If there are
insufficient shares available to satisfy all subscriptions of Eligible Account
Holders, shares will be allocated to Eligible Account Holders so as to permit
each subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares ordered. Thereafter, unallocated shares will be allocated to
remaining subscribing Eligible Account Holders whose subscriptions remain
unfilled in the same proportion that each subscriber's qualifying deposit bears
to the total amount of qualifying deposits of all subscribing Eligible Account
Holders, in each case measured as of September 30, 2006, whose subscriptions
remain unfilled. Subscription rights received by officers and directors of
William Penn Bancorp or William Penn Bank, and such persons' associates, based
on their increased deposits in William Penn Bank in the one year preceding
September 30, 2006 will be subordinated to the subscription rights of the
Eligible Account Holders. To ensure proper allocation of stock, each Eligible
Account Holder must list on his order form all accounts in which he had an
ownership interest as of the Eligibility Record Date. Failure to list an
account, or providing incorrect information, could result in the loss of all or
a part of the subscriber's allocation.
Priority 2: The Employee Stock Ownership Plan. If there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders. It is expected that the William Penn Bank, FSB Employee Stock Ownership
Plan will purchase up to 8% of the aggregate shares sold in the offering plus
contributed to the foundation. To the extent that it does not purchase shares in
the offering, it intends to purchase shares in the open market purchases
subsequent to the closing of the offering, subject to any required regulatory
approval.
Priority 3: Supplemental Eligible Account Holders. If there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the employee stock ownership plan, each Supplemental
Eligible Account Holder shall be given the opportunity to purchase, subject to
the overall limitations described below under Limitations on Purchases of Common
Stock, up to the greater of (i) the maximum purchase limitation in the community
offering (i.e., 25,000 shares), (ii) one-tenth of 1% of the total shares of
common stock offered in the subscription and community offering, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock offered in the
subscription and community offering by a fraction, of which the numerator is the
amount of the qualifying deposits of the Supplemental Eligible Account Holder
and the denominator is the total amount of all qualifying deposits of all
Supplemental Eligible Account Holders. If Supplemental Eligible Account Holders
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders and the employee stock ownership plan, is in excess
of the total number of shares offered in the offering, the shares of common
stock will be allocated among subscribing Supplemental Eligible Account Holders
first so as to permit each subscribing Supplemental Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
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lesser of 100 shares or the number of shares ordered. Thereafter, unallocated
shares will be allocated to each subscribing Supplemental Eligible Account
Holder whose subscription remains unfilled in the same proportion that each
subscriber's qualifying deposit bear to the total amount of qualifying deposits
of all subscribing Supplemental Eligible Account Holders, in each case measured
as of December 31, 2007, whose subscriptions remain unfilled. To ensure proper
allocation of stock, each Supplemental Eligible Account Holder must list on his
order form all accounts in which he had an ownership interest as of the
Supplemental Eligibility Record Date. Failure to list an account, or providing
incorrect information, could result in the loss of all or a part of the
subscriber's allocation.
Priority 4: Other Members. If there are sufficient shares remaining
after satisfaction of subscriptions by Eligible Account Holders, the employee
stock ownership plan and Supplemental Eligible Account Holders, each Other
Member shall be given the opportunity to purchase, subject to the overall
limitations described below under Limitations on Purchases of Common Stock, up
to the greater of (i) the maximum purchase limitation in the community offering
(i.e., 25,000 shares), (ii) one-tenth of 1% of the total shares of common stock
offered in the subscription and community offering, and (iii) 15 times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of common stock offered in the subscription and community
offering by a fraction, of which the numerator is the amount of the qualifying
deposits of the Other Member and the denominator is the total amount of all
qualifying deposits of all Other Members. If Other Members subscribe for a
number of shares which, when added to the shares subscribed for by Eligible
Account Holders, the employee stock ownership plan and Supplemental Eligible
Account Holders, is in excess of the total number of shares offered in the
offering, the shares of common stock will be allocated among subscribing Other
Members first so as to permit each subscribing Other Member to purchase a number
of shares sufficient to make his total allocation equal to the lesser of 100
shares or the number of shares ordered. Thereafter, unallocated shares will be
allocated to each subscribing Other Member whose subscription remains unfilled
in the same proportion that each subscriber's qualifying deposit bear to the
total amount of qualifying deposits of all subscribing Other Members, in each
case measured as of January 31, 2008, whose subscriptions remain unfilled. To
ensure proper allocation of stock, each Other Member must list on his order form
all accounts in which he had an ownership interest as of January 31, 2008.
Failure to list an account, or providing incorrect information, could result in
the loss of all or a part of the subscriber's allocation.
Joint Accounts. Subscription rights in connection with a joint account
must be shared with the other persons on the joint account; a joint account
entitles the holders thereof to submit orders for up to an aggregate of 25,000
shares. Joint account holders are not entitled to place multiple orders that
would in the aggregate exceed 25,000 shares because the joint account
relationship is considered evidence that the holders are acting in concert.
Restrictions on Transfer of Subscription Rights and Shares. Applicable
regulations and the plan of reorganization and stock issuance prohibits any
person with subscription rights from transferring or entering into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights or the shares of common stock to be issued when subscription
rights are exercised. Subscription rights may be exercised only by the person to
whom they are granted. Each person subscribing for shares will be required to
certify that such person is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of the
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase subscription
rights or shares of common stock before the completion of the offering.
We will pursue all available legal and equitable remedies in the event
we become aware of the transfer of subscription rights and will not honor orders
that we determine involve the transfer of subscription rights.
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Deadlines for Purchasing Stock
The subscription offering will terminate at 12:00 noon, Eastern time,
on March 17, 2008. We may extend this expiration date without notice to you for
up to 45 days, until May 1, 2008. Once submitted, your order is irrevocable
unless the offering is extended beyond May 1, 2008. We may request permission
from the Office of Thrift Supervision to extend the offering beyond May 1, 2008,
and the Office of Thrift Supervision may grant one or more extensions of the
offering of up to 90 days per extension, but in no event may the offering be
extended beyond March 25, 2010. If the offering is extended beyond May 1, 2008,
we will notify each subscriber and subscribers will have the right to confirm,
modify or rescind their subscriptions. If an affirmative response is not
received prior to the expiration of the resolicitation period, a subscriber's
subscription will be canceled and funds will be returned with interest.
A community offering and a syndicated community offering, if such
offerings are conducted, may terminate at any time without notice but no later
than May 1, 2008.
Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering then shares
remaining unsubscribed may be made available for purchase in the community
offering to certain members of the general public. The maximum amount of common
stock that any one person may purchase in the community offering is 25,000
shares, or $250,000.
Preference in the community shall be given first to natural persons and
trusts of natural persons residing in Bucks County, Pennsylvania and second to
other natural persons and trusts of natural persons residing in Pennsylvania. If
shares are available for these "preferred purchasers" in the community offering
but there are insufficient shares to satisfy all orders, the available shares
will be allocated first to each preferred purchasers whose order we accept in an
amount equal to the lesser of 100 shares or the number of shares ordered by each
such subscriber, if possible. After that, unallocated shares will be allocated
among the remaining preferred purchasers whose orders remain unsatisfied in the
same proportion that the unfilled order of each such subscriber bears to the
total unfilled orders of all such subscribers. If, after filling the orders of
the first group of preferred purchasers (natural persons and trusts of natural
persons residing in Bucks County, Pennsylvania) and then the orders of the
second group of preferred purchasers (natural persons and trusts of natural
persons residing in Pennsylvania), shares are available for other subscribers in
the community offering but there are insufficient shares to satisfy all orders,
shares will be allocated in the same manner as for preferred purchasers.
We will consider persons to reside in Bucks County if they occupy a
dwelling there and have an ongoing physical presence in Bucks County that is not
merely transitory in nature. We may utilize depositor or loan records or other
evidence provided to us to make a determination as to whether a person is a
resident in Bucks County. In all cases, the determination of residence status
will be made by us in our sole discretion.
The community offering, if any, may commence at any time during or
subsequent to the completion of the subscription offering. The community
offering, if any, must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the Office of Thrift
Supervision.
If we receive regulatory approval for an extension, all subscribers
will be notified of the extension and of the duration of any extension that has
been granted, and will have the right to confirm, increase, decrease or rescind
their orders. If we do not receive an affirmative response from a subscriber to
any
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resolicitation, the subscriber's order will be rescinded and all funds received
will be promptly returned with interest.
The opportunity to subscribe for shares of common stock in the
community offering is subject to our right to reject orders, in whole or part,
either at the time of receipt of an order or as soon as practicable following
the expiration date of the offering. If your order is rejected in part, you will
not have the right to cancel the remainder of your order.
Syndicated Community Offering
The plan of reorganization and stock issuance provides that, if
necessary, all shares of common stock not purchased in the subscription offering
and community offering may be offered for sale to the general public in a
syndicated community offering to be managed by Keefe, Bruyette & Woods, Inc.
acting as our agent. In such capacity, Keefe, Bruyette & Woods may form a
syndicate of other broker-dealers. Alternatively, we may sell any remaining
shares in an underwritten public offering. Neither Keefe, Bruyette & Woods nor
any registered broker-dealer will have any obligation to take or purchase any
shares of the common stock in the syndicated community offering; however, Keefe,
Bruyette & Woods has agreed to use its best efforts in the sale of shares in any
syndicated community offering. The syndicated community offering would terminate
no later than 45 days after the expiration of the subscription offering, unless
extended by us, with approval of the Office of Thrift Supervision. See -
Community Offering above for a discussion of rights of subscribers in the event
an extension is granted.
The opportunity to subscribe for shares of common stock in the
syndicated community offering is subject to our right to reject orders, in whole
or part, either at the time of receipt of an order or as soon as practicable
following the expiration date of the offering. If your order is rejected in
part, you will not have the right to cancel the remainder of your order.
The maximum amount of common stock that any one person may purchase in
the syndicated community offering is 25,000 shares, or $250,000. We may begin
the syndicated community offering or underwritten public offering at any time
following the commencement of the subscription offering.
If we are unable to find purchasers from the general public for all
unsubscribed shares, we will make other purchase arrangements, if feasible.
Other purchase arrangements must be approved by the Office of Thrift Supervision
and may provide for purchases by directors, officers, their associates and other
persons in excess of the limitations provided in the plan of reorganization and
stock issuance and in excess of the proposed director purchases discussed
earlier, although no purchases are currently intended. If other purchase
arrangements cannot be made, we may do any of the following: terminate the stock
offering and promptly return all funds; return all funds, then set a new
offering range and notify all subscribers to give them the opportunity to
confirm, cancel or change their orders; or take such other actions as may be
permitted by the Office of Thrift Supervision.
Limitations on Purchases of Common Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum purchase of common stock by an individual is
$250,000. This limit applies to stock purchases in total in the
subscription, community and/or syndicated community offerings. A
joint account entitles the holders thereof to submit orders for
up to an aggregate of 25,000 shares; they may not exceed 25,000
shares.
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2. The purchases of individuals who are considered to be associates
of each other or who are deemed to be acting in concert with each
other will be limited so that no more than 25,000 shares in
aggregate are purchased by such individuals. This limit applies
to stock purchases in total in the subscription, community and
syndicated community offerings.
3. The maximum number of shares which may be purchased in all
categories in the offering by our officers and directors and
their associates in the aggregate shall not exceed 30% of the
total number of shares sold in the offering.
4. The minimum order is 25 shares, or $250.
5. If the number of shares otherwise allocable to any person or that
person's associates would be in excess of the maximum number of
shares permitted as set forth above, the number of shares
allocated to that person shall be reduced to the lowest
limitation applicable to that person, and then the number of
shares allocated to each group consisting of a person and that
person's associates shall be reduced so that the aggregate
allocation to that person and his associates complies with the
above maximums, and the maximum number of shares shall be
reallocated among that person and his associates in proportion to
the shares subscribed by each (after first applying the maximums
applicable to each person, separately).
6. Depending upon market or financial conditions, with the approval
of the Office of Thrift Supervision and without notice to
subscribers, we may decrease or increase the purchase and
ownership limitations. If a purchase limitation is increased,
subscribers in the subscription offering who ordered the maximum
amount will be given the opportunity to increase their
subscriptions up to the then applicable limit. We also may, in
our sole discretion, contact other large subscribers to give them
the same opportunity. The effect of this type of resolicitation
will be an increase in the number of shares owned by subscribers
who increase their subscriptions.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range of up to 15% (the adjusted maximum) the additional shares
will generally be issued in the following order of priority: (a)
to fill the employee stock ownership plan's subscription; (b) if
there is an oversubscription at the Eligible Account Holder
level, to fill unfilled subscriptions of Eligible Account
Holders; (c) if there is an oversubscription at the Supplemental
Eligible Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders; (d) if there is an
oversubscription at the Other Member level, to fill unfilled
subscriptions of Other Members; (e) to fill orders received in a
community offering, with preference given to persons who live in
the local community; and (f) to fill orders received in the
syndicated community offering. The William Penn Bank, FSB
Employee Stock Ownership Plan may, however, elect to fill part or
all of its stock order in the open market, after completion of
the stock offering.
8. No person will be allowed to purchase any stock if that purchase
would be illegal under any federal or state law or regulation or
would violate regulations or policies of the National Association
of Securities Dealers. We and/or our representatives may ask for
an acceptable legal opinion from any purchaser regarding the
legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
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9. We have the right to reject any order submitted by a person whose
representations we believe are untrue or who we believe is
violating, circumventing or intends to violate, evade or
circumvent the terms and conditions of the plan of reorganization
and stock issuance, either alone or acting in concert with
others.
10. The above restrictions also apply to purchases by persons acting
in concert under applicable regulations of the Office of Thrift
Supervision. Under regulations of the Office of Thrift
Supervision, our directors are not considered to be affiliates or
a group acting in concert with other directors solely as a result
of membership on our Board of Directors.
11. In addition, in any community offering or syndicated community
offering, we must first fill orders for our common stock up to a
maximum of 2% of the total shares issued in the offering in a
manner that will achieve a wide distribution of the stock, and
thereafter any remaining shares will be allocated on an equal
number of shares per order basis, until all orders have been
filled or the shares have been exhausted.
The term "associate" of a person is defined in the plan of
reorganization and stock issuance pursuant to the regulations of the Office of
Thrift Supervision to mean:
(1) any corporation or organization of which that person is a senior
officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities;
(2) any trust or other estate in which that person has a substantial
beneficial interest or as to which that person serves as trustee
or in a similar fiduciary capacity; or
(3) an individual who is related by blood or marriage to that person
if they live in the same home as that person.
For example, a corporation for which a person serves as an officer
would be an associate of that person and all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
In addition, pursuant to the regulations of the Office of Thrift
Supervision, directors or senior officers of William Penn Bank and William Penn
Bancorp who are related by blood or marriage will be considered associates of
each other.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party. We will
presume that certain persons are acting in concert based upon various facts,
including the fact that persons have joint account relationships or the fact
that such persons have filed joint Schedules 13D with the Securities and
Exchange Commission with respect to other companies. In
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addition, persons or entities having the same address on any account or stock
order form will be considered to be acting in concert. We reserve the right to
make an independent investigation of any facts or circumstances brought to our
attention that indicate that one or more persons acting independently or as a
group acting in concert may be attempting to violate or circumvent the
regulatory prohibition on the transferability of subscription rights.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." These
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant, including joint account relationships or shared
addresses on the records of William Penn Bank.
Each person purchasing shares of the common stock in the offering will
be considered to have confirmed that his purchase does not conflict with the
maximum purchase limitation. If the purchase limitation is violated by any
person or any associate or group of persons affiliated or otherwise acting in
concert with that person, we will have the right to purchase from that person at
the $10.00 purchase price per share all shares acquired by that person in excess
of that purchase limitation or, if the excess shares have been sold by that
person, to receive the difference between the purchase price per share paid for
the excess shares and the price at which the excess shares were sold by that
person. Our right to purchase the excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by our directors and executive
officers. For certain restrictions on the common stock purchased by our
directors and executive officers, see Restrictions on Transferability by
Directors and Executive Officers below.
Ordering and Receiving Common Stock
Persons Who are Not Permitted to Participate in the Stock Offering. We
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the plan of reorganization and stock issuance reside. We are not required,
however, to offer stock in the subscription offering to any person who resides
in a foreign country or resides in a state of the United States with respect to
which:
o The number of persons otherwise eligible to subscribe for shares under
the plan of reorganization and stock issuance who reside in such
jurisdiction is small; or
o The granting of subscription rights or the offer or sale of shares of
common stock to such persons would require us or any of our officers,
directors or employees, under the laws of such jurisdiction, to
register as a broker, dealer, salesman or selling agent or to register
or otherwise qualify William Penn Bancorp securities for sale in such
jurisdiction or to qualify as a foreign corporation or file a consent
to service of process in such jurisdiction; or
o Such registration, qualification or filing in our judgment would be
impracticable or unduly burdensome for reasons of cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state
is small, we will base our decision as to whether or not to offer the common
stock in that state on a number of factors, including but not limited to the
size of accounts held by account holders in the state, the cost of registering
or qualifying the shares, or the need for us, or our officers, directors or
employees to register as brokers, dealers or salesmen.
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Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering by mail or in person a properly executed and
completed order form, together with full payment of the purchase price for all
shares for which subscription is made or include appropriate authorization in
the space provided on the order form for withdrawal of full payment from a
deposit account at William Penn Bank. All subscription rights will expire on the
expiration date, whether or not we have been able to locate each person entitled
to subscription rights. To place an order in the community offering, an investor
must complete an order form and return it prior to the applicable expiration
date. Once submitted, subscription orders cannot be revoked without our consent.
To ensure that your stock purchase eligibility and priority are
properly identified, you must list all accounts on the order form, giving all
names in each account and the account number as of the appropriate eligibility
date. We will strive to identify your ownership in all accounts, but cannot
guarantee we will identify all accounts in which you have an ownership interest.
If a stock order form:
o is not delivered to a subscriber and is returned to us by the
United States Postal Service or we are unable to locate the
addressee;
o is not received by us or is received after the applicable
expiration date;
o is not completed correctly or executed; or
o is not accompanied by the full required payment for the shares
subscribed for, including instances where a savings account or
certificate balance from which withdrawal is authorized is
unavailable, uncollected or insufficient to fund the required
payment, but excluding subscriptions by the employee stock
ownership plan;
then the subscription rights for that person will lapse as though that person
failed to return the completed order form within the time period specified.
However, we may, but will not be required to, waive any irregularity on
any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by a date that we may specify.
The waiver of an irregularity on an order form in no way obligates us to waive
any other irregularity on any other order form. Waivers will be considered on a
case by case basis. We are not required to accept orders received on photocopies
or facsimile order forms, or for which payment is to be made by wire transfer or
payment from private third parties. Our interpretation of the terms and
conditions of the plan of reorganization and stock issuance and of the
acceptability of the order forms will be final, subject to the authority of the
Office of Thrift Supervision.
The reverse side of the order form contains a certification form
mandated by regulation. We will not accept order forms where the certification
form is not executed. By executing and returning the certification form, you
will be certifying that you received this prospectus and acknowledging that the
common stock is not a deposit account and is not insured or guaranteed by the
federal government. You also will be acknowledging that you received disclosure
concerning the risks involved in this offering. The certification form could be
used as support to show that you understand the nature of this investment.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus
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will be mailed any later than five days prior to the expiration date or hand
delivered any later than two days prior to the expiration date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will only be distributed with a prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Payment for shares of common stock ordered in the subscription
offering may be made:
o by check or money order made payable to "William Penn Bancorp,
Inc."; or
o by authorization of withdrawal from deposit accounts maintained
with William Penn Bank.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
subscribers' checks must be made payable to William Penn Bancorp, Inc., and
checks received by the stock information center will be deposited directly to
the segregated deposit account at William Penn Bank established to hold funds
received as payment for shares. Interest will be paid on subscription funds
received at William Penn Bank's regular passbook savings rate of interest from
the date payment is received until the offering is completed or terminated. We
may decide during the offering also to hold funds received with orders in a
deposit account at another insured depository institution. In either case, we
will pay interest on all funds received at a rate equal to William Penn Bank's
regular passbook savings rate.
Appropriate means by which account withdrawals may be authorized are
provided on the order form. If a subscriber authorizes us to withdraw the amount
of the purchase price from his or her deposit account, we will do so as of the
completion of the offering, though the account must contain the full amount
necessary for payment at the time the subscription is received. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase the common stock for
which a subscription has been made until the offering has been completed or
terminated. In the case of payments authorized to be made through withdrawal
from savings accounts, all sums authorized for withdrawal will continue to earn
interest at the applicable account rate until the offering has been completed or
terminated. Sums authorized for withdrawal from a certificate of deposit will
continue to earn interest at the contract rate on the certificate until the
offering has been completed or terminated. Interest penalties for early
withdrawal applicable to certificate accounts will not apply to withdrawals
authorized for the purchase of shares. However, if a partial withdrawal results
in a certificate account with a balance less than the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will be converted into a savings
account and will earn interest at the regular passbook savings rate subsequent
to the withdrawal. In the case of payments made by check or money order, funds
will be placed in a segregated account and interest will be paid by William Penn
Bank at the regular passbook savings rate from the date payment is received
until the offering is completed or terminated. It is a violation of the terms of
the offering to stop payment on a check once submitted with an order, and we
will take appropriate action with respect to any such violation.
An executed order form, once we receive it, may not be modified,
amended, or rescinded without our consent, unless the offering is not completed
within 45 days after the conclusion of the subscription offering, in which event
subscribers may be given the opportunity to increase, decrease, or rescind their
subscription for a specified period of time. If the offering is not completed
for any reason, all funds submitted pursuant to the offerings will be promptly
refunded with interest as described above.
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A subscriber interested in using funds in an individual retirement
account to purchase common stock must do so through a self-directed IRA account.
William Penn Bank IRA accounts are not self-directed accounts. To use funds in
an IRA account at William Penn Bank, a subscriber must make a trustee-to-trustee
transfer of the IRA funds held at William Penn Bank to a trustee offering a
self-directed IRA program with the agreement that the funds will be used to
purchase shares in the offering. There will be no early withdrawal or Internal
Revenue Service interest penalties for transfers. The new trustee would hold the
common stock in a self-directed account in the same manner as we now hold the
depositor's IRA funds. An annual administrative fee may be payable to the new
trustee. Subscribers interested in using funds in a William Penn Bank IRA
account to purchase common stock should contact the stock information center as
soon as possible so that the necessary forms may be forwarded for execution and
returned before the subscription offering ends. In addition, federal laws and
regulations require that officers, directors and 10% stockholders who use
self-directed IRA funds to purchase shares of common stock in the subscription
offering, make purchases for the exclusive benefit of IRA accounts.
Federal regulations prohibit William Penn Bank from lending funds or
extending credit to any person to purchase the common stock in the offering.
Stock Information Center. Our stock information center is located at
8150 Route 13, Levittown, Pennsylvania. The phone number is (215) 945-0124. The
stock information center's hours of operation are generally Monday 10:00 a.m. to
4:00 p.m., Tuesday through Thursday 9:00 a.m. to 4:00 p.m., and Friday 9:00 a.m.
to 3:00 p.m. The stock information center is closed on weekends and holidays.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed by our transfer agent to the persons
entitled thereto at the address noted on the order form, as soon as practicable
following completion of the offering. Any certificates returned as undeliverable
will be held until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for the common
stock are available and delivered to subscribers, subscribers may not be able to
sell the shares of stock for which they subscribed, even though trading of our
common stock may have commenced.
Restrictions on Repurchase of Shares
Under Office of Thrift Supervision regulations, we may not, for a
period of one year from the date of the completion of the offering, repurchase
any of our common stock from any person, except (1) in an offer made to all
stockholders to repurchase the common stock on a pro rata basis, approved by the
Office of Thrift Supervision, (2) the repurchase of qualifying shares of a
director, or (3) repurchases to fund restricted stock plans or tax-qualified
employee stock benefit plans, including the employee stock ownership plan. Where
extraordinary circumstances exist, the Office of Thrift Supervision may approve
the open market repurchase of up to 5% of our common stock during the first year
following the offering. To receive such approval, we must establish compelling
and valid business purposes for the repurchase to the satisfaction of the Office
of Thrift Supervision. Furthermore, repurchases of any common stock are
prohibited if they would cause William Penn Bank's regulatory capital to be
reduced below the amount required under the regulatory capital requirements
imposed by the Office of Thrift Supervision. If, in the future, the rules and
regulations regarding the repurchase of stock are liberalized, we may utilize
the rules and regulations then in effect.
The Offering Range
The plan of reorganization and stock issuance requires that the amount
of stock offered must be based on the estimated pro forma market value of
William Penn Bancorp as determined by an
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independent appraisal. Our independent appraiser, RP Financial LC, based its
appraisal on the following factors, among others:
o the present financial condition and recent operating results of
William Penn Bank;
o the economic and demographic conditions in William Penn Bank's
existing market area; and
o the estimated impact of the stock offering as well as the
estimated expense of the stock benefit plans on our net worth and
earnings potential.
RP Financial advised in its valuation appraisal report, dated February
1, 2008, that the estimated pro forma market value of William Penn Bancorp on a
fully-converted basis ranged from a minimum of $36.4 million to a maximum of
$49.2 million with a midpoint of $42.8 million.
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing William Penn
Bancorp's shares. RP Financial did not independently verify the consolidated
financial statements and other information provided by us, nor did RP Financial
value independently our assets or liabilities. The valuation considers us as a
going concern and should not be considered as an indication of our liquidation
value. Moreover, because this valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing common stock in the
offerings will thereafter be able to sell such shares at prices at or above the
purchase price or in the range of the valuation described above.
No sale of shares of common stock in the stock offering may be
completed unless RP Financial confirms that nothing of a material nature has
occurred which would cause it to conclude that the aggregate value of the common
stock to be issued is materially incompatible with the estimate of the aggregate
consolidated pro forma market value of William Penn Bancorp and William Penn
Bank. If this confirmation is not received, we may cancel the stock offering,
extend the offering period and establish a new estimated valuation and offering
range and/or estimated price range, extend, reopen or hold a new offering or
take any other action the Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock to be
issued may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares issued times the
purchase price is not below the minimum or more than 15% above the maximum of
the estimated valuation range. If market or financial conditions change so as to
cause the aggregate value of the common stock to be issued to be below the
minimum of the estimated valuation range or more than 15% above the maximum of
this range, we will be required to return all subscribers' funds to them (with
interest) and conduct a resolicitation of all orders received. Subscribers would
in that case be permitted to modify, rescind or resubmit their orders prior to
the expiration of the resolicitation offering. It is possible that we would
increase or decrease the purchase limitations in such a situation. Any change in
the estimated valuation range would first need to be approved by the Office of
Thrift Supervision.
An increase in the number of shares of common stock to be issued as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and William Penn Bancorp's pro forma net
income and stockholders' equity on a per share basis while increasing pro forma
net income and stockholders' equity on an aggregate basis. A decrease in the
number of shares of common stock to be issued would increase both a subscriber's
ownership interest and William Penn
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Bancorp's pro forma net income and stockholders' equity on a per share basis
while decreasing pro forma net income and stockholders' equity on an aggregate
basis.
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the Bank's
main office and the other locations specified under Where You Can Find More
Information. The appraisal report is an exhibit to the registration statement
filed with the Securities and Exchange Commission.
For its services in making this appraisal, RP Financial's fees and
out-of-pocket expenses are estimated to total approximately $47,500. We have
agreed to indemnify RP Financial and any employees of RP Financial who act for
or on behalf of RP Financial in connection with the appraisal against any and
all loss, cost, damage, claim, liability or expense of any kind, including
claims under federal and state securities laws, arising out of any misstatement,
untrue statement of a material fact or omission to state a material fact in the
information supplied by us to RP Financial, unless RP Financial is determined to
be negligent or otherwise at fault.
Methodology of the Appraisal. Consistent with Office of Thrift
Supervision appraisal guidelines, RP Financial relied primarily on the
comparative market value methodology in determining the pro forma market value.
In applying this methodology, RP Financial analyzed financial and operational
comparisons of William Penn Bank with a selected peer group of publicly traded
mutual holding companies. The following table shows the names of the peer group
companies as well as their locations, initial public offering date, asset size
as of September 30, 2007 and market value data, based on market prices as of
February 1, 2008. All of the companies are NASDAQ traded other than Gouverneur
Bancorp, which is AMEX listed.
Total Market
Company Name, Ticker Symbol and Location IPO Date Assets Value(1)
- -------------------------------------------------------------------------------------------------
(In Millions)
Brooklyn Federal Bancorp - BFSB (Brookylyn, NY) April 2005 $390 $172
United Community Bancorp - UCBA (Lawrenceburg, IN) March 2006 $378 $ 88
Lake Shore Bancorp - LSBK (Dunkirk, NY) April 2006 $356 $ 61
Greene County Bancorp - GCBC (Catskill, NY) December 1998 $339 $ 50
Northeast Community Bancorp - NECB (White Plains, NY) July 2006 $318 $153
Cheviot Financial - CHEV (Cincinnati, OH) January 2004 $316 $ 90
Pathfinder Bancorp - PBHC (Oswego, NY) November 1995 $314 $ 31
Jacksonville Bancorp - JXSB (Jacksonville, IL) April 1995 $282 $ 26
Kentucky First Federal Bancorp - KFFB (Hazard, KY) March 2005 $273 $ 82
Gouverneur Bancorp - GOV (Gouverneur, NY) March 1999 $133 $ 22
_____________
(1) On a fully-converted basis.
Pricing Ratios. Consistent with Office of Thrift Supervision appraisal
guidelines, RP Financial utilized the average and median price-to-earnings and
price-to-book value ratios of the peer group companies, based on their current
stock trading prices, to establish appropriate pro forma pricing ratios for
William Penn Bancorp. The estimated pro forma market value was established based
on how William Penn Bank compares to the peer group companies on a financial and
operational basis.
The ratio of "price-to-earnings" measures the stock's cost relative to
the company's earnings. It is the price of one share of stock divided by the
earnings per share. It represents how much an investor is paying for a company's
earnings ability; a high ratio means the stock is priced high relative to how
much the company earns.
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The ratio of "price-to-book value" measures the stock's cost relative
to the company's equity. Book value per share is another way of saying equity
per share. The company's total equity divided by the number of shares
outstanding is the equity per share. The price-to-book value ratio represents
how much an investor is paying for the stock relative to the net worth of the
company.
The following table presents the pricing ratios for the peer group
companies on a fully-converted basis and the pro forma fully-converted pricing
ratios for William Penn Bancorp. The calculations of the fully-converted pricing
ratios for the peer group companies assume the pro forma impact of selling the
mutual holding company shares of each of the peer group companies at their
respective trading prices as of February 1, 2008. These ratios are based on core
earnings for the twelve-month period ended December 31, 2007. Core earnings
exclude any one time non-operating and extraordinary items. Core earnings for
William Penn excludes the prepayment penalty for the refinancing of Federal Home
Loan Bank Advances incurred during the quarter ended December 31, 2007 and also
reflects an adjustment for the reduced interest expense on Federal Home Loan
Bank Advances that resulted from the refinancing.
Price-to-core Price-to-book
earnings multiple value ratio
----------------------- -------------------
Pricing ratios for peer group on a fully-converted basis:
Average 26.90x 81.22%
Median 29.73x 82.33%
High 32.32x 91.00%
Low 18.49x 69.31%
Price-to-core Price-to-book
earnings multiple value ratio
----------------------- -------------------
Pro forma pricing ratios for William Penn Bancorp
on a fully-converted basis:
Minimum 18.18x 56.50%
Midpoint 21.28x 61.24%
Maximum 24.39x 65.27%
Maximum, as adjusted 27.78x 69.25%
The estimated pro forma market values for mutual holding company stock
offerings as well as full conversion stock offerings are generally set at a
level that results in the company's pro forma price-to-book ratio being less
than the price-to-book ratio of the peer group. The converting company's value
is discounted relative to the peer group because the company's return on equity
(which is a measure of how much the company earns relative to its amount of
capital) following the offering is generally expected to be lower than the peer
group's return on equity until the company is able to profitably deploy the new
capital from the offering. The practice of setting the estimated pro forma
market value to reflect the uncertainty about the company's ability to
profitably deploy its new capital is called the "new issue discount."
The contribution of $150,000 in cash and approximately 2% of the total
shares to be outstanding upon completion of the offering to the charitable
foundation reduced our estimated pro forma market value.
Plan of Distribution and Marketing Arrangements
We have engaged Keefe, Bruyette & Woods, Inc., a broker-dealer
registered with the National Association of Securities Dealers, as a financial
and marketing advisor in connection with the offering of our common stock. In
its role as financial and marketing advisor, Keefe, Bruyette & Woods will assist
us in the offering as follows:
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o consulting as to the securities marketing implications of any
aspect of the plan of reorganization and stock issuance;
o reviewing with our Board of Directors the financial impact of the
offering based upon the independent appraiser's appraisal of the
common stock;
o reviewing all offering documents, including the prospectus, stock
order forms and related offering materials (we are responsible
for the preparation and filing of such documents);
o assisting in the design and implementation of a marketing
strategy for the offering;
o assisting us in scheduling and preparing for meetings with
potential investors and broker-dealers; and
o providing such other general advice and assistance we may request
to promote the successful completion of the offering.
For these services, Keefe, Bruyette & Woods will receive a management
fee of $25,000 payable in four monthly installments that, upon completion of the
offering, will be credited against a success fee of 1.0% of the aggregate dollar
amount of the common stock sold in the subscription and community offerings if
the stock issuance is consummated, excluding in each case shares purchased by
the William Penn Bank, FSB Employee Stock Ownership Plan and shares purchased by
our directors, officers and employees and their immediate families and shares
issued to the charitable foundation.
The plan of reorganization and stock issuance provides that, if
necessary, all shares of common stock not purchased in the subscription offering
and community offering may be offered for sale to the general public in a
syndicated community offering to be managed by Keefe, Bruyette & Woods. In such
capacity, Keefe, Bruyette & Woods may form a syndicate of other broker-dealers.
Neither Keefe, Bruyette & Woods nor any registered broker-dealer will have any
obligation to take or purchase any shares of the common stock in the syndicated
community offering; however, Keefe, Bruyette & Woods has agreed to use its best
efforts in the sale of shares in any syndicated community offering. If there is
a syndicated community offering, Keefe, Bruyette & Woods will receive a
management fee of 1.0% of the aggregate dollar amount of the common stock sold
in the syndicated community offering. The total fees payable to Keefe, Bruyette
& Woods and other National Association of Securities Dealers member firms in the
syndicated community offering shall not exceed 5.5% of the aggregate dollar
amount of the common stock sold in the syndicated community offering.
We also will reimburse Keefe, Bruyette & Woods for its reasonable
out-of-pocket expenses (including legal fees and expenses) associated with its
marketing effort, up to a maximum of $65,000. If the plan of reorganization and
stock issuance is terminated or if Keefe, Bruyette & Woods terminates its
agreement with us in accordance with the provisions of the agreement, Keefe,
Bruyette & Woods will only receive reimbursement of its reasonable out-of-pocket
expenses. We will indemnify Keefe, Bruyette & Woods against liabilities and
expenses (including legal fees) incurred in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions contained
in the offering material for the common stock, including liabilities under the
Securities Act of 1933.
Keefe, Bruyette & Woods has not prepared any report or opinion
constituting a recommendation or advice to us or to persons who subscribe for
our common stock, nor has it prepared an opinion as to the fairness to us of the
purchase price or the terms of the common stock offered for sale. Keefe,
Bruyette & Woods expresses no opinion as to the prices at which the common
stock, once issued, may trade.
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Our directors and executive officers may participate in the
solicitation of offers to purchase common stock. Other trained employees may
participate in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or answering questions of a ministerial nature.
Other questions of prospective purchasers will be directed to executive officers
or registered representatives of Keefe, Bruyette & Woods. We will rely on Rule
3a4-1 of the Securities Exchange Act of 1934 so as to permit officers, directors
and employees to participate in the sale of our common stock. No officer,
director or employee will be compensated for his or her participation by the
payment of commissions or other remuneration based either directly or indirectly
on the transactions in the common stock.
Restrictions on Transferability by Directors and Executive Officers
Shares of the common stock purchased by our directors or executive
officers cannot be sold for a period of one year following completion of the
offering, except for a disposition of shares after death. To ensure this
restriction is upheld, shares of the common stock issued to directors and
executive officers will bear a legend restricting their sale. Appropriate
instructions will be issued to the transfer agent with respect to applicable
restrictions on transfer of such stock. Any shares issued to directors and
executive officers as a stock dividend, stock split or otherwise with respect to
restricted stock will be subject to the same restriction.
For a period of three years following the offering, our directors and
executive officers and their associates may not, without the prior approval of
the Office of Thrift Supervision, purchase our common stock except from a broker
or dealer registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made by tax
qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual directors or executive officers.
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in the offering. This registration does not cover
the resale of the shares. Shares of common stock purchased by persons who are
not affiliates of us may be resold without registration. Shares purchased by an
affiliate of us will have resale restrictions under Rule 144 of the Securities
Act. If we meet the current public information requirements of Rule 144, each
affiliate of ours who complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of certain
other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of 1%
of our outstanding shares or the average weekly volume of trading in the shares
during the preceding four calendar weeks. We may make future provisions to
permit affiliates to have their shares registered for sale under the Securities
Act under certain circumstances.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the offering, no depositor may transfer or
enter into an agreement or understanding to transfer any subscription rights or
the legal or beneficial ownership of the shares of common stock to be purchased
in the offering. Depositors who submit an order form will be required to certify
that their purchase of common stock is solely for their own account and there is
no agreement or understanding regarding the sale or transfer of their shares. We
intend to pursue any and all legal and equitable remedies after we become aware
of any agreement or understanding, and will not honor orders we reasonably
believe to involve an agreement or understanding regarding the sale or transfer
of shares.
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Effects of the Stock Offering
General. The stock offering will not have any effect on William Penn
Bank's present business of accepting deposits and investing its funds in loans
and other investments permitted by law. The stock offering will not result in
any change in the existing services provided to depositors and borrowers, or in
existing offices, management, and staff. After the stock offering, William Penn
Bank will continue to be subject to regulation, supervision, and examination by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Deposits and Loans. Each holder of a deposit account in William Penn
Bank at the time of the stock offering will continue as an account holder in
William Penn Bank after the stock offering, and the stock offering will not
affect the deposit balance, interest rate or other terms. Each deposit account
will be insured by the Federal Deposit Insurance Corporation to the same extent
as before the stock offering. Depositors will continue to hold their existing
certificates, savings records, checkbooks and other evidence of their accounts.
The stock offering will not affect the loans of any borrower from William Penn
Bank. The amount, interest rate, maturity, security for, and obligations under
each loan will remain contractually fixed as they existed prior to the stock
offering.
Voting Rights. As a stock savings bank, all voting rights of William
Penn Bank will be held solely by its sole stockholder, William Penn Bancorp. All
voting rights of William Penn Bancorp will be held by its stockholders,
including William Penn, MHC. All voting rights of William Penn, MHC will be held
by the Board of Directors of William Penn, MHC. William Penn, MHC will own a
majority of the outstanding common stock of William Penn Bancorp, and thus the
Board of Directors of William Penn, MHC, which is comprised of the same
individuals who are directors of William Penn Bancorp, will control the affairs
of William Penn Bancorp, including the election of directors of William Penn
Bancorp.
Material Federal and State Tax Consequences of the Offering. The
reorganization may be completed in any manner approved by the Office of Thrift
Supervision that is consistent with the purposes of the plan and applicable
laws, regulations, and policies. However, we intend to complete the
reorganization using a series of mergers as described below. This structure
allows William Penn Bank to retain all of its historical tax attributes and
produces significant savings to us because it simplifies regulatory approvals
and conditions associated with the reorganization.
We will complete the reorganization as follows:
(i) William Penn Bank, in its mutual form, will organize an interim
federal stock savings bank as a wholly owned subsidiary ("Interim
One");
(ii) Interim One will organize an interim federal stock savings bank
as a wholly owned subsidiary ("Interim Two");
(iii) Interim One will organize William Penn Bancorp, Inc. as a
federal stock corporation and a wholly owned subsidiary of
Interim One;
(iv) William Penn Bank, in its mutual form, will exchange its charter
for a federal stock savings bank charter;
(v) Interim One will cancel its outstanding stock and exchange its
charter for a federal mutual holding company charter;
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(vi) Interim Two will merge with and into William Penn Bank, with
William Penn Bank surviving;
(vii) the former members of William Penn Bank will become members of
William Penn, MHC;
(viii) William Penn, MHC will receive all of the stock of William Penn
Bank in exchange for its shares of Interim Two stock;
(ix) William Penn, MHC will transfer all of the outstanding shares of
William Penn Bank to William Penn Bancorp; and
(x) William Penn Bancorp will offer for sale approximately 28% of its
common stock.
As a result of these transactions: (a) William Penn Bank, FSB will be a
wholly owned subsidiary of William Penn Bancorp; (b) William Penn Bancorp will
be a majority-owned subsidiary of William Penn, MHC; and (c) the former
depositors of William Penn Bank will hold liquidation interests in William Penn,
MHC.
Under this structure: (1) the reorganization is intended to be a
tax-free reorganization under Code section 368(a)(1)(F); and (2) the exchange of
the shares of William Penn Bank's initial common stock deemed constructively
received by William Penn Bank's depositors for liquidation interests in William
Penn, MHC is intended to be a tax-free exchange under Code section 351.
The reorganization is conditioned on, among other things, the prior
receipt by William Penn Bank of either a private letter ruling from the Internal
Revenue Service and from the federal taxing authorities or an opinion of counsel
as to the federal and Pennsylvania income tax consequences of the reorganization
to William Penn Bank (in both its mutual and stock form), William Penn Bancorp
and the eligible account holders and supplemental account holders.
In the following discussion, "the Mutual Bank" refers to William Penn
Bank before the reorganization and "the Stock Bank" refers to William Penn Bank
after the reorganization. We have received an opinion from our counsel, Malizia
Spidi & Fisch, PC on the material federal tax consequences of the reorganization
and stock offering to William Penn Bancorp, the purchasers of the common stock
and the recipients of subscription rights. The opinion has been filed as part of
William Penn Bancorp's registration statement with the United States Securities
and Exchange Commission and covers those federal tax matters that are material
to the transaction. Such opinion is made in reliance upon various statements,
representations and declarations as to matters of fact made by us, as detailed
in the opinion. With regard to the reorganization, we have received an opinion
from Malizia Spidi & Fisch, PC stating that:
o The reorganization will constitute a reorganization under Code section
368(a)(1)(F), and William Penn Bank, FSB (in either its status as the
Mutual Bank or the Stock Bank) will recognize no gain or loss as a
result of the reorganization;
o The basis of each asset of the Mutual Bank received by the Stock Bank
in the reorganization will be the same as the Mutual Bank's basis for
such asset immediately prior to the reorganization;
o The holding period of each asset of the Mutual Bank received by the
Stock Bank in the reorganization will include the period during which
such asset was held by the Mutual Bank prior to the reorganization;
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o For purposes of Code section 381(b), Stock Bank will be treated as if
there had been no reorganization and, accordingly, the taxable year of
the Mutual Bank will not end on the effective date of the
reorganization and the tax attributes of the Mutual Bank (subject to
application of Code sections 381, 382, and 384) will be taken into
account by the Stock Bank as if the reorganization had not occurred;
o The Mutual Bank's members will recognize no gain or loss upon their
constructive receipt of shares of the Stock Bank common stock solely
in exchange for their interest (i.e., liquidation and voting rights)
in the Mutual Bank;
o William Penn, MHC will recognize no gain or loss upon its receipt from
the Mutual Bank's members of shares of Stock Bank common stock solely
in exchange for the Mutual Bank's members' interest (i.e., liquidation
and voting rights) in William Penn, MHC;
o William Penn Bancorp will recognize no gain or loss upon its receipt
of 100% of the common stock of Stock Bank from William Penn, MHC;
o William Penn, MHC will recognize no gain or loss upon its transfer of
100% of the common stock of the Stock Bank to William Penn Bancorp;
o No gain or loss will be recognized by depositors of the Mutual Bank
upon the issuance to them of deposits in the Stock Bank in the same
dollar amount as their deposits in the Mutual Bank;
o No gain or loss will be recognized by William Penn Bancorp on the
receipt of money in exchange for stock sold in the offering; and
o No gain or loss will be recognized by eligible account holders,
supplemental eligible account holders or other members upon the
distribution to them of the non-transferable subscription rights to
purchase shares of stock.
The opinion in the final bullet above is based on (1) no person
receiving any payment, whether in money or property, in lieu of subscription
rights and (2) the position that the subscription rights to purchase shares of
common stock received by account holders have a fair market value of zero. In
reaching such opinion, Malizia Spidi & Fisch, PC has noted that the subscription
rights will be granted at no cost to the recipients, will be legally
non-transferable and of short duration, and will provide the recipients with the
right only to purchase shares of common stock at the same price to be paid by
members of the general public in any community offering. Malizia Spidi & Fisch,
PC believes therefore that it is more likely than not that the fair market value
of the subscription rights to purchase common stock is zero and has noted in its
opinion that it is not aware of the Internal Revenue Service claiming in any
similar transaction that subscription rights have any market value. In that
there are no judicial opinions or official Internal Revenue Service positions on
this issue, however, such position related to subscription rights is a reasoned
conclusion rather than an absolute conclusion. Such conclusion is, however,
supported by the representation from RP Financial LC that the subscription
rights do not have any value when they are distributed or exercised. If the
Internal Revenue Service disagrees with this valuation of subscription rights
and determines that such subscription rights have value, income may be
recognized by recipients of these rights in certain cases, regardless of whether
the rights are exercised. This income may be capital gain or ordinary income,
and William Penn Bancorp could recognize gain on the distribution of these
rights.
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We have also received an opinion from Malizia Spidi & Fisch, PC stating
that, assuming the reorganization does not result in any federal income tax
liability to William Penn Bancorp, Inc., William Penn Bank or William Penn
Bank's members, then implementation of the reorganization and stock offering
will not result in any Pennsylvania income tax liability to those entities or
persons.
Unlike a private letter ruling from the Internal Revenue Service, the
federal and state tax opinions have no binding effect or official status, and no
assurance can be given that the conclusions reached in any of those opinions
would be sustained by a court if contested by the federal or Pennsylvania tax
authorities. Account holders are encouraged to consult with their own tax
advisers as to the tax consequences in the event the subscription rights are
determined to have any market value.
Interpretation, Amendment or Termination of the Plan of Stock Offering
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by the Board, with the concurrence of the Office of
Thrift Supervision. To the extent permitted by law, all interpretations by us of
the plan of reorganization and stock issuance will be final; however, such
interpretations have no binding effect on the Office of Thrift Supervision. The
plan of reorganization and stock issuance provides that, if deemed necessary or
desirable, we may substantively amend the plan of reorganization and stock
issuance as a result of comments from regulatory authorities or otherwise.
Completion of the offering requires the sale of all shares of the
common stock within ninety days following approval of the plan of reorganization
and stock issuance by the Office of Thrift Supervision, unless an extension is
granted by the Office of Thrift Supervision. If this condition is not satisfied,
the plan of reorganization and stock issuance will be terminated and we will
continue our business. We may terminate the plan of reorganization and stock
issuance at any time.
Conditions to the Offering
Completion of the offering is subject to several factors, including:
1. the receipt of all the required approvals of the Office of Thrift
Supervision for the issuance of common stock in the offering,
2. the approval of the members of William Penn Bank, and
3. the sale of 1,024,740 shares of common stock.
If such conditions are not met before we complete the offering, all
funds received will be promptly returned with interest and all withdrawal
authorizations will be canceled. The stock purchases of our officers and
directors will be counted for purposes of meeting the minimum number of shares.
PROPOSED STOCK PURCHASES BY DIRECTORS AND MANAGEMENT
Preliminary indications from our directors and senior management and
their associates are that they will subscribe for an aggregate of approximately
103,500 shares in the stock offering. If 1,203,125 shares are sold (the midpoint
of the offering range), their anticipated purchases would represent 8.6% of the
shares sold in the offering and 2.4% of the 4,281,250 total shares outstanding
after the offering, including shares issued to William Penn, MHC and the
charitable foundation. At the maximum of the offering range, these percentages
decrease to 7.5% and 2.1%.
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The following table sets forth the amount of stock that our directors
and senior management have indicated that they intend to purchase in the
offering. The intended purchases of each individual's associates are included.
Number of
Name Shares
----------------------------- -------------
William J. Feeney 20,000
Charles Corcoran 25,000
Craig Burton 5,000
Glenn Davis 5,000
William B.K. Parry, Jr. 22,500
William F. Heefner 5,000
James D. Douglas 15,000
Terry L. Sager 5,000
Lillian Cruz 1,000
-------------
Total 103,500
=============
The purchases by the William Penn Bank, FSB Employee Stock Ownership
Plan and any stock benefit plans to be adopted following the stock offering will
increase the insiders' ownership of shares.
Purchases of common stock in the offering by directors and executive
officers and their associates will be counted toward the minimum of 1,024,740
shares required to be sold to public stockholders to complete the offering.
Management may, but is not required to, purchase additional shares in the
offering to satisfy this minimum, subject to the limitation on the individual
maximum share purchase limitations and the requirement that directors, executive
officers and their associates may not purchase, in the aggregate, more than 30%
of the shares sold in the offering.
WILLIAM PENN BANK COMMUNITY FOUNDATION
General
In furtherance of our commitment to our local community, the plan of
reorganization and stock issuance provides that we will establish William Penn
Bank Community Foundation as a non-stock, nonprofit Delaware corporation in
connection with the offering. We intend to contribute $150,000 in cash and to
issue a number of shares equal to approximately 2.0% of the shares of common
stock issued in the offering (including shares issued to William Penn, MHC) to
the William Penn Bank Community Foundation. The members of William Penn Bank
will vote upon the contribution of cash and stock to the foundation as a
separate matter from voting on approval of the reorganization and offering.
Purpose of the Charitable Foundation
We emphasize community lending and community activities and the
foundation is being formed in recognition of this commitment. The foundation
will provide financial support to charitable organizations in the communities in
which we operate and will be dedicated completely to community activities and
the promotion of charitable causes.
Structure of the Charitable Foundation
William Penn Bank Community Foundation will be incorporated under
Delaware law as a non-stock, nonprofit corporation. The certificate of
incorporation of William Penn Bank Community Foundation will provide that the
corporation is organized exclusively for charitable purposes as set forth
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in Section 501(c)(3) of the Internal Revenue Code. William Penn Bank Community
Foundation's certificate of incorporation will further provide that no part of
the net earnings of the charitable foundation will inure to the benefit of, or
be distributable to, its directors or officers.
One or more of our current directors in addition to certain members of
senior management will serve on the initial Board of Directors of the charitable
foundation. As required by OTS regulations, we also will select one additional
person to serve on the initial Board of Directors who will not be one of our
officers or directors and who will have experience with local charitable
organizations and grant making. While there are no plans to change the size of
the initial Board of Directors during the year following the completion of the
offering, following the first anniversary of the offering, the charitable
foundation may alter the size and composition of its Board. For five years after
the offering, one seat on the charitable foundation's Board will be reserved for
a person from our local community who has experience with local community
charitable organizations and grant making and who is not one of our officers,
directors or employees, and at least one seat on the charitable foundation's
Board of Directors will be reserved for one of William Penn Bank's directors.
Additionally, for as long as the charitable foundation remains in existence not
less than a majority of seats will be reserved for persons who are either
William Penn directors or officers.
The Board of Directors of William Penn Bank Community Foundation will
be responsible for establishing its grant and donation policies, consistent with
the purposes for which it was established. As directors of a nonprofit
corporation, directors of William Penn Bank Community Foundation will at all
times be bound by their fiduciary duty to advance the charitable foundation's
charitable goals, to protect its assets and to act in a manner consistent with
the charitable purposes for which the charitable foundation is established. The
directors of William Penn Bank Community Foundation also will be responsible for
directing the activities of the charitable foundation, including the management
and voting of the shares of common stock of William Penn Bancorp held by the
charitable foundation. However, as required by OTS regulations, all shares of
common stock held by William Penn Bank Community Foundation must be voted in the
same ratio as all other shares of the common stock on all proposals considered
by stockholders of William Penn Bancorp.
William Penn Bank Community Foundation's place of business will be
located at William Penn Bank's administrative offices. The foundation will
utilize employees of William Penn Bank as necessary to manage the foundation's
operations. To the extent applicable, we will comply with the affiliates
restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and
the OTS regulations governing transactions between William Penn Bank and the
foundation.
William Penn Bank Community Foundation will receive working capital
from the $150,000 initial cash contribution as well as from the following:
(1) any dividends that may be paid on William Penn Bancorp's shares
of common stock in the future;
(2) within the limits of applicable federal and state laws, loans
collateralized by the shares of common stock; or
(3) the proceeds of the sale of any of the shares of common stock in
the open market from time to time.
As a private foundation under Section 501(c)(3) of the Internal Revenue
Code, William Penn Bank Community Foundation will be required to distribute
annually in grants or donations a minimum of 5% of the average fair market value
of its net investment assets. One of the conditions imposed on the gift
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of common stock is that the amount of common stock that may be sold by William
Penn Bank Community Foundation in any one year shall not exceed 5% of the
average market value of the assets held by William Penn Bank Community
Foundation, except where the Board of Directors of the charitable foundation
determines that the failure to sell an amount of common stock greater than such
amount would result in a long-term reduction of the value of its assets and/or
would otherwise jeopardize its capacity to carry out its charitable purposes.
Tax Considerations
Our independent tax advisor, Malizia Spidi & Fisch, PC, has advised us
that an organization created for the above purposes should qualify as a Section
501(c)(3) exempt organization under the Internal Revenue Code and should be
classified as a private foundation. William Penn Bank Community Foundation will
submit a timely request to the Internal Revenue Service to be recognized as an
exempt organization. As long as William Penn Bank Community Foundation files its
application for tax-exempt status within 27 months from the date of its
organization, and provided the Internal Revenue Service approves the
application, its effective date as a Section 501(c)(3) organization will be the
date of its organization. Our independent tax advisor, however, has not rendered
any advice on whether William Penn Bank Community Foundation's tax exempt status
will be affected by the regulatory requirement that all shares of common stock
of William Penn Bancorp held by William Penn Bank Community Foundation must be
voted in the same ratio as all other outstanding shares of common stock of
William Penn Bancorp on all proposals considered by stockholders of William Penn
Bancorp.
We have received an opinion from our independent tax advisor that
William Penn Bancorp's contribution of its shares of stock to William Penn Bank
Community Foundation should not constitute an act of self-dealing and that we
should be entitled to a deduction in the amount of the fair market value of the
stock at the time of the contribution less the nominal amount that William Penn
Bank Community Foundation is required to pay William Penn Bancorp for such
stock. We are permitted to deduct only an amount equal to 10% of our annual
taxable income in any one year. We are permitted under the Internal Revenue Code
to carry the excess contribution over the five-year period following the
contribution to William Penn Bank Community Foundation. We estimate that
substantially all of the contribution should be deductible over the six-year
period (i.e., the year in which the contribution is made and the succeeding
five-year period). However, we do not have any assurance that the Internal
Revenue Service will grant tax-exempt status to the charitable foundation.
Furthermore, even if the contribution is deductible, we may not have sufficient
earnings to be able to use the deduction in full. Any such decision to continue
to make additional contributions to William Penn Bank Community Foundation in
the future would be based on an assessment of, among other factors, our
financial condition at that time, the interests of our stockholders and
depositors, and the financial condition and operations of the foundation.
Although we have received an opinion from our independent tax advisor
that we should be entitled to a deduction for the charitable contribution, there
can be no assurances that the Internal Revenue Service will recognize William
Penn Bank Community Foundation as a Section 501(c)(3) exempt organization or
that the deduction will be permitted. In such event, our contribution to William
Penn Bank Community Foundation would be expensed without tax benefit, resulting
in a reduction in earnings in the year in which the Internal Revenue Service
makes such a determination.
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state income taxation.
However, investment income, such as interest, dividends and capital gains, is
generally taxed at a rate of 2.0%. William Penn Bank Community Foundation will
be required to file an annual return with the Internal Revenue Service within
four and one-half months after the close of its fiscal year. William Penn Bank
Community Foundation will be required to make its annual return available for
public inspection. The annual return for a private
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foundation includes, among other things, an itemized list of all grants made or
approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Requirements Imposed on the Charitable Foundation
OTS regulations impose the following requirements on the establishment
of the William Penn Bank Community Foundation:
o the OTS may examine the foundation at the foundation's expense;
o the foundation must comply with all supervisory directives
imposed by the OTS;
o the foundation must provide annually to the OTS a copy of the
annual report that the foundation submits to the Internal Revenue
Service;
o the foundation must operate according to written policies adopted
by its Board of Directors including a conflict of interest
policy;
o the foundation may not engage in self-dealing and must comply
with all laws necessary to maintain its tax-exempt status under
the Internal Revenue Code; and
o the foundation must vote its shares of William Penn Bancorp in
the same ratio as all of the other shares voted on the proposal
considered by the stockholders of William Penn Bancorp.
Within six months of completing the offering, the William Penn Bank
Community Foundation must submit to the OTS a three-year operating plan.
RESTRICTIONS ON ACQUISITION OF WILLIAM PENN BANCORP
General
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire William Penn Bancorp, William Penn Bank
or their respective capital stock are described below. Also discussed are
certain provisions in William Penn Bancorp's charter and bylaws which may be
deemed to affect the ability of a person, firm or entity to acquire William Penn
Bancorp.
Statutory and Regulatory Restrictions on Acquisition
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class
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of voting stock, or of more than 25% of any class of stock of a savings
institution, where certain enumerated "control factors" are also present in the
acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
o it would result in a monopoly or substantially lessen
competition;
o the financial condition of the acquiring person might jeopardize
the financial stability of the institution; or
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors
or of the public to permit the acquisition of control by such
person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
Under current Office of Thrift Supervision regulations, we can prohibit
anyone from acquiring more than 10% of William Penn Bancorp's outstanding common
stock for the five-year period following the offering. However, because we are
majority owned by William Penn, MHC, this means that someone who holds 10% of
our outstanding common stock controls approximately 36% of the minority shares
held by stockholders other than William Penn, MHC.
The Office of Thrift Supervision has recently proposed changes to its
regulations that would permit us to apply the 10% limit to the minority shares
so that no entity, person or group acting in concert may during the five years
following the offering acquire more than 10% of the minority shares held by
stockholders other than William Penn, MHC. Any stockholder who violated that
prohibition would not be permitted to vote any of the stock acquired in excess
of the limit.
Current Office of Thrift Supervision regulations permit a mutual
holding company to be acquired by a mutual institution in what is commonly
called a "remutualization transaction." However, the Office of Thrift
Supervision has issued a policy statement indicating that it views
remutualization transactions as raising significant issues concerning disparate
treatment of minority stockholders and mutual members of the target entity and
raising issues concerning the effect on the mutual members of the acquiring
entity. Under certain circumstances, the Office of Thrift Supervision intends to
give these issues special scrutiny and reject applications providing for the
remutualization of a mutual holding company unless the applicant can clearly
demonstrate that the Office of Thrift Supervision's concerns are not warranted.
Charter and Bylaws of William Penn Bancorp
The following discussion is a summary of certain provisions of the
charter and bylaws of William Penn Bancorp that relate to corporate governance.
The description is necessarily general and qualified by reference to the charter
and bylaws.
Classified Board of Directors. The Board of Directors of William Penn
Bancorp is required by the bylaws to be divided into three staggered classes as
equal in size as is possible, with one class elected annually by stockholders
for three-year terms. A classified Board promotes continuity and stability of
management of William Penn Bancorp, but makes it more difficult for stockholders
to change a majority of the directors because it generally takes at least two
annual elections of directors for this to occur.
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Directors are elected by a plurality of votes cast, and because William Penn,
MHC will own a majority of the common stock, it will control the election of
directors.
Limitation of Beneficial Ownership and Voting. For a period of three
years following the offering, Office of Thrift Supervision regulations generally
prohibit any person from acquiring or making an offer to acquire beneficial
ownership of more than 10% of the then-outstanding shares of William Penn
Bancorp common stock without Office of Thrift Supervision prior approval.
Additionally, our charter includes a provision that limits the voting
rights of a single stockholder to no more than 10% of the then-outstanding
shares, including shares held by William Penn, MHC and the charitable
foundation, for a period of five years from the date this stock offering is
completed.
Authorized but Unissued Shares of Capital Stock. Following the stock
offering, William Penn Bancorp will have authorized but unissued shares of
preferred stock and common stock. See Description of Capital Stock. Although
these shares could be used by the Board of Directors of William Penn Bancorp to
make it more difficult or to discourage an attempt to obtain control of William
Penn Bancorp through a merger, tender offer, proxy contest or otherwise, it is
unlikely that we would use or need to use shares for these purposes because
William Penn, MHC will own a majority of the common stock.
Special Meetings of Stockholders. William Penn Bancorp's bylaws provide
that special meetings of stockholders may be called only by the chairman of the
Board, the president, or a majority of the Board of Directors, or upon the
written request of the holders of not less than one-tenth of all of the
outstanding stock of William Penn Bancorp.
How Shares are Voted. William Penn Bancorp's bylaws provide that there
will not be cumulative voting by stockholders for the election of William Penn
Bancorp's directors. No cumulative voting rights means that William Penn, MHC,
as the holder of a majority of the shares eligible to be voted at a meeting of
stockholders, may elect all directors of William Penn Bancorp to be elected at
that meeting. This could prevent minority stockholder representation on William
Penn Bancorp's Board of Directors.
Procedures for Stockholder Nominations. William Penn Bancorp's bylaws
provide that any stockholder wanting to make a nomination for the election of
directors or a proposal for new business at a meeting of stockholders must send
written notice to the Secretary of William Penn Bancorp at least five days
before the date of the annual meeting. The bylaws further provide that if a
stockholder wanting to make a nomination or a proposal for new business does not
follow the prescribed procedures, the proposal will not be considered until an
adjourned, special, or annual meeting of the stockholders taking place thirty
days or more thereafter. Management believes that it is in the best interests of
William Penn Bancorp and its stockholders to provide enough time for management
to disclose to stockholders information about a dissident slate of nominations
for directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations if management thinks it is in the best interest of stockholders
generally. Similarly, adequate advance notice of stockholder proposals will give
management time to study such proposals and to determine whether to recommend to
the stockholders that such proposals be adopted.
Indemnification. William Penn Bancorp's bylaws provide for
indemnification of its officers, directors and employees to the fullest extent
authorized by the regulations of the Office of Thrift Supervision.
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DESCRIPTION OF CAPITAL STOCK
General
William Penn Bancorp is authorized to issue 49,000,000 shares of common
stock, par value $0.10 per share and 1,000,000 shares of serial preferred stock,
no par value. Upon completion of the stock offering, we will have between
3,639,063 shares of common stock at the minimum and 4,923,437 shares of common
stock at the maximum of the offering range outstanding (5,661,953 shares at the
adjusted maximum), including shares that will be held by William Penn, MHC and
William Penn Bank Community Foundation. Upon payment of the purchase price
shares of common stock issued in the offering will be fully paid and
non-assessable. Each share of common stock will have the same relative rights
as, and will be identical in all respects with, each other share of common
stock. The common stock will represent non-withdrawable capital, will not be an
account of insurable type and will not be insured by the Federal Deposit
Insurance Corporation or any other governmental agency. The Board of Directors
can, without stockholder approval, issue additional shares of common stock,
although William Penn, MHC, so long as it is in existence, must own a majority
of William Penn Bancorp's outstanding shares of common stock.
Common Stock
Distributions. William Penn Bancorp can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations that
are imposed by law. See Our Policy Regarding Dividends. The holders of common
stock of William Penn Bancorp will be entitled to receive and share equally in
such dividends as may be declared by the Board of Directors of William Penn
Bancorp out of funds legally available therefor. If William Penn Bancorp issues
preferred stock, the holders thereof may have a priority over the holders of the
common stock with respect to dividends. With the permission of the Office of
Thrift Supervision, William Penn, MHC may waive the receipt of dividends on the
shares of William Penn Bancorp it owns.
Voting Rights. The holders of common stock will possess exclusive
voting rights in William Penn Bancorp. The holder of shares of common stock will
be entitled to one vote for each share held on all matters subject to
stockholder vote and will not have any right to cumulate votes in the election
of directors.
Liquidation Rights. In the event of any liquidation, dissolution, or
winding-up of William Penn Bancorp, the holders of the common stock generally
would be entitled to receive, after payment of all debts and liabilities of
William Penn Bancorp (including all debts and liabilities of William Penn Bank),
all assets of William Penn Bancorp available for distribution. If preferred
stock is issued, the holders thereof may have a priority over the holders of the
common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Because the holders of the common stock
do not have any preemptive rights with respect to any shares William Penn
Bancorp may issue, the Board of Directors may sell shares of capital stock of
William Penn Bancorp without first offering such shares to existing
stockholders. The common stock will not be subject to any redemption provisions.
Preferred Stock
We are authorized to issue up to 1,000,000 shares of serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of preferred stock and the qualifications, limitations and
restrictions of those shares as the Board of Directors may determine in its
discretion. Preferred stock may be issued in distinctly designated series, may
be convertible into common stock and
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may rank prior to the common stock as to dividends rights, liquidation
preferences, or both, and may have full or limited voting rights. The issuance
of preferred stock could adversely affect the voting and other rights of holders
of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for William Penn Bancorp's common
stock will be Registrar and Transfer Company.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the stock offering, the establishment of the
charitable foundation, federal taxation and state taxation will be passed upon
for us by Malizia Spidi & Fisch, PC, Washington, D.C. Certain legal matters will
be passed upon for Keefe, Bruyette & Woods, Inc. by Muldoon Murphy & Aguggia
LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of William Penn Bank, FSB at June
30, 2007 and 2006 and for the years then ended have been included in this
prospectus in reliance upon the report of Beard Miller Company LLP, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
RP Financial LC has consented to the publication in this document of a
summary of its letter setting forth its conclusion as to the estimated pro forma
market value of the common stock and has also consented to the use of its name
and statements with respect to it appearing in this document.
REGISTRATION REQUIREMENTS
William Penn Bancorp will register its common stock with the SEC
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended. We
will be subject to the information, proxy solicitation, insider trading
restrictions, tender offer rules, periodic reporting and other requirements of
the SEC under the Securities Exchange Act of 1934. We will not deregister the
common stock under the Securities Exchange Act of 1934 for a period of at least
three years following the stock offering.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the common stock offered in
this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. The statements contained in this document as to the contents of any
contract or other document filed as an exhibit to the registration statement
are, of necessity, brief descriptions. The registration statement and exhibits
can be examined without charge at the public reference facilities of the SEC
located at 100 F Street, N.E., Washington, D.C. You may obtain information on
the operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC
also maintains a web site that contains
118
reports, proxy and information statements and other information regarding
registrants, including William Penn Bancorp, that file electronically with the
SEC. The address for this web site is http://www.sec.gov.
We have filed applications for approval of the reorganization and stock
issuance with the Office of Thrift Supervision. This prospectus omits certain
information contained in those applications. That information can be examined
without charge at the public reference facilities of the Office of Thrift
Supervision located at 1700 G Street, N.W., Washington, D.C. 20552.
A copy of our charter and bylaws, filed as exhibits to the registration
statement as well as those of William Penn Bank, FSB and William Penn, MHC, are
available without charge from William Penn Bank, FSB. Copies of the plan of
reorganization and stock offering are also available without charge.
119
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F - 2
Consolidated Balance Sheets F - 4
Consolidated Statements of Income F - 5
Consolidated Statements of Equity F - 6
Consolidated Statements of Cash Flows F - 7
Notes to Consolidated Financial Statements F - 8
SCHEDULES
All schedules are omitted because the required information is not
applicable or is included in the consolidated financial statements and
related notes.
The registrant, William Penn Bancorp, Inc., is in organization and has not
yet commenced operations to date; accordingly, the financial
statements of William Penn Bancorp, Inc. have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
William Penn Bank, FSB
Levittown, Pennsylvania
We have audited the accompanying consolidated balance sheets of William
Penn Bank, FSB and subsidiary as of June 30, 2007 and 2006, and the related
consolidated statements of income, equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Bank is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Bank's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of William Penn
Bank, FSB and subsidiary as of June 30, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Bank adopted Statement of Financial Accounting Standards No. 158, "Employer's
Accounting for Defined Benefit Pension and Other Post-Retirement Plans," on June
30, 2007.
We have reviewed the accompanying consolidated balance sheet of William
Penn Bank, FSB and subsidiary as of September 30, 2007, the related consolidated
statements of income and cash flows for the three months ended September 30,
2007 and 2006, and the consolidated statement of equity for the three months
ended September 30, 2007. These interim consolidated financial statements are
the responsibility of the Bank's management.
F-2
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
/s/Beard Miller Company LLP
Beard Miller Company LLP
Paoli, Pennsylvania
December 13, 2007
F-3
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
JUNE 30,
SEPTEMBER 30, --------------------
2007 2007 2006
-------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Cash and due from banks $ 14,176 $ 14,229 $ 7,476
Interest bearing time deposits 3,123 3,418 2,801
Securities available for sale 117 25 1,615
Securities held to maturity, fair value $60,537, $61,049
and $59,571 60,327 61,637 60,600
Loans receivable, net of allowance for loan losses $1,860,
$1,840 and $1,675 179,655 180,204 181,012
Premises and equipment, net 1,893 1,937 2,030
Federal Home Loan Bank stock, at cost 3,855 3,838 3,663
Deferred income taxes 1,816 1,816 1,595
Accrued interest receivable and other assets 1,846 1,726 1,557
-------- -------- --------
TOTAL ASSETS $266,808 $268,830 $262,349
======== ======== ========
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 1,357 $ 1,755 $ 1,239
Interest bearing 156,330 157,185 158,090
-------- -------- --------
Total Deposits 157,687 158,940 159,329
Advances from Federal Home Loan Bank 71,000 71,000 66,000
Advances from borrowers for taxes and insurance 687 1,947 1,912
Accrued interest payable and other liabilities 2,918 2,885 2,436
-------- -------- --------
TOTAL LIABILITIES 232,292 234,772 229,677
COMMITMENTS AND CONTINGENCIES -- -- --
- ----------------------------- -- -- --
EQUITY 34,516 34,058 32,672
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $266,808 $268,830 $262,349
======== ======== ========
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-4
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
-----------------------------------------
2007 2006 2007 2006
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
INTEREST INCOME
Loans receivable, including fees $ 2,995 $ 2,877 $ 11,517 $ 11,614
Taxable securities 839 762 3,020 2,608
Other 248 157 815 560
-------- -------- -------- --------
TOTAL INTEREST INCOME 4,082 3,796 15,352 14,782
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 1,670 1,492 6,201 5,101
Borrowings 1,010 954 3,912 3,868
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 2,680 2,446 10,113 8,969
-------- -------- -------- --------
NET INTEREST INCOME 1,402 1,350 5,239 5,813
PROVISION FOR LOAN LOSSES 20 40 156 186
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,382 1,310 5,083 5,627
-------- -------- -------- --------
OTHER INCOME
Service fees 26 22 111 119
Realized gains (losses) on sales of securities -- -- 9 (18)
Other 33 34 147 42
-------- -------- -------- --------
TOTAL OTHER INCOME 59 56 267 143
-------- -------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 457 486 1,851 1,673
Occupancy and equipment 152 149 631 616
Other 139 122 560 548
-------- -------- -------- --------
TOTAL OTHER EXPENSES 748 757 3,042 2,837
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 693 609 2,308 2,933
INCOME TAX EXPENSE 235 207 748 967
-------- -------- -------- --------
NET INCOME $ 458 $ 402 $ 1,560 $ 1,966
======== ======== ======== ========
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-5
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EQUITY
PERIOD ENDED SEPTEMBER 30, 2007 AND YEARS ENDED JUNE 30, 2007 AND 2006
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE TOTAL
EARNINGS LOSS EQUITY
-------- ---- ------
(IN THOUSANDS)
BALANCE - JULY 1, 2005 $30,706 $ (2) $30,704
------
Comprehensive income:
Net income 1,966 - 1,966
Net change in unrealized loss on securities
available for sale, net of taxes - 2 2
------
TOTAL COMPREHENSIVE INCOME 1,968
------- ----------- ------
BALANCE - JUNE 30, 2006 32,672 - 32,672
Net income 1,560 - 1,560
Adjustment to initially apply SFAS No. 158, net of deferred
income tax benefit of $89 - (174) (174)
------- ----------- ------
BALANCE - JUNE 30, 2007 34,232 (174) 34,058
Net income (unaudited) 458 - 458
------- ------ ------
BALANCE - SEPTEMBER 30, 2007 (UNAUDITED) $34,690 $ (174) $34,516
======= ====== =======
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-6
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
----------------------- -----------------------
2007 2006 2007 2006
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 458 $ 402 $ 1,560 $ 1,966
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 20 40 156 186
Provision for depreciation 44 44 182 148
Net accretion of securities premiums and discounts (60) (44) (177) (149)
Deferred income taxes -- -- (132) (59)
Realized (gains) losses on sales of securities -- -- (9) 18
Increase in accrued interest receivable and other
assets (120) (74) (169) (7)
Increase in accrued interest payable and other
liabilities 33 216 186 97
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 375 584 1,597 2,200
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (92) (1,984) (7,349) (7,417)
Proceeds from sales of securities -- 1,099 8,948 7,124
Securities held to maturity:
Purchases (4,002) (5,425) (33,708) (20,503)
Maturities, calls and principal paydowns 5,372 9,145 32,848 17,507
Proceeds from sale of loan -- -- 150 --
Net decrease in loans receivable 529 2,601 502 1,766
Net (purchases) maturities of interest bearing time deposits 295 (1) (617) (575)
Net (increase) decrease in Federal Home Loan Bank stock (17) 9 (175) 157
Purchases of premises and equipment -- (27) (89) (514)
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,085 5,417 510 (2,455)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,253) (4,567) (389) 171
Proceeds from advances from Federal Home Loan Bank -- -- 5,000 5,000
Repayment of advances from Federal Home Loan Bank -- -- -- (6,000)
Increase (decrease) in advances from borrowers for taxes and
insurance (1,260) (1,336) 35 (49)
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,513) (5,903) 4,646 (878)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53) 98 6,753 (1,133)
CASH AND CASH EQUIVALENTS - BEGINNING 14,229 7,476 7,476 8,609
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 14,176 $ 7,574 $ 14,229 $ 7,476
======== ======== ======== ========
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid $ 2,640 $ 2,451 $ 10,085 $ 8,979
======== ======== ======== ========
Income taxes paid $ 240 $ -- $ 825 $ 1,035
======== ======== ======== ========
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
F-7
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
William Penn Bank, FSB (the Bank) is a federally chartered mutual savings bank.
The Bank's primary business consists of the taking of deposits and granting of
mortgage loans to customers generally in the Bucks County, Pennsylvania area.
The Bank is supervised and regulated by the Office of Thrift Supervision.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Bank and
its wholly-owned subsidiary, WPSLA Investment Corporation. WPSLA Investment
Corporation was incorporated under Delaware law in 2000 to hold securities
for the Bank. At September 30, 2007, this subsidiary held $28,100,000 of
the Bank's $60,444,000 securities portfolio (unaudited). All intercompany
transactions and balances have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The most significant estimates
relate to the determination of the allowance for loan losses and the
evaluation of other than temporary impairment of securities.
PRESENTATION OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and interest bearing demand deposits.
SECURITIES
Securities classified as held to maturity are those debt securities the
Bank has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost adjusted for the
amortization of premium and accretion of discount, computed by the interest
method over the terms of the securities.
Securities classified as available for sale are those securities that the
Bank intends to hold for an indefinite period of time but not necessarily
to maturity. Any decision to sell a security classified as available for
sale would be based on various factors, including significant movement in
interest rates, changes in maturity mix of the Bank's assets and
liabilities, liquidity needs, regulatory capital considerations and other
similar factors. Securities available for sale are carried at fair value.
Unrealized gains and losses are reported in other comprehensive income, net
of the related deferred tax effect. Realized gains or losses, determined on
the basis of the cost of the specific securities sold, are included in
earnings. Premiums and discounts are recognized in interest income using
the interest method over the terms of the securities.
- --------------------------------------------------------------------------------
F-8
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES (CONTINUED)
Declines in the fair value of held to maturity and available for sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. In estimating
other-than-temporary impairment losses, management considers (1) the length
of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Bank to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.
Management determines the appropriate classification of debt securities at
the time of purchase.
Federal law requires a member institution of the Federal Home Loan Bank
system to hold stock of its district Federal Home Loan Bank according to a
predetermined formula. This restricted stock is carried at cost.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their
outstanding unpaid principal balances, net of an allowance for loan losses
and any deferred fees and costs. Interest income is accrued on the unpaid
principal balance. Loan origination fees and costs are deferred and
recognized as an adjustment of the yield (interest income) of the related
loans. The Bank is generally amortizing these amounts over the contractual
life of the loan.
The accrual of interest is generally discontinued when the contractual
payment of principal or interest has become 90 days past due or management
has serious doubts about further collectibility of principal or interest,
even though the loan is currently performing. A loan may remain on accrual
status if it is in the process of collection and is either guaranteed or
well secured. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's
judgment as to the collectibility of principal. Generally, loans are
restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period
of time and the ultimate collectibility of the total contractual principal
and interest is no longer in doubt.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon the Bank's past loan experience, known or inherent credit
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revision as more information
becomes available.
- --------------------------------------------------------------------------------
F-9
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The allowance consists of specific, general, and unallocated components.
The specific component relates to loans that are classified as either
doubtful, substandard, or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the impaired
loan is lower than the carrying value of that loan. The general component
covers non-classified loans and is based on historical loss experience
adjusted for qualitative factors. An unallocated component is maintained to
cover uncertainties that could affect management's estimate of probable
losses. The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential mortgage loans for impairment
disclosures, unless such loans are the subject of a restructuring
agreement.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets, including loan and loan participation sales,
are accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Bank, (2) the transferee
obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets and
(3) the Bank does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on a straight-line basis
over the following estimated useful lives of the related assets:
YEARS
-----
Office buildings and improvements 5 - 33
Furniture, fixtures and equipment 5 - 10
Automobiles 4
- --------------------------------------------------------------------------------
F-10
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Bank follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense for the three months ended September 30,
2007 and 2006 was $6,000 and $8,000, respectively (unaudited). Advertising
expense for the years ended June 30, 2007 and 2006 was $34,000 and $46,000,
respectively.
INCOME TAXES
Deferred taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit.
Such financial instruments are recorded in the balance sheets when they are
funded.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on available
for sale securities, are reported as a separate component of the equity
section of the balance sheet, such items, along with net income, are
components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
---------------------------- ----------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
(UNAUDITED)
Unrealized holding gains (losses)
on available for sale
securities $ - $ - $ 9 $ (15)
Reclassification adjustment for
(gains) losses included in
net income - - (9) 18
----------- ----------- ----------- -----------
NET UNREALIZED GAINS - - - 3
Income tax effect - - - (1)
----------- ----------- ----------- -----------
NET OF TAX AMOUNT $ - $ - $ - $ 2
=========== =========== =========== ===========
- --------------------------------------------------------------------------------
F-11
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RETIREMENT BENEFITS
Substantially all employees are covered by a pension plan. The cost of the
plan is based on actuarial computations of current and future benefits for
employees. It is the Bank's policy to fund the recommended required
contribution determined under the Employee Retirement Income Security Act.
SEGMENT REPORTING
The Bank acts as an independent community financial services provider, and
offers traditional banking and related financial services to individual,
business and government customers. Through its branch and automated teller
machine network, the Bank offers a full array of commercial and retail
financial services, including the taking of time, savings and demand
deposits; the making of commercial, consumer and mortgage loans; and the
providing of other financial services.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial and retail operations of the
Bank. As such, discrete financial information is not available and segment
reporting would not be meaningful.
RECLASSIFICATION
Certain items in the 2006 financial statements have been reclassified to
conform to the 2007 financial statement presentation format. These
reclassifications had no effect on net income.
NEW ACCOUNTING STANDARDS
In July 2006, the FASB issued FASB Interpretation ("FIN") 48, "Accounting
for Uncertainty in Income Taxes." This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal
years beginning after December 15, 2006. The Bank is evaluating the impact
the adoption of FIN 48 will have on our consolidated financial position and
results of operations.
In May 2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1
"Definition of Settlement in FASB Interpretation No. 48" (FSP FIN 48-1).
FSP FIN 48-1 provides guidance on how to determine whether a tax position
is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to
January 1, 2007. The Bank is evaluating the impact the adoption of FIN 48
will have on our consolidated financial position and results of operations.
In September 2006, the FASB issued FASB Statement ("SFAS") No. 157, "Fair
Value Measurements," which defines fair value, establishes a framework for
measuring fair value under GAAP, and expands disclosures about fair value
measurements. FASB Statement No. 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new
guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those
fiscal years. The Bank is evaluating the impact, if any, of the adoption of
SFAS No. 157 on our consolidated financial position and results of
operations.
- --------------------------------------------------------------------------------
F-12
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS (CONTINUED)
In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1,
"Conforming Amendments to the Illustrations in FASB Statements No. 87, No.
88, and No 106 and to the Related Staff Implementation Guides." This FSP
makes conforming amendments to other FASB statements and staff
implementation guides and provides technical corrections to SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans." The conforming amendments in this FSP shall be applied upon
adoption of SFAS No. 158. The adoption of FSP FAS 158-1 did not have a
material impact on our consolidated financial statements or disclosures.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected
will be recognized in earnings at each subsequent reporting date. SFAS No.
159 is effective for the Bank July 1, 2008. The Bank is evaluating the
impact that the adoption of SFAS No. 159 will have on our consolidated
financial statements.
NOTE 3 - INVESTMENT IN INTEREST-BEARING TIME DEPOSITS
The interest-bearing time deposits by contractual maturity are shown below (in
thousands):
JUNE 30,
SEPTEMBER 30, -------------------
2007 2007 2006
------------ ------ ------
(UNAUDITED)
Due in one year or less $1,645 $1,841 $1,616
Due after one year through five years 1,478 1,577 1,185
------ ------ ------
$3,123 $3,418 $2,801
====== ====== ======
NOTE 4 - SECURITIES
The amortized cost and approximate fair value of securities are summarized as
follows (in thousands):
SEPTEMBER 30, 2007
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(UNAUDITED)
AVAILABLE FOR SALE:
Mutual funds $ 117 $ - $ - $ 117
========= ======== ========= =======
HELD TO MATURITY:
U.S. Government corporations and
agencies securities $ 52,779 $ 365 $ (122) $53,022
Mortgage-backed securities 7,548 25 (58) 7,515
--------- -------- --------- -------
$ 60,327 $ 390 $ (180) $60,537
========= ======== ========= =======
- --------------------------------------------------------------------------------
F-13
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SECURITIES (CONTINUED)
JUNE 30, 2007
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
AVAILABLE FOR SALE:
Mutual funds $ 25 $ - $ - $ 25
======= ======= ======= =======
HELD TO MATURITY:
U.S. Government corporations and
agencies securities $53,718 $ 13 $ (457) $53,274
Mortgage-backed securities 7,919 20 (164) 7,775
------- ------- ------- -------
$61,637 $ 33 $ (621) $61,049
======= ======= ======= =======
JUNE 30, 2006
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
AVAILABLE FOR SALE:
Mutual Funds $ 1,615 $ - $ - $ 1,615
======= ====== ====== =======
HELD TO MATURITY:
U.S. Government corporations and
agencies securities $51,542 $ - $ (830) $50,712
Mortgage-backed securities 9,058 39 (238) 8,859
------- ------- ------- -------
$60,600 $ 39 $(1,068) $59,571
======= ======= ======= =======
No securities were sold during the three months ended September 30, 2007 and
September 30, 2006 (unaudited).
Gross realized gains on sales of securities were $9,000 and $-0- for the years
ended June 30, 2007 and 2006, respectively. Gross realized losses were $-0- and
$18,000 for the years ended June 30, 2007 and 2006, respectively.
The amortized cost and fair value of securities, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities because
the securities may be called or prepaid with or without penalties (in
thousands).
SEPTEMBER 30, 2007 JUNE 30, 2007
--------------------------- -----------------------------
HELD TO MATURITY HELD TO MATURITY
--------------------------- -----------------------------
AMORTIZED FAIR FAIR
COST VALUE AMORTIZED COST VALUE
---- ----- -------------- -----
(UNAUDITED)
Due in one year or less $ 4,500 $ 4,507 $ 5,500 $ 5,488
Due after one year through five years 35,401 35,649 35,399 35,125
Due after five years through ten years 6,875 6,953 6,875 6,843
Due after ten years 6,003 5,913 5,944 5,818
Mortgage-backed securities 7,548 7,515 7,919 7,775
--------- --------- -------- --------
$ 60,327 $ 60,537 $ 61,637 $ 61,049
========= ========= ======== ========
- --------------------------------------------------------------------------------
F-14
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SECURITIES (CONTINUED)
The following table shows the Bank's investments' gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position (in thousands):
SEPTEMBER 30, 2007
--------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------- ----------------------- -----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
----- ------ ----- ------ ----- ------
(UNAUDITED)
HELD TO MATURITY:
U.S. Government
corporations and
agencies securities $5,640 $(54) $4,192 $(68) $ 9,832 $(122)
Mortgage-backed
securities - - 2,279 (58) 2,279 (58)
--------- ------------ ------------ ------------- ------------- ------------
TOTAL TEMPORARILY
IMPAIRED SECURITIES $5,640 $(54) $6,471 $(126) $12,111 $(180)
========= ============ ============ ============= ============= ============
JUNE 30, 2007
--------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Government
corporations and
agencies securities $25,299 $(198) $18,953 $(259) $44,252 $(457)
Mortgage-backed
securities - - 5,417 (164) 5,417 (164)
--------- ------------ ------------ ------------- ------------- ------------
TOTAL TEMPORARILY
IMPAIRED SECURITIES $25,299 $(198) $24,370 $(423) $49,669 $(621)
========= ============ ============ ============= ============= ============
JUNE 30, 2006
--------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Government
corporations and
agencies securities $27,833 $(541) $22,879 $(289) $50,712 $ (830)
Mortgage-backed
securities 1,064 (18) 5,341 (220) 6,405 (238)
---------- ------------ ------------ ------------- ------------- ------------
TOTAL TEMPORARILY
IMPAIRED SECURITIES $28,897 $(559) $29,759 $(509) $58,656 $(1,068)
========== ============ ============ ============= ============= ============
- --------------------------------------------------------------------------------
F-15
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SECURITIES (CONTINUED)
The Bank had 10 securities in an unrealized loss position as of September 30,
2007 (unaudited). In management's opinion, the unrealized losses on the Bank's
investments in direct obligations of U.S. government agencies and
mortgage-backed securities were caused by interest rate increases. The
contractual terms of U.S. government agencies do not permit the issuer to settle
the securities at a price less than the par value of the investment. The
contractual cash flows of mortgage-backed securities are guaranteed by FNMA and
FHLMC. Accordingly, it is expected that the securities would not be settled at a
price less than the par value of the Bank's investment. Because the decline in
fair value is attributable to changes in interest rates and not credit quality,
and because the Bank has the intent and ability to hold such investments to
maturity or market price recovery, no securities are deemed to be
other-than-temporarily impaired.
The Bank had 43 securities in an unrealized loss position as of June 30, 2007.
NOTE 5 - LOANS RECEIVABLE
The composition of net loans receivable is as follows (in thousands):
JUNE 30,
SEPTEMBER 30, -------------------------
2007 2007 2006
------------ -------- --------
(UNAUDITED)
Mortgage loans on real estate:
Residential 1-4 family $117,081 $117,338 $117,335
Residential multi-family (five or more) 10,826 10,829 11,137
Commercial - non-residential 26,783 27,397 25,298
Construction 12,548 11,111 9,822
Land 3,997 4,010 4,254
Home equity and second mortgages 8,966 8,791 9,022
Equity lines of credit 7,105 7,162 7,096
-------- -------- --------
TOTAL MORTGAGE LOANS ON REAL ESTATE 187,306 186,638 183,964
Consumer loans 2,130 2,762 3,613
Loans on savings accounts 419 428 422
-------- -------- --------
TOTAL LOANS 189,855 189,828 187,999
Loans in process (7,302) (6,668) (4,081)
Unearned loan origination fees (1,038) (1,116) (1,231)
Allowance for loan losses (1,860) (1,840) (1,675)
-------- -------- --------
NET LOANS $179,655 $180,204 $181,012
======== ======== ========
- --------------------------------------------------------------------------------
F-16
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE (CONTINUED)
The following is a summary of the allowance for loan losses (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
--------------------------- ----------------------------
2007 2006 2007 2006
------ ------ ------ ------
(UNAUDITED)
Balance, beginning $1,840 $1,675 $1,675 $1,500
Provision for loan losses 20 40 156 186
Charge-offs - - - (13)
Recoveries - - 9 2
------ ------ ------ ------
Balance, ending $1,860 $1,715 $1,840 $1,675
====== ====== ====== ======
The following is a summary of information pertaining to impaired and non-accrual
loans (in thousands):
JUNE 30,
SEPTEMBER 30, -----------------------------
2007 2007 2006
--------- --------- -------
(UNAUDITED)
Impaired loans without a valuation allowance $ - $ - $ 39
Impaired loans with a valuation allowance 3,448 4,147 3,001
--------- --------- -------
TOTAL IMPAIRED LOANS $ 3,448 $ 4,147 $ 3,040
========= ========= =======
Valuation allowance related to impaired loans 495 565 450
Total non-accrual loans 888 2,064 402
Total loans past due ninety days or more and still accruing - - -
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
--------------------------- --------------------------
2007 2006 2007 2006
---- ---- ---- ----
(UNAUDITED)
Average investment in impaired loans $3,798 $3,039 $3,583 $3,001
Interest income recognized on impaired
loans 87 80 382 345
Interest income recognized on cash basis
on impaired loans 87 80 382 345
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The total amount of loans serviced for the benefit of others was
approximately $1,816,000 (unaudited), $1,694,000 (unaudited), $1,825,000 and
$1,702,000 at September 30, 2007, September 30, 2006, June 30, 2007 and 2006,
respectively. Custodial escrow balances maintained in connection with the
foregoing loan servicing are included in advances from borrowers for taxes and
insurance.
- --------------------------------------------------------------------------------
F-17
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE (CONTINUED)
In the ordinary course of business, the Bank has granted loans to principal
officers and directors and their affiliates. Activity consisted of the following
(in thousands):
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
2007 JUNE 30, 2007
---- -------------
(UNAUDITED)
Beginning balance $1,231 $ 846
New loans - 462
Repayments (88) (77)
------ ------
Ending balance $1,143 $1,231
====== ======
NOTE 6 - PREMISES AND EQUIPMENT
The components of premises and equipment are as follows (in thousands):
JUNE 30,
SEPTEMBER 30, ---------------------------
2007 2007 2006
------ -------- -------
(UNAUDITED)
Land $ 822 $ 822 $ 822
Office buildings and improvements 1,937 1,937 1,912
Furniture, fixtures and equipment 227 255 265
Automobiles 20 20 20
------ -------- -------
3,006 3,034 3,019
Accumulated depreciation (1,113) (1,097) (989)
------ -------- -------
$1,893 $ 1,937 $ 2,030
====== ======== =======
- --------------------------------------------------------------------------------
F-18
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEPOSITS
Deposits and their respective weighted average interest rate consist of the
following major classifications (dollars in thousands):
JUNE 30,
SEPTEMBER 30, -------------------------------------------------------
2007 2007 2006
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
INTEREST INTEREST INTEREST
RATE AMOUNT RATE AMOUNT RATE AMOUNT
---- ------ ---- ------ ---- ------
(UNAUDITED)
Non-interest bearing demand
accounts - % $ 1,357 - % $ 1,755 - % $ 1,239
NOW accounts 1.50 12,269 1.45 12,920 1.29 13,856
Money market accounts 4.04 37,801 4.25 37,516 3.97 32,770
Savings and club accounts 2.99 12,998 2.96 13,993 2.56 14,840
Certificates of deposit 4.79 93,262 4.77 92,756 4.18 96,624
--------- ---------- ----------
4.20 $ 157,687 4.21 $ 158,940 3.73 $ 159,329
========= ========== ==========
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $33,198,000 (unaudited), $32,182,000 and $34,027,000
at September 30, 2007, June 30, 2007 and 2006, respectively. Generally, deposits
in excess of $100,000 are not insured by Federal Deposit Insurance Corporation.
The scheduled maturities of certificates of deposit are as follows (in
thousands):
FISCAL YEAR SEPTEMBER 30, JUNE 30,
ENDING JUNE 30: 2007 2007
--------------- ------- -------
(UNAUDITED)
2008 $67,601 $67,001
2009 12,239 10,661
2010 4,803 6,563
2011 2,791 3,136
2012 4,110 2,676
Thereafter 1,718 2,719
------- -------
$93,262 $92,756
======= =======
- --------------------------------------------------------------------------------
F-19
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DEPOSITS (CONTINUED)
A summary of interest expense on deposits is as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, YEARS ENDED JUNE 30,
-------------------------------- --------------------------
2007 2006 2007 2006
-------- ------- ------ -------
(UNAUDITED)
NOW $ 46 $ 47 $ 187 $ 179
Money market 400 324 1,412 969
Savings and club 99 87 382 337
Certificates of deposit 1,125 1,034 4,220 3,616
-------- ------- ------ -------
$ 1,670 $ 1,492 $ 6,201 $ 5,101
======== ======= ======= =======
At September 30, 2007, June 30, 2007 and 2006, deposits from principal officers
and directors and their affiliates were approximately $1,012,000 (unaudited),
$1,016,000 and $918,000, respectively.
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank has a maximum borrowing capacity with the FHLB of Pittsburgh of
approximately $186,582,000 (unaudited) at September 30, 2007 and $182,508,000 at
June 30, 2007 of which $71,000,000 was outstanding at September 30, 2007 and
June 30, 2007. Advances are secured by qualifying assets of the Bank which
include the Federal Home Loan Bank stock, mortgage-backed securities and
mortgage loans.
Advances from the Federal Home Loan Bank consist of the following (dollars in
thousands):
JUNE 30,
SEPTEMBER 30, ------------------------
MATURITY DATE INTEREST RATE (%) 2007 2007 2006
------------- ----------------- ---- ---- ----
(UNAUDITED)
December 2007 6.41 - Fixed $5,000 $ 5,000 $ 5,000
February 2008 5.48 - Convertible 5,000 5,000 5,000
July 2009 5.45 - Convertible 5,000 5,000 5,000
July 2009 6.05 - Convertible 5,000 5,000 5,000
September 2009 5.84 - Convertible 5,500 5,500 5,500
February 2010 5.91 - Convertible 4,000 4,000 4,000
March 2010 6.05 - Convertible 4,000 4,000 4,000
April 2010 5.856 - Convertible 4,000 4,000 4,000
July 2010 6.54 - Convertible 3,500 3,500 3,500
September 2010 6.10 - Convertible 4,000 4,000 4,000
October 2010 6.06 - Convertible 4,000 4,000 4,000
May 2014 5.60 - Convertible 4,000 4,000 4,000
June 2015 4.04 - Convertible 5,000 5,000 5,000
September 2015 4.13 - Convertible 5,000 5,000 5,000
November 2015 6.07 - Convertible 3,000 3,000 3,000
December 2016 4.49 - Convertible 5,000 5,000 -
------- ------- -------
TOTAL $71,000 $71,000 $66,000
======= ======= =======
- --------------------------------------------------------------------------------
F-20
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)
On the convertible rate notes, the Federal Home Loan Bank has the option to
convert the notes at rates ranging from 0.01% to 0.23% above the three-month
LIBOR on a quarterly basis upon the arrival of specified conversion dates or the
occurrence of specific events. Accordingly, contractual maturities above may
differ from expected maturities.
Maturities of long-term debt at both September 30, 2007 and June 30, 2007 are as
follows (in thousands):
Fiscal year ending June 30:
2008 $10,000
2009 -
2010 27,500
2011 11,500
2012 -
Thereafter 22,000
-------
$71,000
=======
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED JUNE 30,
--------------------------- -----------------------
2007 2006 2007 2006
---- ---- ---- ----
(UNAUDITED)
Federal:
Current $235 $207 $880 $1,016
Deferred - - (132) (59)
---- ---- ---- ------
235 207 748 957
State, current - - - 10
---- ---- ---- ------
$235 $207 $748 $ 967
==== ==== ==== ======
- --------------------------------------------------------------------------------
F-21
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax at a rate of 34% to the
income tax expense included in the statements of income is as follows (dollars
in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------------------------
2007 2006
------------------------ ------------------------
% OF % OF
PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME
------ ------ ------ ------
Federal income tax at statutory rate $ 235 34.0% $ 207 34.0%
State tax, net of federal benefit - - - -
------- ------ ------- ------
$ 235 34.0% $ 207 34.0%
======= ====== ======= ======
YEARS ENDED JUNE 30,
----------------------------------------------------------
2007 2006
---------------------- ------------------------
% OF % OF
PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME
------ ------ ------ ------
Federal income tax at statutory rate $785 34.0% $997 34.0%
State tax, net of federal benefit - - 6 0.2
Low income housing tax credit (39) (1.7) (39) (1.3)
Other 2 0.1 3 0.1
---- ---- ---- ----
$748 32.4% $967 33.0%
==== ==== ==== ====
Items that gave rise to significant portions of deferred tax assets and
liabilities are as follows:
JUNE 30,
---------------------------
2007 2006
------ ------
(IN THOUSANDS)
Deferred tax assets:
Loan origination fees $ 379 $ 419
Allowance for loan losses 651 573
Deferred directors' fees 513 469
Deferred compensation 75 71
Other 62 53
Premises and equipment 47 10
Employee benefit plan 89 -
------ ------
1,816 1,595
Deferred tax liabilities - -
------ ------
NET DEFERRED TAX ASSET $1,816 $1,595
====== ======
- --------------------------------------------------------------------------------
F-22
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (CONTINUED)
Retained earnings include $2,800,000 at September 30, 2007 (unaudited), June 30,
2007 and 2006, for which no provision for federal income tax has been made.
These amounts represent deductions for bad debt reserves for tax purposes which
were only allowed to savings institutions which met certain definitional tests
prescribed by the Internal Revenue Code of 1986, as amended. The Small Business
Job Protection Act of 1996 eliminated the special bad debt deduction granted
solely to thrifts. Under the terms of the Act, there would be no recapture of
the pre-1988 (base year) reserves. However, these pre-1988 reserves would be
subject to recapture under the rules of the Internal Revenue Code if the Bank
itself pays a cash dividend in excess of earnings and profits, or liquidates.
The Act also provides for the recapture of deductions arising from "applicable
excess reserve" defined as the total amount of reserve over the base year
reserve. The Bank's total reserve exceeds the base year reserve and deferred
taxes have been provided for this excess.
NOTE 10 - EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Bank has a pension plan covering substantially all employees. The plan
provides a benefit based on final average earnings and years of service.
The Bank has adopted the provisions of Statement of Financial Accounting
Standards No. 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)" ("SFAS No. 158"), as of June 30, 2007. In accordance with SFAS No. 158,
our fiscal year 2006 accounting and related disclosures were not affected by the
adoption of the new standard. The table below summarizes the incremental effects
of SFAS No. 158 adoption on the individual line items in our Consolidated
Balance Sheets at June 30, 2007.
PRE SFAS NO. SFAS POST SFAS
NO. 158 NO. 158 NO. 158
ADOPTION ADJUSTMENT ADOPTION
-------- ---------- --------
Assets:
Deferred income taxes $1,727 $ 89 $1,816
Accrued interest receivable and other assets 1,728 (2) 1,726
Liabilities:
Accrued interest payable and other liabilities 2,624 261 2,885
Equity:
Accumulated other comprehensive loss - (174) (174)
- --------------------------------------------------------------------------------
F-23
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EMPLOYEE AND DIRECTOR BENEFIT PLANS (CONTINUED)
The following table sets forth the aggregate funded status of the pension plan
at June 30, 2007 and 2006:
2007 2006
------- -------
(IN THOUSANDS)
Accumulated benefit obligation $ 1,142 $ 1,093
======= =======
Change in benefit obligation:
Benefit obligation at beginning of the year $ 1,429 $ 1,415
Service cost 98 92
Interest cost 89 73
Actuarial (gain) loss 43 (118)
Benefits paid (176) (33)
------- -------
Benefit obligation at end of the year 1,483 1,429
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 1,224 1,093
Actual return on plan assets 92 90
Employer contributions 83 74
Benefit paid (176) (33)
------- -------
Fair value of plan assets at end of year 1,223 1,224
------- -------
FUNDED STATUS $ (260) $ (205)
======= =======
Prior to the adoption of SFAS No. 158:
Funded status $ -- $ (205)
Unrecognized net actuarial loss -- 197
Unrecognized transition obligation -- 18
------- -------
NET AMOUNT RECOGNIZED AS PREPAID PENSION COST $ -- $ 10
======= =======
Subsequent to the adoption of SFAS No. 158:
Unrecognized net actuarial loss $ 247
Unrecognized transition obligation 16
-------
263
Income tax benefit (89)
------
NET AMOUNT RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE LOSS $ 174
=======
- --------------------------------------------------------------------------------
F-24
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EMPLOYEE AND DIRECTOR BENEFIT PLANS (CONTINUED)
2007 2006
----- -----
(IN THOUSANDS)
Components of net periodic benefit cost for the year ended June 30:
Service cost $ 98 $ 92
Interest cost 89 73
Expected return on plan assets (102) (91)
Amortization of net loss 4 12
Amortization of transition obligation 2 2
----- -----
NET PERIODIC PENSION COST $ 91 $ 88
===== =====
Assumptions used in determining the net periodic pension cost and the plan's
funded status for 2007 and 2006 are as follows:
2007 2006
---- ----
Discount rate 6.35% 6.35%
Rate of increase in compensation levels 3.00 3.00
Expected long-term rate of return on plan assets 8.50 8.50
The Bank's pension plan asset allocations at June 30, 2007 and 2006 are as
follows:
PERCENTAGE OF PLAN
ASSETS AT
------------------
ASSET CATEGORY 2007 2006
-------------- ---- ----
Money market 1% 6%
William Penn Bank, FSB certificate of deposit 99 94
--- ---
100% 100%
==== ===
It is the Bank's intention to terminate this plan in the year ending June 30,
2008. As of June 30, 2007, the Bank expects to pay approximately $400,000 to
settle its plan obligation, of which $322,000 was paid in October 2007. If the
plan is terminated, all obligations are expected to be satisfied by lump-sum
disbursements to plan participants.
The Bank also has a savings plan qualified under Section 401(k) of the Internal
Revenue Code which covers substantially all of its employees. Employees can
contribute up to 20% of gross pay and the Bank matches 25% of such contributions
up to 12%. Savings plan expense charged to operations amounted to $32,000 and
$28,000 for the years ended June 30, 2007 and 2006, respectively, and $7,000 and
$8,000 for the three months ended September 30, 2007 and 2006, respectively
(unaudited).
- --------------------------------------------------------------------------------
F-25
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EMPLOYEE AND DIRECTOR BENEFIT PLANS (CONTINUED)
The Bank has a retirement plan for the directors of the Bank. Upon retirement, a
director who agrees to serve as a consulting director to the Bank will receive a
monthly benefit amount for a period of up to 60 months. The expense included in
the statements of income for these benefits was $17,000 and $1,000 for the years
ended June 30, 2007 and 2006, respectively, and $4,000 and $4,000 for the three
months ended September 30, 2007 and 2006, respectively (unaudited). At September
30, 2007, June 30, 2007 and 2006, approximately $222,000 (unaudited), $219,000
and $208,000, respectively, had been accrued under this plan.
The Bank has deferred compensation plans for certain directors of the Bank
whereby they can elect to defer their directors' fees. Under the plans'
provisions, benefits which accrue at the Bank's highest certificate of deposit
rate will be payable upon retirement, death or permanent disability. At
September 30, 2007, June 30, 2007 and 2006, approximately $1,537,000
(unaudited), $1,509,000 and $1,379,000, respectively, had been accrued under the
plans. Interest expense included in the statements of income for these benefits
was $67,000 and $56,000 for the years ended June 30, 2007 and 2006,
respectively, and $18,000 and $15,000 for the three months ended September 30,
2007 and 2006, respectively (unaudited).
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
A summary of the Bank's financial instruments with off-balance sheet risk is as
follows (in thousands):
JUNE 30,
SEPTEMBER 30, -------------------------
2007 2007 2006
---- ---- ----
(UNAUDITED)
Commitments to extend credit $15,432 $13,594 $ 7,915
Unfunded commitments under lines of credit 10,566 10,431 11,656
- --------------------------------------------------------------------------------
F-26
WILLIAM PENN BANK, FSB
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have 90-day fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation. Collateral held varies, but includes principally residential
or commercial real estate.
Included in the above commitments to extend credit at June 30, 2007 were fixed
rate commitments to grant loans of approximately $5,230,000 which had interest
rates that range from 6.25% to 8.25%.
Included in the above commitments to extend credit at September 30, 2007 were
fixed rate commitments to grant loans of approximately $6,503,000 which had
interest rates that range from 5.88% to 7.50% (unaudited).
NOTE 12 - CONCENTRATION OF CREDIT RISK
The Bank grants loans to customers primarily located in Bucks County,
Pennsylvania. The concentration of credit by type of loan is set forth in Note
5. Although the Bank has a diversified loan portfolio, its debtors' ability to
honor their contracts is influenced by the region's economy.
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet the minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and core capital (as defined in the regulations) to total
adjusted assets (as defined) and of total capital (as defined) to risk-weighted
assets (as defined). Management believes, as of September 30, 2007 (unaudited)
and June 30, 2007, that the Bank meets all capital adequacy requirements to
which it is subject.
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F-27
WILLIAM PENN BANK, FSB
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
As of September 30, 2007 and June 30, 2007, the most recent notification from
the regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum core, Tier I risk-based and total risk-based
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented below (in
thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
AS OF SEPTEMBER 30, 2007 (UNAUDITED):
Total risk-based capital $35,598 23.9% $=>11,939 =>8.0% $=>14,914 =>10.0%
Core capital (to risk-weighted
assets) 34,690 23.9 N/A N/A => 8,708 => 6.0
Core capital (to adjusted total
assets) 34,690 13.0 =>10,654 =>4.0 =>13,321 => 5.0
Tangible capital (to adjusted
total assets) 34,690 13.0 => 4,003 =>1.5 N/A N/A
AS OF JUNE 30, 2007:
Total risk-based capital $35,082 24.0% $=>11,710 =>8.0% $=>14,638 =>10.0%
Core capital (to risk-weighted
assets) 34,232 23.3 N/A N/A => 8,815 => 6.0
Core capital (to adjusted total
assets) 34,232 12.7 =>10,781 =>4.0 =>13,477 => 5.0
Tangible capital (to adjusted
total assets) 34,232 12.7 => 4,026 =>1.5 N/A N/A
AS OF JUNE 30, 2006:
Total risk-based capital $33,897 23.2% $=>11,693 =>8.0% $=>14,616 =>10.0%
Core capital (to risk-weighted
assets) 32,672 22.5 N/A N/A => 8,770 => 6.0
Core capital (to adjusted total
assets) 32,672 12.4 =>10,522 =>4.0 =>13,174 => 5.0
Tangible capital (to adjusted
total assets) 32,672 12.4 => 3,945 =>1.5 N/A N/A
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F-28
WILLIAM PENN BANK, FSB
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The following table presents a reconciliation of the Bank's equity as determined
using accounting principles generally accepted in the United States of America
(GAAP) and its regulatory capital amounts (in thousands):
JUNE 30,
SEPTEMBER 30, ---------------------------
2007 2007 2006
---- ---- ----
(UNAUDITED)
Bank GAAP Equity $34,516 $34,058 $32,672
Accumulated other comprehensive loss 174 174 -
------- ------- -------
TANGIBLE CAPITAL, CORE CAPITAL AND TIER 1 34,690 34,232 32,672
RISK-BASED CAPITAL
Allowance for loan losses (excluding specific reserves of
$495, $565, and $450, respectively) 1,323 1,265 1,225
Equity investments and other assets required to be
deducted (415) (415) -
------- -------- -------
TOTAL RISK-BASED CAPITAL $35,598 $35,082 $33,897
======= ======== =======
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Bank
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been reevaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Bank since a fair value calculation is only provided for a
limited portion of the Bank's assets and liabilities. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Bank's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Bank's financial instruments:
CASH AND CASH EQUIVALENTS AND INTEREST BEARING TIME DEPOSITS
The carrying amounts of cash and cash equivalents and interest bearing time
deposits approximate their fair value.
SECURITIES
Fair values of securities are based on quoted market prices.
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F-29
WILLIAM PENN BANK, FSB
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS RECEIVABLE
For variable-rate loans that reprice frequently and which entail no
significant changes in credit risk, fair values are based on carrying
values. The fair value of fixed rate loans are estimated using discounted
cash flow analyses at interest rates currently offered for loans with
similar terms to borrowers of similar credit quality.
FEDERAL HOME LOAN BANK STOCK
The carrying amount of Federal Home Loan Bank stock approximates fair
value.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amount of accrued interest receivable and payable approximates
fair value.
DEPOSITS
Fair values for demand deposits, savings accounts and certain money market
deposits are, by definition, equal to the amount payable on demand at the
reporting date. Fair values of fixed-maturity certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on similar instruments with similar
maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK
Fair value of advances from Federal Home Loan Bank is estimated using
discounted cash flow analyses, based on rates currently available to the
Bank for advances from Federal Home Loan Bank with similar terms and
remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account
market interest rates, the remaining terms and present credit worthiness of
the counterparties.
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F-30
WILLIAM PENN BANK, FSB
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments were as follows
(in thousands):
SEPTEMBER 30, JUNE 30,
--------------------- -------------------------------------------------
2007 2007 2006
--------------------- --------------------- ---------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------ ----- ------ ----- ------ -----
(UNAUDITED)
Financial assets:
Cash and amounts due from banks $14,176 $14,176 $ 14,229 $ 14,229 $ 7,476 $ 7,476
Interest bearing time deposits 3,123 3,123 3,418 3,418 2,801 2,801
Securities available for sale 117 117 25 25 1,615 1,615
Securities held to maturity 60,327 60,537 61,637 61,049 60,600 59,571
Loans receivable, net 179,655 179,444 180,204 178,285 181,012 180,714
Federal Home Loan Bank stock 3,855 3,855 3,838 3,838 3,663 3,663
Accrued interest receivable:
Loans receivable 863 863 827 827 728 728
Investment securities 666 666 624 624 448 448
Mortgage-backed securities 27 27 30 30 35 35
Financial liabilities:
Non-interest bearing demand
deposits 1,357 1,357 1,755 1,755 1,239 1,239
NOW accounts 12,269 12,269 12,920 12,920 13,856 13,856
Money market accounts 37,801 37,801 37,516 37,516 32,770 32,770
Savings and club accounts 12,998 12,998 13,993 13,993 14,840 14,840
Certificates of deposit 93,262 93,661 92,756 92,395 96,624 95,493
Advances from Federal Home Loan Bank 71,000 72,358 71,000 71,064 66,000 65,894
Accrued interest payable 409 409 369 369 341 341
Off-balance sheet financial instruments - - - - - -
NOTE 15 - LEGAL CONTINGENCIES
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Bank's consolidated financial statements.
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F-31
WILLIAM PENN BANK, FSB
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONVERSION TO MUTUAL HOLDING COMPANY
On November 21, 2007, the Board of Directors approved a plan of reorganization
and stock issuance by which the Bank will reorganize from its current status as
a mutual savings bank to a mutual holding company structure. Pursuant to the
plan of reorganization and stock issuance, the Bank will become a wholly owned
stock-form subsidiary of William Penn Bancorp, Inc., a to-be-formed Federal
corporation. Upon completion of the reorganization, at least a majority of the
to-be outstanding shares of common stock of William Penn Bancorp, Inc. will be
issued to William Penn, MHC. Consummation of the reorganization and stock
issuance is subject to regulatory approval and approval by the Bank's members.
Pursuant to the plan, a minority interest in the to-be outstanding shares of
William Penn Bancorp, Inc. common stock will be offered for sale for cash in a
subscription offering to the Bank's members and, if necessary, a community
offering or syndicated community offering and an amount equal to ^approximately
2% of the to-be issued shares will be contributed to the William Penn Charitable
Foundation.
Upon completion of the reorganization and offering, the mutual holding company
is expected to own 70.0% of the outstanding shares of common stock of William
Penn Bancorp, Inc., the charitable foundation will own approximately 2.0% and
the minority public stockholders will own the remaining 28.0%. In the future,
any payment of dividends by William Penn Bancorp, Inc. will be subject to
certain regulatory restrictions.
The costs associated with the stock offering will be deferred and will be
deducted from the proceeds upon sale of the stock. Approximately $15,000 of
costs have been incurred at September 30, 2007 (unaudited). No costs had been
incurred at June 30, 2007. If the stock offering is unsuccessful these costs
will be expensed.
NOTE 17 - SUBSEQUENT EVENT
In December 2007, the Bank refinanced $25,000,000 of advances from the Federal
Home Loan Bank, which had a weighted average interest rate of 5.87%. The
refinancing was funded with new advances totaling $30,000,000, which have a
weighted average interest rate of 3.84%. The transaction resulted in a
prepayment penalty of approximately $1,524,000, which will be reflected in other
expenses in the quarter ending December 31, 2007.
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F-32
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which the offer or solicitation would be unlawful. Our affairs may change
after the date of this prospectus. Delivery of this document and the sales of
shares made hereunder does not mean otherwise.
WILLIAM PENN BANCORP, INC.
(Proposed Holding Company for William Penn Bank, FSB)
Up to 1,381,511 Shares of Common Stock
(Subject to Increase to Up to 1,586,655 Shares)
PROSPECTUS
Keefe Bruyette & Woods
February 11, 2008
Until the later of May 20, 2008, or 90 days after commencement of the syndicated
community offering, if any, whichever is later, all dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.