U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended JUNE 30, 2003
- - or -
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ________________ to ________________
Commission File Number: 0-49706
WILLOW GROVE BANCORP, INC.
--------------------------
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 80-0034942
- --------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employee Identification No.)
incorporation or organization)
WELSH AND NORRISTOWN ROADS
MAPLE GLEN, PENNSYLVANIA 19002
------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number: (including area code) (215) 646-5405
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer(as defined
in Exchange Act Rule 12b-2).
YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on September 22, 2003 was $138,733,111 (8,480,019 shares at $16.36
per share). Although directors and executive officers of the Registrant and
certain employee benefit plans were assumed to be "affiliates" of the Registrant
for purposes of the calculation, the classification is not to be interpreted as
an admission of such status.
As of September 22, 2003 there were 10,230,808 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
- -----------------------------------
1. Portions of the Definitive Proxy Statement for the 2003 Annual Meeting
of Stockholders are incorporated by reference in Part III.
Willow Grove Bancorp, Inc.
FORM 10-K
For the Fiscal Year Ended June 30, 2003
INDEX
PART I
Item 1. Business 1
Item 2. Properties 32
Item 3. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 34
Item 6. Selected Financial Data 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 48
Item 8. Financial Statements and Supplementary Data 54
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 88
Item 9A. Control and Procedures 88
PART III
Item 10. Directors and Executive Officers of the Registrant 88
Item 11. Executive Compensation 88
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters 89
Item 13, Certain Relationships and Related Transactions 89
Item 14. Principal Accounting Fees and Services 89
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports of Form 8-K 90
Signatures 92
ii
Forward Looking Statements
This Form 10-K contains certain forward-looking statements and
information based upon our beliefs as well as assumptions we have made. In
addition, to those and other portions of this document, the words "anticipate,"
"believe," "estimate," "expect," "intend," "should," and similar expressions, or
the negative thereof, as they relate to us are intended to identify
forward-looking statements. Such statements reflect our current view with
respect to future looking events and are subject to certain risks, uncertainties
and assumptions. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, hostilities involving the United
States, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting our operations, markets,
products, services and fees. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended. We do not intend to update these forward-looking
statements.
PART I
Item 1. Business
General. Willow Grove Bancorp, Inc. (the "Company"), a Pennsylvania corporation,
was formed to facilitate the reorganization of Willow Grove Bank (the "Bank")
from the two-tier mutual holding company form to the stock holding company form
of organization. The reorganization was completed on April 3, 2002. The Company
issued 6,414,125 shares of common stock in a subscription offering and issued
4,869,375 shares of common stock in exchange for the stock held by the
shareholders of the former Willow Grove Bancorp, Inc., the federally chartered
stock-form mid-tier holding company. The Bank, which is now a wholly-owned
subsidiary of the Company, was originally organized in 1909. In December 1998,
the Bank was reorganized from a federally chartered mutual savings bank into a
federally chartered stock savings bank in the mutual holding company form of
ownership with a "mid-tier" holding company. The Bank is primarily engaged in
attracting deposits from the general public and using those funds to invest in
loans and securities. At the present time, the business of the Company is
primarily the business of the Bank. In September 2000, Willow Grove Investment
Corporation ("WGIC"), a Delaware corporation was formed as a wholly owned
subsidiary of the Bank to hold and manage certain securities investments of the
Bank. In May 2003, Willow Grove Insurance Agency, LLC (the "Agency"), a
Pennsylvania limited liability company was formed by the Bank to conduct
permitted fixed rate annuity transactions for the Bank.
References in this document to "we," "our" or "us" refer to Willow
Grove Bancorp, Inc. together with its subsidiary, Willow Grove Bank, unless the
context otherwise requires.
In recent years, we have concentrated our business plan on the
following primary goals - changing operations to a full-service community bank,
continuing steady growth and maintaining a high level of asset quality. We
intend to continue our growth through internal means, and to the extent
opportunities are available and deemed prudent by management, through
acquisitions of other institutions. We believe our business plan will continue
to enhance shareholder value.
Our principal sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and funds borrowed from outside sources
such as the Federal Home Loan Bank ("FHLB") of Pittsburgh. These funds are
primarily used for the origination of various loan types including,
single-family residential, commercial real estate and multi-family residential
mortgage loans, construction real estate loans, home equity loans, consumer
loans and commercial business loans. Our major source of income is the interest
payments received on our loan and securities portfolios, while our major expense
is interest paid on deposit accounts.
1
The Office of Thrift Supervision ("OTS") is the Bank's chartering
authority and primary regulator. The Bank is also regulated by the Federal
Deposit Insurance Corporation ("FDIC"), the administrator for the Savings
Association Insurance Fund ("SAIF"). The Bank is also subject to reserve
requirements established by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board" or "FRB"), and we are a member of the FHLB of
Pittsburgh, one of the regional banks comprising the FHLB System.
Our executive offices are located at Welsh and Norristown Roads, Maple
Glen, Pennsylvania, and our telephone number is (215) 646-5405. The office for
Willow Grove Investment Corporation is 1105 Market Street, Suite 1300,
Wilmington, Delaware. The office for Willow Grove Insurance Agency, LLC are
located at Welsh and Norristown Roads, Maple Glen, Pennsylvania.
Second Step Conversion
On April 3, 2002 Willow Grove Bank completed its reorganization from
the two-tier mutual holding company form of organization to the stock form of
organization (the "April 2002 Reorganization"). The former Willow Grove Bancorp,
Inc. was a federally chartered mid-tier mutual holding company with
approximately 56.9% of its stock being held by Willow Grove Mutual Holding
Company and the remaining 43.1% being held by public shareholders. As part of
the April 2002 Reorganization, the former Willow Grove Bancorp, Inc., the
federal corporation, was merged into Willow Grove Bank and the current Willow
Grove Bancorp Inc., a Pennsylvania corporation, was incorporated by the Bank for
the purpose of becoming the holding company for the Bank. Willow Grove Bancorp,
Inc., the new Pennsylvania corporation, through a public subscription offering,
sold 6,414,125 shares of stock at $10.00 per share and issued 4,869,375 to the
stockholders of Willow Grove Bancorp, Inc., the former federal corporation,
which represented an exchange of 2.28019 shares of its stock for each share of
the former company. Willow Grove Bank is now the wholly-owned subsidiary of
Willow Grove Bancorp, Inc., the Pennsylvania corporation. All per share data and
information prior to April 3, 2002 refers to the former Willow Grove Bancorp,
Inc., the federal corporation and has been restated to reflect the effect of the
increased shares resulting from the share issuance and exchange resulting from
the April 2002 Reorganization.
Available Information
The Company files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
("SEC"). Our SEC filings are available to the public at the SEC's web site at
http://www.sec.gov. Members of the public may also read and copy any document we
file at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can request copies of these documents by writing to the SEC and
paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for
more information about the operation of the public reference room. In addition,
our stock is listed for trading on the Nasdaq National Market and trades under
the symbol "WGBC". You may find additional information regarding Willow Grove
Bancorp, Inc. at www.nasdaq.com. In addition to the foregoing, we maintain a web
site at www.willowgrovebank.com. We make available on our Internet web site
copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to such documents as soon as
reasonably practicable after we file such material with or furnish such
documents to the SEC.
Market Area and Competition
Our main office is in Montgomery County, Pennsylvania, approximately 20
miles north of downtown Philadelphia. The primary market areas that we serve
are: Montgomery County, Bucks County and the northeast section of Philadelphia
that borders these counties. To a lesser extent, we provide services to areas of
Chester and Delaware counties, the remainder of the City of Philadelphia, and
central and southern New Jersey.
Most of our direct competition for attracting deposits and originating
loans has historically come from savings associations, other savings banks,
commercial banks and credit unions. We face additional competition for deposits
from short-term money market funds and other corporate and government securities
funds, mutual funds, and other non-financial institutions such as securities
brokerage firms and insurance companies. Locally, in the three counties where
our banking offices reside we estimate that we compete with approximately 84
other financial institutions and 55 offices of securities brokers in our market
service area.
2
Lending Activities
General. At June 30, 2003 our net loan portfolio totaled $413.8 million
or 48.96% of our total assets. Historically, our primary emphasis has been the
origination of loans secured by first liens on single-family (one-to four-units)
residences. In recent years, we have changed the focus of our lending to place
more emphasis on home equity loans, construction, commercial real estate and
multi-family residential loans and commercial business loans. At June 30, 2003,
commercial real estate and multi-family residential loans amounted to $155.9
million, or 37.14% of our total loan portfolio. As of that date, construction
loans were $36.2 million or 8.62% of our loan portfolio; commercial business
loans totaled $20.5 million or 4.90% of the total loan portfolio. Loans secured
by liens on single-family residential properties include first mortgage loans
totaling $131.8 million, or 31.40% of the loan portfolio, and $73.0 million of
home equity loans and lines of credit, which accounted for 17.39% of the loan
portfolio at June 30, 2003.
The types of loans that we originate are subject to federal and state
laws and regulations. Interest rates and fees charged on these loans are
affected primarily by the demand for loans by borrowers and the supply of funds
available for lending purposes and rates and fees charged by our competitors.
Local, national and international economic conditions and their effect on the
monetary policies of the Federal Reserve Board, legislative and tax policies and
budgetary matters of local, state, and federal governmental bodies affect the
supply of funds available and the demand for loans.
3
Loan Portfolio Composition. The following table sets forth the
composition of the loan portfolio at the dates indicated. This data does not
include single family loans classified as held for sale which amounted to $5.3
million, $1.6 million, $2.6 million, $35.8 million, and zero at June 30, 2003,
2002, 2001, 2000 and 1999, respectively.
June 30, 2003 June 30, 2002 June 30, 2001 June 30, 2000 June 30, 1999
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of total Amount of total Amount of total Amount of total Amount of total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
Single-family $131,821 31.40% $181,454 40.40% $198,310 43.17% $206,340 48.04% $231,498 61.16%
Commercial real estate 155,892 37.14 134,294 29.90 128,613 28.00 102,513 23.86 65,707 17.36
and multi-family
Construction 36,191 8.62 29,306 6.52 27,724 6.04 14,973 3.49 7,773 2.05
Home equity 72,990 17.39 75,016 16.70 75,060 16.34 72,217 16.81 54,090 14.29
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans 396,894 94.55 420,070 93.52 429,707 93.55 396,043 92.20 359,068 94.86
Consumer loans 2,324 0.55 10,081 2.24 9,688 2.11 7,818 1.82 6,431 1.70
Commercial business loans 20,549 4.90 19,067 4.24 19,925 4.34 25,683 5.98 13,023 3.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable 419,767 100.00% 449,218 100.00% 459,320 100.00% 429,544 100.00% 378,522 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Allowance for loan losses (5,312) (4,626) (4,313) (3,905) (3,138)
Deferred loan fees (656) (737) (808) (699) (800)
-------- -------- -------- -------- --------
Loans receivable, net $413,799 $443,855 $454,199 $424,940 $374,584
======== ======== ======== ======== ========
4
Contractual Principal Repayments and Interest Rates. The following
table sets forth scheduled contractual amortization of the loan portfolio at
June 30, 2003. Demand loans, loans having no schedule of repayments and no
stated maturity and overdraft loans are reported as due in one year or less.
At June 30, 2003, the amount due within
--------------------------------------------------------------------------------------
more than more than more than more than
1 year 1 year to 3 years to 5 years to 10 years to more than
or less 3 years 5 years 10 years 20 years 20 years Total
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
Single-family and $ 3,626 $ 3,356 $ 13,418 $ 30,366 $ 68,596 $ 85,449 $204,811
home equity
Commercial real 5,007 9,752 9,706 25,837 96,180 9,410 155,892
estate and
multi-family
Construction 21,502 10,642 2,061 -- 1,714 272 36,191
-------- -------- -------- -------- -------- -------- --------
Total mortgage loans 30,135 23,750 25,185 56,203 166,490 95,131 396,894
Consumer 185 1,014 717 176 48 184 2,324
Commercial business 6,227 2,044 4,667 5,163 789 1,659 20,549
-------- -------- -------- -------- -------- -------- --------
Total $ 36,547 $ 26,808 $ 30,569 $ 61,542 $167,327 $ 96,974 $419,767
======== ======== ======== ======== ======== ======== ========
Of the $383.2 million of loan principal repayments due after June 30,
2004, $230.7 million have fixed rates of interest and $152.5 million have
adjustable rates of interest.
Lending Activity. Our lending activities are subject to underwriting
standards and origination procedures which have been approved by our Board of
Directors. We process, underwrite and originate single-family residential
mortgage loans on both a retail and wholesale basis. We have developed a network
of approximately 25 active residential mortgage brokers and mortgage bankers to
support our wholesale production system. These correspondents identify, process
and close loans on our behalf based upon rates and terms that we provide to them
on a regular basis which correlate to our assessment of our demand for various
types of loans. The correspondents forward completed loan applications for our
review. Based upon this review, we will determine whether to reject the loan if
it fails to meet our prescribed standards or acquire the loan for our portfolio
or for sale into the secondary market. Depending upon the various programs we
have with the correspondents, loans will be classified as either purchased or
originated. When the correspondent advances funds for the closing of a loan we
have committed to purchase, it is classified as "purchased". When we provide the
funds for the closing of the loan, it is classified as "originated". In either
case, we may retain the loan in our portfolio or sell it (on either a servicing
released or retained basis) in the secondary market. Retail production is
supported through bank loan officers who obtain loan applications through our
branch network and referrals from local builders, real estate brokers and
financial consultants. Single-family residential mortgage loans generally are
required to be underwritten in accordance with Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
guidelines (this facilitates resale into the secondary market). We also acquire
loans that do not conform to FHLMC/FNMA guidelines ("non-conforming" loans) for
the portfolio. Non-conforming loans that we place in the portfolio include, but
are not limited to, sub-prime, investor loans and non-FNMA "A" paper.
Non-conforming loans are underwritten according to our alternative underwriting
guidelines. We believe that our underwriting guidelines are consistent with
industry standards. These non-conforming loans account for approximately 24.7%
of our single-family loan portfolio.
In addition to originating loans, the Bank periodically purchases
participation interests in larger balance loans, typically multi-family and
commercial real estate mortgage loans and construction loans from other
financial institutions in our market area. These participations are reviewed for
compliance with our underwriting standards before they are purchased. Recently
the Bank has considered purchasing larger pools of high quality single-family
5
residential loans that may include local or geographically dispersed loans. Any
purchased loan pool would be subject to our due diligence review and would
conform to our internal underwriting standards.
Our loan underwriting function is managed at our main office. The
majority of our conforming loans are contractually underwritten by any one of
several private mortgage insurance companies to ensure saleability in the
secondary market. From time to time we also underwrite conforming loans based on
our internal capacity and market conditions. We require a current appraisal
prepared by an independent appraiser or an acceptable alternative property
valuation on all new mortgage loans. We require title insurance on loans secured
by real estate with the exception of certain single-family residential loans
originated under $150,000 and most home equity loans originated under $100,000.
Hazard insurance is required on all real estate loans. Flood insurance is also
required for all loans secured by properties located in a designated flood area.
Our loan policy authorizes certain officers to approve loans up to
certain designated amounts, not exceeding $500,000, collectively, in the case of
the President and Chief Operating Officer. Loans exceeding individual or
collective limits must be approved by: the Management Loan Committee consisting
of the President, Chief Operating Officer, other executive officers and other
Bank lending vice-presidents; the Director's Loan Committee, consisting of three
outside directors, the President, the Chief Operating Officer and Chief Lending
Officer or the full Board of Directors. The Director's Loan Committee and the
full Board of Directors are also provided with summaries of new loan activity on
a routine basis.
As a federal savings bank, we are limited in the amount of loans we
make to any one borrower. This amount is equal to 15% of the Bank's unimpaired
capital and surplus (in our case, this amount would be approximately $13.7
million at June 30, 2003), although there are provisions that would allow us to
lend an additional 10% of unimpaired capital and surplus if the loans are
secured by readily marketable securities. Our aggregate loans to any one
borrower have been within these limits. At June 30, 2003, our three largest
credit relationships with an individual borrower and related entities amounted
to $11.6 million, $7.7 million and $7.2 million; all the loans included in these
relationships were performing in accordance with their terms and conditions.
The following table shows the activity in our loan portfolio during the
periods indicated.
6
Year ended June 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
(Dollars in thousands)
Loans held at the beginning of the period (1) $ 449,218 $ 459,320 $ 429,544
Originated and purchased for portfolio:
Mortgage loans
Single-family 91,904 43,841 27,867
Commercial real estate and multi-family 46,768 23,341 30,591
Construction 28,854 32,369 27,758
Home equity 53,419 36,725 27,985
Consumer loans 2,669 10,371 8,873
Commercial business loans 13,488 11,057 21,675
--------- --------- ---------
Total originations and purchases for portfolio 237,102 157,704 144,749
Transfer of loans from portfolio to held for sale (43,451) -- --
Amortization (222,711) (166,852) (107,525)
Charge-offs (391) (954) (7,448)
--------- --------- ---------
Net change in loans (29,451) (10,102) 29,776
--------- --------- ---------
Total loans held at the end of the period $ 419,767 $ 449,218 $ 459,320
========= ========= =========
<FN>
(1) Excludes loans classified as held for sale at the time of origination.
</FN>
Single-Family Residential Loans. We utilize bank loan officers and a
network of mortgage brokers and bankers to originate and buy conventional
single-family (one-to-four-units) mortgage loans. During the year ended June 30,
2003, single-family residential loans originated to be kept in our portfolio
amounted to $91.9 million. In addition, we originated $80.1 million of
single-family residential mortgage loans for resale in the secondary market. Our
total single-family residential mortgage loans originated for portfolio or
resale amounted to $172.0 million in the year ended June 30, 2003, of which
$103.2 million were originated through our wholesale network and the remaining
$68.8 million was originated through our retail sources. Conventional loans are
loans that are neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Department of Veterans Affairs ("VA"). The majority
of our single-family mortgage loans are secured by properties located in our
primary lending area which includes Montgomery, Bucks and Philadelphia Counties,
Pennsylvania. Our residential lending areas have expanded to include
northeastern Pennsylvania, central and southern New Jersey and Delaware. At June
30, 2003, single-family mortgage loans amounted to $131.8 million, or 31.40% of
our total loan portfolio. Due to our strategic plan to diversify the loan
portfolio, the single-family portion of our loan portfolio has decreased during
the past five years. However, we expect future changes in this portfolio to
include increases from the balances at June 30, 2003.
Single-family residential mortgage loans which we purchase or originate
for sale generally are underwritten with terms conforming to FHLMC/FNMA
guidelines. Loans purchased or originated for our portfolio, may conform to
these guidelines, may exceed the conforming loan amount for those agencies, or
may otherwise not comply with the underwriting standards of the agencies for a
variety of reasons, including credit risk. Recently we have been more active in
selling conforming loans, in excess of our portfolio needs, in the secondary
market. We have generally sold loans to three national investors who purchase
our loans primarily on a best efforts, servicing released basis. This
arrangement, although not eliminating all risks associated with secondary market
activity, can provide an additional source of non-interest income. As of June
30, 2003, $5.3 million of our single-family residential mortgage loans were
classified as held-for-sale. During the year ended June 30, 2003, we sold an
aggregate of $74.8 million of single-family residential mortgage loans at a gain
of $1.2 million while for the year ended June 30, 2002, we had loan sales of
$77.8 million at a gain of $519,000. Although we anticipate continuing sales of
loans in the secondary market, there can be no assurance that this activity will
continue as currently
7
structured or result in the realization of non-interest income. Low interest
rates among other factors have led to the increased sales activity over the past
two years.
Interest rates on our single-family residential mortgage loans either
are fixed for the life of the loan ("fixed-rate") or are subject to adjustment
at certain pre-determined dates throughout the life of the loan ("ARM"). Our
fixed-rate loans generally mature in 10, 15, 20 or 30 years, and have equal
monthly payments to repay the loan with interest by the end of the loan term. At
June 30, 2003, the fixed-rate portion of our residential mortgage loan portfolio
which includes single-family real estate loans and home equity loans, totaled
$151.0 million which was 73.7% of the total single-family residential loans plus
home equity loans outstanding at that date.
We offer a variety of ARM loans. These loans have a pre-determined
interest rate for a specified period of time ranging from one to ten years.
After this initial period, the interest rate will adjust on a periodic basis in
accordance with a designated index such as the one-year US Treasury yield
adjusted to a constant maturity ("CMT") plus a stipulated margin. Also, ARM
loans generally carry an annual limit for rate changes of 1% or 2%, and a
maximum amount the rate can increase or decrease from the initial rate of 4% to
6% during the life of the loan. From time to time, we offer ARM loans with an
initial rate less than the fully-indexed rate (the index at the time of
origination plus the stipulated margin). These loans are underwritten based upon
the borrower making payments calculated at the fully-indexed rate. Our ARM loans
require that any payment adjustment caused by a change in the interest rate
result in full amortization of the loan by the end of the original loan term,
and no portion of the payment increase is permitted to be added to the principal
balance of the loan, so-called negative amortization. At June 30, 2003, $53.8
million or 26.3% of our residential mortgage loan portfolio, which includes
single-family real estate loans and home equity loans, were adjustable rate.
ARM loans decrease some of the risks associated with changing interest
rates. However, increases in the amount of a borrower's payment due to interest
rate increases may affect the borrower's ability to repay the loan increasing
the potential for default. To date, we have not experienced a material impact as
a result of this additional credit risk associated with ARM loans, and believe
that this risk is less than the interest rate risk of holding fixed-rate loans
in a rising interest rate environment.
Such factors as consumer preferences, the general level of interest
rates, competition, and the availability of funds affect the amount of ARM loans
we originate. Although we anticipate that we will continue to offer ARM loans,
there can be no assurance that we can originate a sufficient amount of such
loans to increase or maintain the percentage of such loans in our portfolio.
Generally the largest single-family mortgage loan we originate or
purchase does not exceed $500,000. In addition, our maximum loan-to-value ratio
(the rate of the loan amount to the lesser of the appraised value or sales price
- - "LTV") is 95%. Some special first time homebuyer programs have loan to value
ratios of 100%. In all cases when the loan to value ratio exceeds 80%, we
require the borrower to maintain private mortgage insurance until the loan
balance is reduced to 80% of current market value.
Home Equity Loans. In recent years, we have increased our emphasis on
the origination of home equity loans and lines of credit, due to their shorter
maturities (the maximum term of our home equity loans is 20 years with the
exception of purchase money second mortgage loans whose maximum term may be up
to 30 years) and higher interest rates. A home equity loan is a fixed-rate loan
where the borrower receives the total loan amount at a closing and makes monthly
payments to repay the loan within a specific time period. Home equity lines of
credit are a revolving line of credit with a variable rate and no stated
maturity date. The borrower may draw on this account (up to the maximum credit
amount) and repay this line at any time. At June 30, 2003 we had $73.0 million
or 17.39% of the total loan portfolio in home equity loans and lines of credit
outstanding. Of the $73.0 million outstanding at June 30, 2003, $11.6 million
were in lines of credit. The unused portion of equity lines of credit was $14.5
million at that date. The low level of interest rates in recent periods has
increased amortization and prepayments on home equity loans. This has resulted
in a slight decline in the outstanding balance of home equity loans held at June
30, 2003 despite increases in the amount of home equity loans originated during
the year.
Home equity loans and lines of credit are secured by the borrower's
residence, and we generally obtain a second lien position on these loans. We
offer home equity programs in amounts, when combined with the first
8
mortgage, up to 100% of the value of the property securing the loan. In addition
to originating home equity loans through our branch offices, we purchase loans
from our network of correspondents.
Commercial Real Estate and Multi-Family Residential Real Estate Loans.
At June 30, 2003 commercial real estate and multi-family residential loans
amounted to $155.9 million or 37.14% of the total loan portfolio. This compares
to $134.3 million or 29.90% at June 30, 2002.
Our commercial real estate and multi-family residential loan portfolio
consists primarily of loans secured by office buildings, retail and industrial
use buildings, strip shopping centers, residential properties with five or more
units, non-FNMA eligible single-family residential investment properties and
other properties used for commercial and multi-family purposes located in our
market area. Our commercial and multi-family real estate loans tend to be
originated in an amount less than $3.0 million but will occasionally exceed that
amount. At June 30, 2003, the average commercial and multi-family residential
loan size was $504,000. The five largest commercial real estate and multi-family
residential loans outstanding at June 30, 2003, were $4.2 million, $4.1 million,
$3.9 million, $3.5 million and $3.4 million and all of such loans were
performing in accordance with their terms. However, during an internal review of
the portfolio in fiscal 2002, it was determined that the debt service coverage
ratio for the loan in the amount of $4.1 million was no longer meeting our
underwriting standards and therefore was classified as substandard. During the
year ended June 30, 2003, our commercial real estate and multi-family loan
portfolio grew by $21.6 million, or 16.1% as the result of originations,
purchases and the conversion of loans from construction to permanent status. The
relatively low interest rate environment during the year ended June 30, 2003
stimulated increased amortization and prepayments which partially offset the
total amount of multi-family and commercial real estate originations of $46.8
million during the year.
Although terms for commercial real estate and multi-family loans vary,
our underwriting standards generally allow for terms up to 20 years with monthly
amortization over the life of the loan and LTV ratios of not more than 80%.
Interest rates are either fixed or adjustable, based upon designated market
indices such as the 5-year Treasury CMT or 5-year FHLB of Pittsburgh advance
rate plus a margin, and fees ranging from 0.5% to 1.5% are generally charged to
the borrower at the origination of the loan. Prepayment fees are generally
charged on most commercial real estate and multi-family loans in the event of
early repayment. Generally we obtain personal guarantees of the principals as
additional collateral for commercial real estate and multi-family real estate
loans.
Commercial real estate and multi-family real estate lending involves
different risks than single-family residential lending. These risks include, but
are not limited to, larger loans to individual borrowers and loan payments that
are dependent upon the successful operation of the project or the borrower's
business. These risks can be affected by supply and demand conditions in the
project's market area of rental housing units, office and retail space,
warehouses, and other commercial space. We attempt to minimize these risks by
limiting our loans to proven businesses, only considering properties with
existing operating performance which can be analyzed, using conservative debt
coverage ratios in our underwriting, and periodically monitoring the operation
of the business or project and the physical condition of the property. As of
June 30, 2003, $48,000, or 0.03% of our commercial real estate and multi-family
residential mortgage loans were on non-accrual status compared to $1.2 million
or 0.88% at June 30, 2002. The decrease was primarily related to an impaired
$675,000 loan subsequently acquired in foreclosure and reclassified as
real-estate owned during fiscal 2003.
Various aspects of a commercial and multi-family loan transaction are
evaluated in our effort to mitigate the additional risk in these types of loans.
In our underwriting procedures, consideration is given to the stability of the
property's cash flow history, future operating projections, current and
projected occupancy levels, location and physical condition. Generally, we
impose a debt service ratio (the ratio of net cash flows from operations before
the payment of debt service to debt service) of not less than 115%. We also
evaluate the credit and financial condition of the borrower, and if applicable,
the guarantor. Appraisal reports prepared by independent appraisers are obtained
on each loan to substantiate the property's market value, and are reviewed by us
prior to the closing of the loan.
Construction Loans. We originate construction loans for residential and
commercial uses within our market area. We generally limit construction loans to
builders and developers with whom we have an established relationship, or who
are otherwise known to officers of the Bank. Construction loans outstanding at
June 30, 2003 were $36.2 million, or 8.62% of total loans, compared to $29.3
million or 6.52% of total loans at June 30, 2002.
9
Our construction loans generally have variable rates of interest, a
maximum term to maturity of three years and LTV ratios less than 80%.
Residential construction loans to developers are made on either a pre-sold or
speculative (unsold) basis. Limits are placed on the number of units that can be
built on a speculative basis based upon the reputation and financial position of
the builder, his/her present obligations, the location of the property and prior
sales in the development and the surrounding area. Generally a limit of two to
six model homes is permitted per project.
Prior to committing to a construction loan, we require that an
independent appraiser prepare an appraisal of the property. We also review and
inspect each project at its inception and prior to every disbursement of loan
proceeds. Disbursements are made after inspections based upon a percentage of
project completion. Monthly payment of interest is required on all construction
loans.
We also make construction loans for the acquisition and development of
land for sale (i.e. roads, sewer and water lines). We make these loans only in
conjunction with a commitment for a construction loan for the units to be built
on the site. These loans are secured by a lien on the property and are limited
to a LTV ratio of 75% of the appraised value. The loans have a variable rate of
interest and require monthly payments of interest. The principal of the loan is
repaid as units are sold and released. All of our loans of this type are in our
market area and are to developers with whom we have established relationships.
In most cases, we also obtain personal guarantees from the borrowers.
Construction and land loans generally are considered to involve a
higher level of risk than single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effect of economic conditions on developers, builders and projects. Additional
risk is also associated with construction lending because of the inherent
difficulty in estimating both a property's value at completion and the estimated
cost (including interest) to complete a project. The nature of these loans is
such that they are more difficult to evaluate and monitor. In addition,
speculative construction loans to a builder are not pre-sold and thus pose a
greater potential risk than construction loans to individuals on their personal
residences. At June 30, 2003, our five largest construction loans had
outstanding balances of $4.3 million, $2.3 million, $2.3 million, $2.0 million
and $2.0 million and all were performing in accordance with the terms of their
agreements with the exception of the $4.3 million loan representing a 25.3% loan
participation on the construction of a commercial real estate office building
located in Montgomery County in the suburbs of Philadelphia. The loan which has
a loan-to-value ratio of 88.0%, is secured by a property which is approximately
50% tenant occupied but has fallen behind original leasing projections
necessitating two extensions of the original maturity date of November 2002 to
October 2003, and as a result has been classified as substandard. It is
anticipated that an additional two year extension will be granted upon
expiration of the current extension.
In order to mitigate some of the risks inherent to construction
lending, we inspect properties under construction, review construction progress
prior to advancing funds, work with builders who have established relationships,
and obtain personal guarantees from the principals.
Commercial Business Loans. At June 30, 2003, we had $20.5 million in
commercial business loans (4.90% of gross loans outstanding) compared to $19.1
million at June 30, 2002, an increase of $1.4 million or 7.3%. During the year
ended June 30, 2003, we originated or advanced additional funds on business
lines of credit in the amount of $10.8 million. These originations were offset
by increased amortization and prepayments of loans primarily due to the low
interest rate environment. We began originating loans to small-to-mid-sized
businesses in our market area in May 1997. Since that time, we have hired
commercial lenders to actively solicit commercial business loans as well as
commercial real estate and multi-family real estate loans. During fiscal 2002
and 2003, we generally did not originate new commercial business loans in
amounts exceeding $250,000. Management undertook a process designed to enhance
the Company's commercial business lending function. During fiscal 2003 we hired
a Chief Lending Officer, experienced in business lending, and a Credit Risk
Manager whose responsibilities include reviewing existing systems and policies,
establishing or improving procedures, where necessary, and training new and
existing personnel with respect to the origination and oversight of commercial
business loans. Such steps were taken in anticipation of a renewal in fiscal
2004 of the Company's efforts to increase originations of commercial business
loans in excess of $250,000. During fiscal 2003, the Company restricted its
originations of new commercial business loans in excess of $250,000. Only eight
such loans were originated after they had been reviewed and approved by the full
10
board of directors. The Company expects that in fiscal 2004 it will gradually
increase the amount of its originations of commercial business loans in excess
of $250,000 as it fully implements its enhanced policies and procedures with
respect to such loans. In addition to our commercial loan officers, we use our
business development officers working from several of our branch locations to
actively solicit potential customers in the Bank's market area. No assurance can
be given as to the volume of new commercial loans originated in the future. This
portfolio may decline in the near term as previously originated larger balance
loans are repaid and replaced with smaller balance new originations. We believe
that these types of loans assist in our asset/liability management since they
generally provide shorter maturities and/or adjustable rates of interest in
addition to generally having higher rates of return which are designed to
compensate for the additional credit risk associated with these loans.
Generally, the Bank provides secured revolving lines of credit for
short term working capital support of a business's accounts receivables and
inventory. Typically the secured revolving line of credit is collateralized
based upon an advance rate of up to 75% of eligible accounts receivable and up
to 30% of finished goods inventory. Secured term loan financing is provided for
the acquisition of fixed business assets, such as real property, vehicles,
equipment and machinery. Generally, we provide financing up to 80% of the
purchase price for the new fixed assets and 70% of book value for pre-owned
fixed assets. In addition to business assets pledged as collateral, most
commercial business loans are personally guaranteed by the principal owner(s) of
the borrower. Interest rates are adjustable, indexed to a published prime rate
of interest or fixed. At June 30, 2003, the Bank's five largest commercial
business loans were $849,000, $560,000 $448,000, $407,000 and $335,000 and all
such loans were performing in accordance with their terms with the exception of
the $849,000 loan which was delinquent 61 days. The total credit relationship
associated with this borrower is $953,000. The Bank is carefully monitoring this
loan and understands that the borrower is experiencing financial difficulties.
Management believes that certain additional provisions to its allowance for loan
losses may be necessary in the quarter ending September 30, 2003 due to this
loan. At June 30, 2003 the average balance of the Bank's commercial business
loans was $84,000.
Generally, commercial business loans have been characterized as having
higher risks associated with them than single-family mortgage loans. We have
hired individuals, experienced in this type of lending, and have implemented
policies and procedures which we deem to be prudent. As of June 30, 2003, the
Bank had $360,000 of non-accrual commercial business loans compared to $724,000
at June 30, 2002. Charge-offs of commercial business loans amounted to $103,000
during the year ended June 30, 2003 compared to $769,000 in the year ended June
30, 2002.
Other Consumer Lending Activities. In our efforts to provide a full
range of financial services to our customers, we offer various types of consumer
loans primarily consisting of loans secured by automobiles and to a much lesser
extent deposit account loans, and unsecured personal loans. In addition to
originating consumer loans we facilitate the funding of student loans through
our banking offices in conjunction with American Education Services
("AES/PHEAA"). Consumer loans are originated and facilitated primarily through
existing and walk-in customers and direct advertising. At June 30, 2003, $2.3
million, or 0.55% of our total loan portfolio consisted of these types of loans.
This compares to $10.1 million of consumer loans, or 2.24% of the total loan
portfolio at June 30, 2002. The decline was exclusively related to $7.8 million
received from the liquidation of our education loan portfolio.
Consumer loans, other than loans secured by deposit accounts, generally
have higher interest rates and shorter terms than residential loans, however
they have additional credit risk due to the type of collateral securing the loan
or in some cases the absence of collateral. In the fiscal year ended June 30,
2003, there were charge-offs, net of recoveries totaling $4,000 related to other
consumer loans. This compares to $162,000 in net consumer loan charge-offs in
the fiscal year ended June 30, 2002.
Asset Quality
General. As a part of our efforts to maintain asset quality, we have
developed and implemented an asset classification system in conjunction with
federal regulations. All of our assets are subject to this classification
system. Loans are periodically reviewed and the classifications reviewed at
least quarterly by the Asset Quality Committee of the Board of Directors.
11
When a borrower fails to make a scheduled payment, we attempt to cure
the deficiency by making personal contact with the borrower. Initial contacts
are generally made 16 days after the date the payment is due. In most cases,
deficiencies are promptly resolved. If the delinquency continues, late charges
are assessed and additional efforts are made to collect the deficiency. We
generally work with borrowers to resolve such problems, however, when the
account becomes 90 days delinquent, we institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
On loans which we consider the collection of principal or interest
payments doubtful, we cease the accrual of interest income ("non-accrual"
loans). On loans more than 90 days past due, as to principal and interest
payments, it is our policy to discontinue accruing additional interest and
reverse any interest currently accrued (unless we determine that the loan
principal and interest are fully secured and in the process of collection). On
occasion, we may take this action earlier if the financial condition of the
borrower raises significant concern with regard to his/her ability to service
the debt in accordance with the terms of the loan. Interest income is not
accrued on these loans until the borrower's financial condition and payment
record demonstrate an ability to service the debt.
Real estate which we acquire as a result of foreclosure or deed-in-lieu
of foreclosure is classified as real estate owned until sold. Real estate owned
is recorded at the lower of cost or fair value less estimated selling cost.
Costs associated with acquiring and improving a foreclosed property are usually
capitalized to the extent that the carrying value does not exceed fair value
less estimated selling costs. Holding costs are charged to expense. Gains and
losses on the sale of real estate owned are reflected in operations, as
incurred.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at the dates indicated. The amounts presented represent the
total outstanding principal balances of the related loans rather than the actual
payment amounts that are past due.
At At
June 30, 2003 June 30, 2002
--------------------- ---------------------
30 to 60 to 30 to 60 to
59 days 89 days 59 days 89 days
-------- -------- -------- --------
(Dollars in thousands)
Mortgage loans:
Single-family $ 2,218 $ 603 $ 2,449 $ 566
Commercial real estate and multi-family 205 -- 767 --
Construction -- -- -- --
Home equity 158 12 192 --
Consumer loans -- 1 9 16
Commercial business loans 1,203 104 412 35
-------- -------- -------- --------
Total loans receivable $ 3,784 $ 720 $ 3,829 $ 617
======== ======== ======== ========
Loans delinquent 30 to 89 days amounted to $4.5 million at June 30,
2003 compared to $4.4 million at June 30, 2002. Increases in the amount of
delinquent commercial business loans were offset by decreases in delinquent
commercial real estate loans and to a lesser extent single-family mortgage
loans. Management continues to regularly monitor all delinquent loan activity.
Management does not consider the current level of delinquencies to be of any
significant concern as, based upon past experience, most of such loans are
expected to return to fully performing status without going to non-accrual
status. In any event, management believes that for the most part these loans are
adequately collateralized.
Non-Performing Assets. The following table sets forth information with
respect to non-performing assets we have identified, including non-accrual loans
and other real estate owned. The decrease in non-performing assets from $5.8
million at June 30, 2002 to $4.1 million at June 30, 2003 was the result of
decreases in non-accrual single family, multi-family and commercial real estate
mortgage loans, consumer loans and commercial business loans.
12
At June 30,
--------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Accruing loans 90 or more days past due
Mortgage loans $ 367 $ -- $ 42 $ 9 $ 4
Commercial business loans 147 200 -- -- --
Other -- -- 49 -- --
------ ------ ------ ------ ------
Total accruing but 90 or more days past due 514 200 91 9 4
------ ------ ------ ------ ------
Nonaccrual loans
Mortgage loans:
Single-family 1,064 1,897 1,485 828 1,006
Commercial real estate and multi-family 48 1,179 675 140 --
Construction -- -- -- -- --
Home equity 236 55 278 10 37
Consumer 7 104 151 19 8
Commercial business 360 724 966 250 13
------ ------ ------ ------ ------
Total nonaccrual loans 1,715 3,959 3,555 1,247 1,064
------ ------ ------ ------ ------
Performing troubled debt restructurings 1,463 1,512 1,535 -- --
Total non-performing loans 3,692 5,671 5,181 1,256 1,068
Other real estate owned, net 391 85 -- -- --
------ ------ ------ ------ ------
Total non-performing assets $4,083 $5,756 $5,181 $1,256 $1,068
====== ====== ====== ====== ======
Non-performing loans to total loans 0.88% 1.26% 1.13% 0.29% 0.28%
Non-performing assets to total assets 0.48% 0.76% 0.83% 0.22% 0.23%
Classified and Criticized Assets. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, based upon their judgment, classify
them. There are three classifications for problem assets: "substandard,"
"doubtful," and "loss". Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of current
existing facts, conditions and values, questionable, and there is a high
probability of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Federal regulations also require another unclassified category
designated "special mention" to be established and maintained for assets that do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful, or loss. At June 30, 2003, we
had $13.3 million of our assets classified as substandard ($1.3 million of
single-family mortgage loans, $5.8 million of multi-family and commercial real
estate loans, $4.4 million of construction loans, $1.5 million of commercial
business loans, $250,000 of home equity loans and $66,000 of consumer loans);
$28,000 of business loans classified as doubtful and no loans classified as
loss. This compares to $13.6 million in assets classified as substandard,
$93,000 classified as doubtful and no assets classified as a loss, at June 30,
2002.
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level we believe is adequate to cover known and inherent losses in the loan
portfolio that are both probable and reasonable to estimate at each reporting
date. Our determination of the adequacy of the allowance is based upon an
evaluation of the portfolio, loss experience, current economic conditions,
volume, growth, composition of the portfolio, and other relevant factors. With
the expansion of our lending activities into commercial real estate, business
and other consumer loans in recent years, we consider industry-wide loss
experience in our process when we determine the adequacy of our allowance
13
for loan losses. We believe that due to the changing mix of our loan portfolio
and our relative lack of historical loss experience with these types of loans,
considering loan loss data from other banking institutions with loan portfolios
similar to ours and in a similar geographic setting will provide us with a more
representative approach to evaluating the credit risks in our loan portfolio.
During the year ended June 30, 2001, based upon a more detailed stratification
of the loan portfolio, we modified the formulas we use to calculate the
allowance on various loan types. In some cases, such as business lending and
home equity lending where the combined LTV exceeds 80%, the percentage used to
calculate the allowance was increased. In other cases, such as single-family
first mortgage lending with LTVs below 60%, the percentage used was decreased.
The overall effect of this modification did not materially impact the amount of
the allowance for loan loss. During the fiscal year ended June 30, 2002 we
modified the methodology for calculating the allowance for loan loss based upon
the guidance provided by the SEC and the Federal Financial Institutions
Examination Council ("FFIEC"). We continue to use historical loss factors for
each loan type and for loans that we consider higher risk for all but
single-family mortgage loans and guaranteed consumer loans, we now add a
component for factors that may not be included in the historical loss
calculation. This component establishes a range for factors such as, but not
limited to, delinquency trends, asset classification trends and current economic
conditions. Management then assesses these conditions and establishes, to the
best of its ability, the allowance for loan loss from within the range
calculated, based upon the facts known at that time. At June 30, 2003, our
allowance for loan loss was in the lower quartile of the range established by
this methodology. The result of this change in methodology is to allocate the
entire allowance for loan loss to specific loan types, whereas prior methodology
had an unallocated component. The change in methodology does not imply that any
portion of the allowance for loan loss is restricted, but the allowance for loan
loss applies to the entire loan portfolio.
The allowance is increased by provisions for loan losses which are
charges against income. As shown in the table below, at June 30, 2003, our
allowance for loan losses amounted to $5.3 million or 143.88% and 1.27% of our
non-performing loans and total loans receivable less deferred fees,
respectively.
Year ended June 30,
--------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Balance - beginning of period $4,626 $4,313 $3,905 $3,138 $2,665
Plus: provisions for loan losses 1,034 1,212 7,856 706 531
Less: charge-offs for
Mortgage loans 284 12 18 51 32
Consumer loans 4 173 72 31 23
Commercial business loans 103 769 7,359 3 3
------ ------ ------ ------ ------
Total charge-offs 391 954 7,449 85 58
------ ------ ------ ------ ------
Plus: recoveries for
Mortgage loans -- -- -- 16 --
Consumer loans -- 11 1 -- --
Commercial business loans 43 44 -- 130 --
------ ------ ------ ------ ------
Total recoveries 43 55 1 146 --
------ ------ ------ ------ ------
Balance - end of period $5,312 $4,626 $4,313 $3,905 $3,138
====== ====== ====== ====== ======
Allowance for loan loss to total end
of period non-performing loans 143.88% 81.57% 83.25% 310.91% 293.82%
Charge-offs to average loans 0.08% 0.21% 1.65% 0.02% 0.02%
Allowance for loan loss to end of
period total loans less deferred fees 1.27% 1.03% 0.94% 0.91% 0.83%
14
Provisions for loan losses for the year ended June 30, 2003 were $1.0
million, a decline from $1.2 million in the prior year. Charge-offs also
decreased from $954,000 in fiscal year 2002 to $391,000 in fiscal year 2003. The
primary reason for the increase in the percent of the allowance for loan loss to
total loans was the increase of commercial real estate and multi-family real
estate loan portfolios as a percentage of the total loan portfolio. We assess
our allowance for loan losses at least quarterly, and make any necessary
provision for losses needed to maintain our allowance for losses at a level
deemed adequate. We believe that the allowance for losses was adequate at June
30, 2003 to cover losses that are both probable and reasonably estimable based
upon the facts and circumstances known to us at that date.
Effective December 21, 1993, the OTS in conjunction with the
Comptroller of the Currency, the FDIC and the Federal Reserve Board issued a
Policy Statement regarding a financial institution's allowance for loan and
lease losses. The Policy Statement, which reflects the position of the
regulatory agencies and does not necessarily constitute generally accepted
accounting principles, includes guidance (i) on our responsibilities for the
assessment and establishment of an adequate allowance; and (ii) for the
agencies' examiners to use in evaluating the adequacy of such allowance and the
policies used to determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets classified
substandard and doubtful and with respect to the remaining portion of the
institution's portfolio. Specifically, the Policy Statement sets forth the
following quantitative measures which examiners may use to determine the
reasonableness of an allowance: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio classified substandard; and (iii) for the
portions of the portfolio that have not been classified (including loans
designated special mention), estimated credit losses over the upcoming twelve
months based on facts and circumstances available as of the evaluation date.
While the Policy Statement sets forth this quantitative measure, such guidance
is not intended as a "floor" or "ceiling". Our policy for establishing loan
losses is consistent with the Policy Statement. In July 2001, the SEC issued
Staff Accounting Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance
Methodology And Documentation Issues". The guidance in the SAB was effective
immediately and focuses on the documentation the SEC staff normally expects
registrants to prepare and maintain in support of the allowance for loan losses.
Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies,
represented by the FFIEC issued an interagency policy statement entitled
"Allowance For Loan and Lease Loss Methodologies And Documentation For Banks and
Savings Institutions" ("FFIEC Policy Statement"). The SAB and FFIEC Policy
Statement were the result of an agreement between the SEC and the federal
banking agencies in March 1999 to provide guidance on allowance for loan loss
methodologies and supporting documentation. We believe to the best of our
knowledge that our documentation relating to the allowance for loan loss is
consistent with these pronouncements.
15
We have allocated the allowance for loan losses as shown in the table
below into components by loan types at year end. Due to a change in methodology
there is no unallocated portion of the allowance after June 30, 2001. Through
such allocations, we do not intend to imply that actual future charge-offs will
necessarily follow the same pattern or that any portion of the allowance is
restricted.
June 30, 2003 June 30, 2002 June 30, 2001 June 30, 2000 June 30, 1999
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
loan type to loan type to loan type to loan type to loan type to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
Mortgage loans:
Single-family $ 161 31.40% $ 255 40.40% $ 239 43.17% $ 591 48.04% $ 598 61.16%
Commercial real estate 2,705 37.14 2,239 29.90 1,454 28.00 1,230 23.86 695 17.36
and multi-family
Construction 1,156 8.62 937 6.52 554 6.04 299 3.49 346 2.05
Home equity 430 17.39 472 16.70 437 16.34 482 16.81 359 14.29
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans 4,452 94.55 3,903 93.52 2,684 93.55 2,602 92.20 1,998 94.86
Consumer loans 70 0.55 70 2.24 86 2.11 38 1.82 29 1.70
Commercial business loans 790 4.90 653 4.24 656 4.34 382 5.98 186 3.44
Unallocated -- -- -- -- 887 n/a 883 n/a 925 n/a
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $5,312 100.00% $4,626 100.00% $4,313 100.00% $3,905 100.00% $3,138 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
16
Securities Activities
General. Our investment policy is designed, among other things, to
assist us in our asset/liability management strategies. It emphasizes principal
preservation, favorable returns, maintaining liquidity and flexibility, and
minimizing credit risk. The policy permits investments in US Government and
agency securities, investment grade corporate bonds and commercial paper,
municipal bonds, various types of mortgage-backed securities, certificates of
deposit and federal funds sold to financial institutions approved by our Board
of Directors, equity investments in the FHLB of Pittsburgh, the FNMA, the FHLMC,
and mutual funds with investments in the above described investments.
Currently, we are not participating in hedging programs, interest rate
swaps, caps, collars or other activities involving the use of off-balance sheet
financial derivatives. Also, we do not purchase mortgage-backed derivative
instruments that would be characterized "high-risk" under OTS regulations at the
time of purchase, nor do we purchase corporate obligations, which are not rated
investment grade. Although permissible by our policy, currently we do not own
any corporate bonds regardless of rating.
In order to maintain a high degree of flexibility with our investment
securities, prior to January 2002, all of our investment securities were
classified as Available For Sale ("AFS") pursuant to Statement of Financial
Accounting Standards No. 115. In January 2002 we changed the classification on
our municipal bond portfolio from AFS to Held to Maturity ("HTM"). This
accounting pronouncement requires us to classify a security as AFS, Held to
Maturity, or trading, at the time of acquisition. Securities being classified as
HTM must be purchased with the intent and ability to hold that security until
its final maturity, and can be sold prior to maturity only under rare
circumstances. HTM securities are accounted for based upon the historical cost
of the security. AFS securities can be sold at any time based upon our needs or
judgment as to market changes. AFS securities are accounted for at fair value,
unrealized gains and losses on these securities, net of income tax effects, are
reflected in the stockholders' equity section of our Statement of Financial
Condition.
At June 30, 2003, our investment securities amounted to $309.2 million,
or 36.59% of total assets. This includes a $1.9 million unrealized gain, net of
income tax, on those investment securities classified as AFS. The portfolio
consists primarily of US government agency securities, most with callable
features and agency mortgage-backed pass-through securities. Other investments
include municipal bonds, equity investments in the FHLB of Pittsburgh, other
equity securities and a mutual fund consisting of adjustable-rate
mortgage-backed securities.
The following table sets forth information on the carrying value and
the amortized cost of our securities classified as held to maturity and
available for sale at the dates indicated.
17
At June 30,
-------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Amortized Market Amortized Market Amortized Market
Cost value Cost value Cost value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Held to maturity:
Municipal bonds $ 17,320 $ 17,995 $ 13,973 $ 14,117 $ -- $ --
---------- ---------- ---------- ---------- ---------- ----------
Total held to maturity 17,320 17,995 13,973 14,117 -- --
---------- ---------- ---------- ---------- ---------- ----------
Amortized Carrying Amortized Carrying Amortized Carrying
Cost value Cost value Cost value
---------- ---------- ---------- ---------- ---------- ----------
Available for sale:
FHLB stock 9,252 9,252 5,042 5,042 3,434 3,434
Equity securities 6,477 6,410 4,472 4,421 4,442 4,404
US Gov't agency securities 76,980 78,205 75,692 76,693 43,722 43,798
Mortgage-backed securities 196,184 198,018 166,445 168,531 75,905 75,834
Municipal bonds -- -- -- -- 2,903 2,888
---------- ---------- ---------- ---------- ---------- ----------
Total available for sale 288,893 291,885 251,651 254,687 130,406 130,358
---------- ---------- ---------- ---------- ---------- ----------
Total securities $ 306,213 $ 309,880 $ 265,624 $ 268,804 $ 130,406 $ 130,358
========== ========== ========== ========== ========== ==========
Mortgage-Backed Securities. At June 30, 2003, we had mortgage-backed
securities totaling $198.0 million compared to $168.5 million at June 30, 2002.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages. Mortgages are sold by various
originators to intermediaries (generally agencies of the US Government and
government sponsored enterprises) that pool and repackage the mortgages and sell
participation interests in the pools to investors. The servicer of the mortgage
loan collects the principal and interest payments and passes those payments
through to the intermediary who then remits the payment to the investor. The US
Government agencies and government sponsored enterprises, primarily the
Government National Mortgage Association ("GNMA"), FNMA and FHLMC, guarantee the
timely payment of principal and interest on these securities.
Mortgage-backed securities are issued in stated principal amounts and
are backed by mortgage loans within a specific interest rate range, but may have
varying maturity dates. The underlying pool of mortgages may be comprised of
either fixed-rate or adjustable-rate mortgage loans. Each mortgage-backed
security pool will also differ based upon the actual level of prepayment
experienced by the underlying mortgage loans.
At June 30, 2003, the weighted average life of our mortgage-backed
securities was approximately 3.2 years, based upon our assumptions related to
the future prepayments of the underlying mortgages. Prepayments that are greater
than those projected will shorten the remaining term of the security, while a
decrease in the amount of prepayments will lengthen the amount of time until the
security matures. Prepayments depend on many factors, including the type of
mortgage, the coupon rate, the geographic region, and the general level of
market interest rates. During periods of rising interest rates, if the coupon
rates of the underlying mortgages are less than prevailing market rates offered
on mortgages, refinancings will decrease and prepayments of the mortgages
underlying the security will decline. Conversely, when market interest rates are
falling, and the coupon rate on the underlying mortgage exceeds the prevailing
market interest rate for mortgages offered, refinancings tend to increase which
will increase the amount of prepayments of the underlying mortgages. During the
year ended June 30, 2003, prepayments on mortgage-backed securities exceeded
$60.3 million compared to $28.0 million for the year ended June 30, 2002. This
increase in prepayments is primarily related to the general level of interest
rates which has been favorable for refinancing activity.
18
Our average yield on our mortgage-backed securities was 3.95% at June
30, 2003. This yield is computed by decreasing/increasing the amount of interest
income collected on the security by the amortization/accretion of the
premium/discount associated with the acquisition of the security. In accordance
with generally accepted accounting principles, premiums/discounts are
amortized/accreted over the estimated remaining life of the security. The yield
on the security may vary if the prepayment assumptions used to determine the
remaining life differ from actual prepayment experiences. These assumptions are
reviewed on a periodic basis to reflect actual prepayments.
US Government Agency Securities and Municipal Bonds. At June 30, 2003,
we had $78.2 million, which includes approximately $1.2 million in unrealized
gains, in securities issued by US government agencies, primarily the FHLB, FNMA,
FHLMC and the Federal Farm Credit Bank compared to $76.7 million at June 30,
2002. Most of these securities have call features that allow the issuer to
redeem these securities at par value prior to their stated maturity. Generally,
if the prevailing market interest rate on new issue callable agency securities
with similar maturities exceeds the coupon rate of the security with the call
feature, the call will not be exercised. Conversely, if the prevailing market
interest rate for new issue agency callable securities with similar maturities
is below the coupon rate of the security with the call feature, the call will be
exercised and the bond will be redeemed. When calls are exercised and bonds
redeemed prior to their maturity, we face the risk of re-investing those
proceeds into other investments with lower yields or longer terms.
Our Municipal bonds were classified as held to maturity at June 30,
2003 and are recorded at an amortized cost basis of $17.3 million. The market
value of these securities at June 30, 2003 was $18.0 million. These municipal
bonds include issues from various townships and school districts located in
Pennsylvania.
The following table sets forth certain information regarding the
contractual maturities (without regard to any call provisions) of the carrying
value of our US government agency securities and municipal bonds at June 30,
2003. The yields on tax-exempt bonds have not been adjusted to taxable
equivalent yield.
Carrying Average
value yield
---------- ---------
(Dollars in thousands)
Maturing in:
One year or less $ 2,999 5.08%
One to five years 52,737 3.69
Five to ten years 22,974 3.90
Over ten years 15,590 4.70
-------- -----
Total $ 94,300 3.95%
======== =====
Other Investments. Other than mortgage-backed securities and US
Government agency securities, we have investments in various equity securities
and mutual funds. At June 30, 2003, $9.7 million was invested in equity
securities and $6.0 million was invested in mutual funds. The equity securities
include stock in the FHLB of Pittsburgh and equity securities of several
publicly traded companies. FHLB stock at June 30, 2003 was $9.3 million and the
other equity investments amounted to $477,000. The mutual fund investment of
$6.0 million is backed primarily by investments in adjustable-rate
mortgage-backed securities.
Sources of Funds
General. Deposits are the primary source of funds for our lending and
investment activities. In addition to deposits, we obtain funds from the
amortization and prepayments on our loan and mortgage-backed security portfolio,
maturities of investments, and borrowings. Scheduled loan amortization is a
relatively stable source of funds. However, competition and the general level of
interest rates and market conditions significantly influence deposit inflows and
outflows. Borrowings may be used on a short-term basis to compensate for
reductions in other funding sources. On a longer-term basis, borrowings may be
used for general business purposes.
19
Deposits
As shown in the table below, during the year ended June 30, 2003,
certificates of deposit fell as a percentage of total deposits from 57.7% to
51.1% while other core deposit accounts increased to 48.9% of total deposits
from 42.3% of deposits at June 30, 2002.
At June 30,
--------------------------------------------
2003 2002
---- ----
Percent Percent
Amount of total Amount of total
-------- -------- -------- --------
(Dollars in thousands)
Savings accounts (passbooks, $ 86,447 14.7% $ 73,218 13.8%
statements and clubs)
Money market accounts 79,280 13.5 47,752 9.0
Certificates of deposit 299,794 51.1 305,807 57.7
Checking accounts:
Interest-bearing 51,541 8.8 40,045 7.6
Non-interest-bearing 69,581 11.9 62,930 11.9
-------- ------- -------- -------
Total $586,643 100.0% $529,752 100.0%
======== ======= ======== =======
During the year ended June 30, 2003, total deposits increased by $56.9
million or 10.7% compared to an increase of $32.7 million, or 6.6% for the year
ended June 30, 2002.
Year ended June 30,
----------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Beginning balance $529,752 $497,030 $452,857
Net increase in deposits 45,268 16,979 27,942
Interest credited 11,623 15,743 16,231
-------- -------- --------
Total increase in deposits 56,891 32,722 44,173
-------- -------- --------
Ending balance $586,643 $529,752 $497,030
======== ======== ========
The following table sets forth by various interest rate categories, the
amount of certificates of deposit at the dates indicated.
20
At June 30,
--------------------
2003 2002
-------- --------
(Dollars in thousands)
Interest rates:
- --------------------
from 0.00% to 2.99% $181,942 $106,833
from 3.00% to 3.99% 56,897 71,310
from 4.00% to 4.99% 43,394 76,275
from 5.00% to 6.99% 17,101 48,853
7.00% and over 460 2,536
-------- --------
Total $299,794 $305,807
======== ========
Shown below are the amount and remaining term to maturity for
certificates of deposit as of June 30, 2003.
Amounts maturing in
--------------------------------------------------------------------------------
Over six
months Over one Over two
Six months through one year through years through Over three
or less year two years three years years
------------ ------------ ------------ ------------- ------------
Interest rates: (Dollars in thousands)
- -------------------
from 0.00% to 2.99% $ 92,502 $ 49,925 $ 32,814 $ 4,011 $ 2,690
from 3.00% to 3.99% 8,532 10,206 21,224 3,989 12,946
from 4.00% to 4.99% 10,578 7,762 15,015 3,602 6,437
from 5.00% to 6.99% 11,836 3,703 863 558 141
7.00% and over 460 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total $ 123,908 $ 71,596 $ 69,916 $ 12,160 $ 22,214
============ ============ ============ ============ ============
At June 30, 2003 the total amount of outstanding certificates of
deposit in amounts greater than or equal to $100,000 was $57.0 million. The
following table provides information regarding the maturity of these
certificates of deposit.
Amounts maturing in
--------------------------------------------------------------------------------
Over three Over six
Three months months
months or through six through one Over one
less months year year Total
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
$ 16,587 $ 11,189 $ 10,352 $ 18,846 $ 56,974
Borrowings.
We use outside borrowings to supplement our funding needs. We also use
borrowings in revenue enhancement programs that allow us to take advantage of
arbitrage opportunities when investment returns exceed the cost of borrowings.
At June 30, 2003 we had $132.5 million in borrowings outstanding, all of which
were from the FHLB of Pittsburgh. Advances from the FHLB of Pittsburgh are
secured by our investment in FHLB stock and a portion of our residential
mortgage loan portfolio. The FHLB of Pittsburgh provides an array of borrowing
programs which include: fixed or variable rate programs; various fixed terms
ranging from overnight to 20 years; and other programs that have callable or
putable features attached to them. We intend to continue to utilize borrowings
in the future as an alternative source of funds.
21
The following table sets forth certain information regarding our
outside borrowings for the periods indicated.
At or for the year ended
--------------------------------
June 30, 2003 June 30, 2002
------------- -------------
(Dollars in thousands)
FHLB advances:
Average balance outstanding for the period $ 129,633 $ 73,830
Maximum outstanding at any month end 139,132 100,800
Balance outstanding at end of the period 132,557 97,824
Average interest rate for the period 4.57% 5.58%
Interest rate at the end of the period 3.84% 5.05%
At June 30, 2003 the maturity of our FHLB advances ranged from July
2003 to May 2013. Certain advances also require monthly payments of principal.
At June 30, 2003, $70.5 million of FHLB advances were callable at the option of
the FHLB within certain parameters, of which $56.5 million could be called
within one year. Of the $70.5 million of FHLB advances that are callable at the
discretion of the FHLB, $37.5 million of these advances could be called only if
an index exceeded a specific pre-determined rate.
Subsidiaries. Willow Grove Bank, a federally chartered stock savings bank, is
the wholly owned subsidiary of Willow Grove Bancorp, Inc. The Bank has two
direct subsidiaries, Willow Grove Investment Corporation and Willow Grove
Insurance Agency. WGIC is a Delaware corporation formed in 2000 to hold and
manage certain securities investments of the Bank. At June 30, 2003, assets
under management at WGIC totaled $229.4 million. The Agency, formed in May 2003,
is a Pennsylvania limited liability company that conducts fixed rate annuity
transactions for the Bank.
Employees. At June 30, 2003, we had 182 full-time employees, and 63 part-time
employees. None of our employees are represented by a collective bargaining
group, and we believe that our relationship with our employees is good.
22
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to Willow Grove Bancorp and Willow Grove Bank. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
General
Willow Grove Bank, as a federally chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Willow Grove Bank also is subject to
regulation and examination by the Federal Deposit Insurance Corporation, which
insures the deposits of Willow Grove Bank to the maximum extent permitted by
law, and requirements established by the Federal Reserve Board. Federally
chartered savings institutions are required to file periodic reports with the
Office of Thrift Supervision and are subject to periodic examinations by the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The
investment and lending authority of savings institutions is prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting stockholders.
The Office of Thrift Supervision regularly examines Willow Grove Bank
and prepares reports for consideration by its Board of Directors on any
deficiencies that it may find in the bank's operations. The Federal Deposit
Insurance Corporation also has the authority to examine Willow Grove Bank in its
role as the administrator of the Savings Association Insurance Fund. Willow
Grove Bank's relationship with its depositors and borrowers also is regulated to
a great extent by both federal and, to a lesser extent, state laws, especially
in such matters as the ownership of savings accounts and the form and content of
Willow Grove Bank's mortgage requirements. The Office of Thrift Supervision's
enforcement authority over all savings institutions and their holding companies
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the Office of Thrift Supervision. Any change in such laws or
regulations, whether by the Federal Deposit Insurance Corporation, Office of
Thrift Supervision or Congress, could have a material adverse impact on us and
Willow Grove Bank and our operations.
Willow Grove Bancorp, Inc.
Willow Grove Bancorp is a registered savings and loan holding company
under Section 10 of the Home Owners' Loan Act, as amended and subject to Office
of Thrift Supervision examination and supervision as well as certain reporting
requirements. In addition, because Willow Grove Bank's deposits are insured by
the Savings Association Insurance Fund maintained by the Federal Deposit
Insurance Corporation, Willow Grove Bank is subject to certain restrictions in
dealing with us and with other persons affiliated with the Bank.
Generally the Home Owners' Loan Act prohibits a savings and loan
holding company, such as us, directly or indirectly, from (1) acquiring control
(as defined) of a savings institution (or holding company thereof) without prior
Office of Thrift Supervision approval, (2) acquiring more than 5% of the voting
shares of a savings institution (or holding company thereof) which is not a
subsidiary, subject to certain exceptions, without prior Office of Thrift
Supervision approval, or (3) acquiring through a merger, consolidation or
purchase of assets of another savings institution (or holding company thereof)
or acquiring all or substantially all of the assets of another savings
institution (or holding company thereof) without prior Office of Thrift
Supervision approval or (4) acquiring control of an uninsured institution. A
savings and loan holding company may not acquire as a separate subsidiary a
savings institution which has its principal offices outside of the state where
the principal offices of its subsidiary institution is located, except (a) in
the case of certain emergency acquisitions approved by the Federal Deposit
Insurance Corporation, (b) if the holding company controlled (as defined) such
savings institution as of March 5, 1987 or (c) when the laws of the state in
which the savings institution to be acquired is located specifically authorize
such an acquisition. No director or officer of a savings and loan holding
company or person owning or controlling more than
23
25% of such holding company's voting shares may, except with the prior approval
of the Office of Thrift Supervision, acquire control of any savings institution
which is not a subsidiary of such holding company.
Willow Grove Bank
Insurance of Accounts. The deposits of Willow Grove Bank are insured to
the maximum extent permitted by the Savings Association Insurance Fund, which is
administered by the Federal Deposit Insurance Corporation, and are backed by the
full faith and credit of the U.S. Government. As insurer, the Federal Deposit
Insurance Corporation is authorized to conduct examinations of, and to require
reporting by, insured institutions. It also may prohibit any insured institution
from engaging in any activity the Federal Deposit Insurance Corporation
determines by regulation or order to pose a serious threat to the Federal
Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also
has the authority to initiate enforcement actions against savings institutions,
after giving the Office of Thrift Supervision an opportunity to take such
action.
Under current Federal Deposit Insurance Corporation regulations,
Savings Association Insurance Fund-insured institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital - "well capitalized," "adequately capitalized," and "undercapitalized" -
which are defined in the same manner as the regulations establishing the prompt
corrective action system discussed below. These three groups are then divided
into three subgroups which reflect varying levels of supervisory concern, from
those which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates during the last six months of 2001
ranging from zero for well capitalized, healthy institutions, such as Willow
Grove Bank, to 27 basis points for undercapitalized institutions with
substantial supervisory concerns.
In addition, all institutions with deposits insured by the Federal
Deposit Insurance Corporation are required to pay assessments to fund interest
payments on bonds issued by the Financing Corporation, a mixed-ownership
government corporation established to recapitalize the predecessor to the
Savings Association Insurance Fund. The assessment rate for the second quarter
of 2003 was .004% of insured deposits and is adjusted quarterly. These
assessments will continue until the Financing Corporation bonds mature in 2019.
The Federal Deposit Insurance Corporation may terminate the deposit
insurance of any insured depository institution, including Willow Grove Bank, if
it determines after a hearing that the institution has engaged or is engaging in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any
condition imposed by an agreement with the Federal Deposit Insurance
Corporation. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution
has no tangible capital. If insurance of accounts is terminated, the accounts at
the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the Federal Deposit Insurance Corporation. Management is aware of
no existing circumstances which would result in termination of Willow Grove
Bank's deposit insurance.
Regulatory Capital Requirements. The Office of Thrift Supervision
capital requirements consist of a "tangible capital requirement," a "leverage
capital requirement" and a "risk-based capital requirement." The Office of
Thrift Supervision is authorized to impose capital requirements in excess of
those standards on individual institutions on a case-by-case basis.
Under the tangible capital requirement, a savings bank must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.
Under the leverage capital requirement adopted by the Office of Thrift
Supervision, savings banks must maintain "core capital" in an amount equal to at
least 3.0% of adjusted total assets. Core capital is defined as common
stockholders' equity (including retained earnings), non-cumulative perpetual
preferred stock, and minority interests in the equity accounts of consolidated
subsidiaries, plus purchased mortgage servicing rights valued at the lower of
90% of fair market value, 90% of original cost or the current amortized book
value as determined under generally accepted accounting principles, and
"qualifying supervisory goodwill," less non-qualifying intangible assets.
24
Under the risk-based capital requirement, a savings bank must maintain
total capital (which is defined as core capital plus supplementary capital)
equal to at least 8.0% of risk-weighted assets. A savings bank must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors, which range from 0% for cash and securities issued by the
United States Government or its agencies to 100% for repossessed assets or loans
more than 90 days past due. Qualifying one- to four-family residential real
estate loans and qualifying multi-family residential real estate loans (not more
than 90 days delinquent and having an 80% or lower loan-to-value ratio), which
at June 30, 2003, represented 45.4% of the total loans receivable of Willow
Grove Bank, are weighted at a 50% risk factor. Supplementary capital may
include, among other items, cumulative perpetual preferred stock, perpetual
subordinated debt, mandatory convertible subordinated debt, intermediate-term
preferred stock, and general allowances for loan losses. The allowance for loan
losses includable in supplementary capital is limited to 1.25% of risk-weighted
assets. The amount of supplementary capital that can be included is limited to
100% of core capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital, in addition to the adjustments
required for calculating core capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
non-residential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. However, in calculating
regulatory capital, institutions can add back unrealized losses and deduct
unrealized gains net of taxes, on debt securities reported as a separate
component of capital calculated according to generally accepted accounting
principles.
Office of Thrift Supervision regulations establish special
capitalization requirements for savings banks that own service corporations and
other subsidiaries, including subsidiary savings banks. According to these
regulations, certain subsidiaries are consolidated for capital purposes and
others are excluded from assets and capital. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks, engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to Willow
Grove Bank's level of ownership, including the assets of includable subsidiaries
in which Willow Grove Bank has a minority interest that is not consolidated for
generally accepted accounting principles purposes. For excludable subsidiaries,
the debt and equity investments in such subsidiaries are deducted from assets
and capital. At June 30, 2003, Willow Grove Bank had no investments subject to a
deduction from tangible capital.
Under currently applicable Office of Thrift Supervision policy, savings
institutions must value securities available for sale at amortized cost for
regulatory capital purposes. This means that in computing regulatory capital,
savings institutions should add back any unrealized losses and deduct any
unrealized gains, net of income taxes, on debt securities reported as a separate
component of capital calculated according to generally accepted accounting
principles.
At June 30, 2003, Willow Grove Bank exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital ratios of
10.2%, 10.2% and 20.8%, respectively.
The Office of Thrift Supervision and the Federal Deposit Insurance
Corporation generally are authorized to take enforcement action against a
savings bank that fails to meet its capital requirements, which action may
include restrictions on operations and banking activities, the imposition of a
capital directive, a cease-and-desist order, civil money penalties or harsher
measures such as the appointment of a receiver or conservator or a forced merger
into another institution. In addition, under current regulatory policy, a
savings bank that fails to meet its capital requirements is prohibited from
paying any dividends.
Prompt Corrective Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991, the federal banking regulators are required
to take prompt corrective action if an insured depository institution fails to
satisfy certain minimum capital requirements, including a leverage limit, a
risk-based capital requirement, and any other measure of capital deemed
appropriate by the federal banking regulator for measuring the capital adequacy
of an insured depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
management fees if the institution would thereafter fail to satisfy the minimum
levels for any of its capital requirements.
25
Under the Federal Deposit Insurance Corporation Improvement Act an
institution is deemed to be (a) "well capitalized" if it has total risk-based
capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more,
has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any
order or final capital directive to meet and maintain a specific capital level
for any capital measure, (b) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(c) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (d) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%, and (e) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Under specified
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the Federal
Deposit Insurance Corporation may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with its appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions, and the appropriate federal banking agency also may
take any number of discretionary supervisory actions.
At June 30, 2003, Willow Grove Bank was in the "well capitalized"
category for purposes of the above regulations.
Safety and Soundness Guidelines. The Office of Thrift Supervision and
the other federal bank regulatory agencies have established guidelines for
safety and soundness, addressing operational and managerial standards, as well
as compensation matters for insured financial institutions. Institutions failing
to meet these standards may be required to submit compliance plans to their
appropriate federal regulators. The Office of Thrift Supervision and the other
agencies have also established guidelines regarding asset quality and earnings
standards for insured institutions. Willow Grove Bank believes that it is in
compliance with these guidelines and standards.
Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution to make capital distributions. A savings institution must
file an application for Office of Thrift Supervision approval of the capital
distribution if any of the following occur or would occur as a result of the
capital distribution (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or Office of Thrift Supervision-imposed condition, or (4)
the institution is not eligible for expedited treatment of its filings. If an
application is not required to be filed, savings institutions which are a
subsidiary of a holding company (as well as certain other institutions) must
still file a notice with the Office of Thrift Supervision at least 30 days
before the board of directors declares a dividend or approves a capital
distribution.
Branching by Federal Savings Institutions. Office of Thrift Supervision
policy permits interstate branching to the full extent permitted by statute
(which is essentially unlimited). Generally, federal law prohibits federal
savings institutions from establishing, retaining or operating a branch outside
the state in which the federal institution has its home office unless the
institution meets the IRS' domestic building and loan test (generally, 60% of a
thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement
does not apply if: (a) the branch(es) result(s) from an emergency acquisition of
a troubled savings institution (however, if the troubled savings institution is
acquired by a bank holding company, does not have its home office in the state
of the bank holding
26
company bank subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the state where
the savings institution is located); (b) the law of the state where the branch
would be located would permit the branch to be established if the federal
savings institution were chartered by the state in which its home office is
located; or (c) the branch was operated lawfully as a branch under state law
prior to the savings institution's reorganization to a federal charter.
Furthermore, the Office of Thrift Supervision will evaluate a branching
applicant's record of compliance with the Community Reinvestment Act of 1977. An
unsatisfactory Community Reinvestment Act record may be the basis for denial of
a branching application.
Community Reinvestment Act and the Fair Lending Laws. Savings
institutions have a responsibility under the Community Reinvestment Act and
related regulations of the Office of Thrift Supervision to help meet the credit
needs of their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities, and failure to comply with
the fair lending laws could result in enforcement actions by the Office of
Thrift Supervision, as well as other federal regulatory agencies and the
Department of Justice.
Qualified Thrift Lender Test. All savings institutions are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, a savings institution can comply with the qualified
thrift lender test by either qualifying as a domestic building and loan bank as
defined in Section 7701(a)(19) of the Internal Revenue Code or by meeting the
second prong of the qualified thrift lender test set forth in Section 10(m) of
the Home Owner's Loan Act. A savings institution that does not meet the
qualified thrift lender test must either convert to a bank charter or comply
with the following restrictions on its operations: (a) the institution may not
engage in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (b) the
branching powers of the institution shall be restricted to those of a national
bank; (c) the institution shall not be eligible to obtain any new advances from
its Federal Home Loan Bank, other than special liquidity advances with the
approval of the Office of Thrift Supervision; and (d) payment of dividends by
the institution shall be subject to the rules regarding payment of dividends by
a national bank. Upon the expiration of three years from the date the savings
institution ceases to be a qualified thrift lender, it must cease any activity
and not retain any investment not permissible for a national bank and
immediately repay any outstanding Federal Home Loan Bank advances (subject to
safety and soundness considerations).
Currently, the portion of the qualified thrift lender test that is
based on Section 10(m) of the Home Owners' Loan Act rather than the Internal
Revenue Code requires that 65% of an institution's "portfolio assets" (as
defined) consist of certain housing and consumer-related assets on a monthly
average basis in nine out of every 12 months. Assets that qualify without limit
for inclusion as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential housing and
manufactured housing; home equity loans; mortgage-backed securities (where the
mortgages are secured by domestic residential housing or manufactured housing);
stock issued by the Federal Home Loan Bank of Pittsburgh; and direct or indirect
obligations of the Federal Deposit Insurance Corporation. Small business loans,
credit card loans and student loans are also included without limitation as
qualified investments. In addition, the following assets, among others, may be
included in meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated and
sold within 90 days of origination; 100% of loans for personal, family and
household purposes (other than credit card loans and educational loans); and
stock issued by Fannie Mae or Freddie Mac. Portfolio assets consist of total
assets minus the sum of (a) goodwill and other intangible assets, (b) property
used by the savings institution to conduct its business, and (c) liquid assets
up to 20% of the institution's total assets. At June 30, 2003, approximately
92.4% of the portfolio assets of Willow Grove Bank were qualified thrift
investments.
Federal Home Loan Bank System. Willow Grove Bank is a member of the
Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home
Loan Banks that administer the home financing credit function of savings
institutions. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the Federal Home Loan Bank
System. It makes loans to members (i.e., advances) in accordance with policies
and
27
procedures established by its board of directors. At June 30, 2003, Willow Grove
Bank had $132.5 million of Federal Home Loan Bank advances.
As a member, Willow Grove Bank is required to purchase and maintain
stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to at least
1% of its aggregate unpaid residential mortgage loans, home purchase contracts
or similar obligations at the beginning of each year or 5% of the members'
aggregate amount of outstanding advances and 0.7% of the members' unused
borrowing capacity. At June 30, 2003, Willow Grove Bank had $9.3 million in
stock of the Federal Home Loan Bank of Pittsburgh, which was in compliance with
this requirement.
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 and could also result
in the Federal Home Loan Banks imposing higher interest rates on advances to
members. These contributions also could have an adverse effect on the value of
Federal Home Loan Bank stock in the future.
Federal Reserve System. Federal Reserve Board regulations require all
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and
non-personal time deposits. At June 30, 2003, Willow Grove Bank was in
compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the Office of Thrift Supervision.
Savings banks are authorized to borrow from a Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require savings banks
to exhaust other reasonable alternative sources of funds, including Federal Home
Loan Bank advances, before borrowing from a Federal Reserve Bank.
Affiliate Restrictions. Section 11 of the Home Owners' Loan Act
provides that transactions between an insured subsidiary of a holding company
and an affiliate thereof will be subject to the restrictions that apply to
transactions between banks that are members of the Federal Reserve System and
their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act.
Generally, Sections 23A and 23B and Office of Thrift Supervision
regulations issued in connection therewith limit the extent to which a savings
institution or its subsidiaries may engage in certain "covered transactions"
with affiliates to an amount equal to 10% of the institution's capital and
surplus, in the case of covered transactions with any one affiliate, and to an
amount equal to 20% of such capital and surplus, in the case of covered
transactions with all affiliates. Section 23B applies to "covered transactions"
and certain other transactions and requires that all such transactions be on
terms and under circumstances that are substantially the same, or at least as
favorable to the savings institution or its subsidiary, as those prevailing at
the time for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by an affiliate; a
purchase of assets from an affiliate, with certain exceptions; the acceptance of
securities issued by an affiliate as collateral for a loan or extension of
credit to any party; or the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate. Section 23B transactions also apply to the
provision of services and the sale of assets by a savings association to an
affiliate.
In addition, under Office of Thrift Supervision regulations, a savings
institution may not make a loan or extension of credit to an affiliate unless
the affiliate is engaged only in activities permissible for bank holding
companies; a savings institution may not purchase or invest in securities of an
affiliate other than shares of a subsidiary; a savings institution and its
subsidiaries may not purchase a low-quality asset from an affiliate; and covered
transactions and certain other transactions between a savings institution or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions, each
loan or extension of credit by a savings institution to an affiliate must be
secured by collateral with a market value ranging from 100% to 130% (depending
on the type of collateral) of the amount of the loan or extension of credit.
28
The Office of Thrift Supervision regulation generally excludes all
non-bank and non-savings institution subsidiaries of savings institutions from
treatment as affiliates, except to the extent that the Office of Thrift
Supervision or the Federal Reserve Board decides to treat such subsidiaries as
affiliates. The regulation also requires savings institutions to make and retain
records that reflect affiliate transactions in reasonable detail, and provides
that certain classes of savings institutions may be required to give the Office
of Thrift Supervision prior notice of affiliate transactions.
Federal Securities Law
Our common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended, and under Office of Thrift Supervision
regulations, and generally may not be deregistered for at least three years
after the April 2002 Reorganization. We are subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Securities Exchange Act of 1934, as amended.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act
of 2002 implementing legislative reforms intended to address corporate and
accounting fraud. In addition to the establishment of a new accounting oversight
board which will enforce auditing, quality control and independence standards
and will be funded by fees from all publicly traded companies, the
Sarbanes-Oxley Act restricts provision of both auditing and consulting services
by accounting firms. To ensure auditor independence, any non-audit services
being provided to an audit client will require preapproval by the company's
audit committee members. In addition, the audit partners must be rotated. The
Sarbanes-Oxley Act requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement. In addition, under the
Sarbanes-Oxley Act, counsel will be required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.
Longer prison terms will also be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited to a fund for the benefit of harmed investors. The Federal Accounts
for Investor Restitution ("FAIR") provision also requires the SEC to develop
methods of improving collection rates. The legislation accelerates the time
frame for disclosures by public companies, as they must immediately disclose any
material changes in their financial condition or operations. Directors and
executive officers must also provide information for most changes in ownership
in a company's securities within two business days of the change.
The Sarbanes-Oxley Act also increases the oversight of, and codifies
certain requirements relating to audit committees of public companies and how
they interact with the company's "registered public accounting firm" ("RPAF").
Audit committee members must be independent and are barred from accepting
consulting, advisory or other compensatory fees from the issuer. In addition,
companies must disclose whether at least one member of the committee is a
"financial expert" (as such term is defined by the SEC) and if not, why not.
Under the Sarbanes-Oxley Act, a RPAF is prohibited from performing statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial officer, comptroller, chief accounting officer or any person
serving in equivalent positions has been employed by such firm and participated
in the audit of such company during the one-year period preceding the audit
initiation date. The Sarbanes-Oxley Act also prohibits any officer or director
of a company or any other person acting under their direction from taking any
action to fraudulently influence, coerce, manipulate or mislead any independent
public or certified accountant engaged in the audit of the company's financial
statements for the purpose of rendering the financial statement's materially
misleading. The Sarbanes-Oxley Act also requires the SEC to prescribe rules
requiring inclusion of an internal control report and assessment by management
in the annual report to shareholders. The Sarbanes-Oxley Act requires the RPAF
that issues the audit report to attest to and report on management's assessment
of the company's internal controls. In addition, the
29
Sarbanes-Oxley Act requires that each financial report required to be prepared
in accordance with (or reconciled to) generally accepted accounting principles
and filed with the SEC reflect all material correcting adjustments that are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC.
TAXATION
Federal Taxation
General. We are subject to federal income taxation in the same general
manner as other corporations with some exceptions listed below. The following
discussion of federal taxation is only intended to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the
applicable tax rules. Our federal income tax returns have been closed without
audit by the Internal Revenue Service ("IRS") through 1995.
We will file a consolidated federal income tax return which includes
the Bank. Accordingly, it is anticipated that any cash distributions made by us
would be treated as cash dividends, and not as a non-taxable return of capital
to stockholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, we report our
income and expenses on the accrual method of accounting and file our federal
income tax return using a June 30 fiscal year end.
Bad Debt Reserves. The Small Business Protection Act of 1996 (the "1996
Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995. Prior to the 1996 Act, the Bank was permitted to establish a reserve for
bad debts and to make additions to the reserve. These additions could, within
specified formula limits, be deducted in arriving at taxable income. As a result
of the 1996 Act, savings associations must use the specific chargeoff method in
computing their bad debt deduction beginning with their 1996 federal tax return.
In addition, federal legislation requires the recapture (over a six year period)
of the excess of tax bad debt reserves at December 31, 1995 over those
established as of December 31, 1987. The amount of the Bank's reserve subject to
recapture as of June 30, 2003 is approximately $400,000.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income if the Bank failed to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or ceases to maintain a bank
charter.
At June 30, 2003, the Bank's total federal pre-1988 reserve was
approximately $6.2 million. The reserve reflects the cumulative effects of
federal tax deductions for which no federal income tax provisions have been
made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. We have not
been subject to the AMT nor do we have any such amounts available as credits for
carryover.
Net Operating Loss Carryovers. We may carry back net operating losses
to the three preceding taxable years and forward to the succeeding 15 taxable
years. This provision applies to losses incurred in taxable years beginning
before August 6, 1997. For net operating losses in years beginning after August
5, 1997, such net operating losses can be carried back to the two preceding
taxable years and forward to the succeeding 20 taxable years. At June 30, 2003,
we had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. We may exclude from income 100%
of dividends received from a member of the same affiliated group of
corporations. The corporate dividends received deduction is 80% in the case of
dividends received from corporations which a corporate recipient owns less than
80%, but at least 20%
30
of the distribution corporation. Corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received.
State and Local Taxation
Pennsylvania Taxation. We are subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Corporation Net Income Tax
rate for fiscal 2003 is 9.99% and is imposed on unconsolidated taxable income
for federal purposes with certain adjustments. In general, the Capital Stock Tax
is a property tax imposed at the rate of approximately 0.724% of a corporation's
capital stock value, which is determined in accordance with a fixed formula
based upon average net income and net worth.
The Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "MTIT"), as amended to include thrift institutions
having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT
exempts the Bank from other taxes imposed by the Commonwealth of Pennsylvania
for state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principles ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on state and federal
obligations, while disallowing a percentage of a thrift's interest expense
deduction in the proportion of interest income on those securities to the
overall interest income of the Bank. Net operating losses, if any, thereafter
can be carried forward three years for MTIT purposes.
31
Item 2. Properties
We operate from the following locations:
At June 30, 2003
----------------
Owned or Lease
Leased expiration date Net book value Deposits
------ --------------- -------------- --------
(Dollars in thousands)
Executive office:
- -----------------
Welsh and Norristown Roads (1) Owned n/a $1,740 $131,710
Maple Glen, PA 19002-8030
Operations center: Leased December 2008 63 n/a
- ------------------
101 Witmer Road (2)
Horsham, PA 19044-2200
Branch offices:
- ---------------
1555 W. Street Road Leased January 2006 n/m 48,279
Warminster, PA 18974-3103
1141 Ivyland Road Leased June 2004 10 23,979
Warminster, PA 18974-2048
9 Easton Road (3) Owned n/a 1,039 120,358
Willow Grove, PA 19090-0905
701 Twining Road Owned n/a 750 59,976
Dresher, PA 19025-1894
761 Huntingdon Pike Owned n/a 318 51,160
Huntingdon Valley, PA 19006-8399
2 N. York Road Leased May 2007 n/m 32,525
Hatboro, PA 19040-3201
1331 Easton Road Leased December 2003 30 19,898
Roslyn, PA 19001-2426
11730 Bustleton Avenue Leased February 2004 20 38,937
Philadelphia, PA 19116-2516
122 N. Main Street Leased February 2010 84 12,000
North Wales, PA 19454-3115
8200 Castor Avenue Leased December 2009 127 24,006
Philadelphia, PA 19152-2719
735 Davisville Road Leased May 2011 161 13,258
Southampton, PA 18966-3276
1452 Buck Road Leased April 2007 200 5,514
C-8 Village Shires Center
Holland, PA 18966-2626
9869 Bustleton Ave (4) Leased July 2012 294 5,601
Belair Shopping Center
Philadelphia, PA 19115-2611
32
- -------------------------
(1) Includes adjacent nine-acre parcel that could be used for future expansion.
(2) Includes expansion into second unit beginning July 2003.
(3) Includes adjacent parcel of land with an existing structure.
(3) Opened in January 2003.
Item 3. Legal Proceedings
Brenda DiCicco v. Willow Grove Bank, (United States District Court, Eastern
District of Pennsylvania). On October 11, 2002, a lawsuit was filed against
Willow Grove Bank by Ms. DiCicco in her individual capacity as president and
sole shareholder of ATS Products Corp. ("ATS") alleging eight causes of action
related to a line of credit between the Bank and ATS. The complaint has since
been amended to add Mr. Marcell and one present and one former employee of the
Bank as defendants. The causes of action are: breach of contract, breach of oral
contract, fraud, negligent misrepresentation, breach of fiduciary duty, unjust
enrichment, conversion and negligence. The plaintiff seeks a multi-million
dollar recovery for compensatory damages , punitive damages, attorney fees and
costs. ATS previously filed suit against the Bank in the U.S. Bankruptcy Court
averring similar causes of action. The Bank is vigorously defending the claims
made by the plaintiff in both suits and believes that those claims are without
merit.
Irvine Construction Co. v. Sklaroff, et al., (Court of Common Pleas of
Montgomery County, Pennsylvania). On September 5, 2003, a lawsuit was filed
against Willow Grove Bank and eight additional defendants by Irvine Construction
Co., Inc., alleging thirteen causes of action related to an agreement for the
construction of an office building. Eleven of such causes of action include the
Bank as a defendant and are: breach of contract (two counts), unjust
enrichment/equitable restitution (in the alternative), fraud, civil conspiracy
(two counts), fraudulent transfer and aiding and abetting fraudulent transfers,
constructive trust, abuse of process, and tortious interference with existing
contractual relations (two counts). Four counts against the Bank seek damages in
excess of $1.0 million, five counts seek damages in excess of $50,000, punitive
damages and other relief, and two counts seek constructive relief. The Bank
anticipates that it will vigorously defend the claims made by the plaintiff and
believes that those claims are without merit .
Other than the above referenced litigation, the Company is involved in various
legal proceedings occurring in the ordinary course of business. Management of
the Company, based on discussions with litigation counsel, believes that such
proceedings will not have a material adverse effect on the financial condition
or operations of the Company. There can be no assurance that any of the
outstanding legal proceedings to which the Company is a party will not be
decided adversely to the Company's interests and have a material adverse effect
on the financial condition and operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on the NASDAQ National Market (NASDAQ) under the
symbol WGBC. Local newspapers listings include WillowG and WillGrvBcp. At
September 22, 2003 there were 2,011 registered shareholders of record, not
including the number of persons or entities whose stock is held in nominee or
"street" name through various brokerage firms and banks. The following table
shows the quarterly high and low trading prices of our stock and the amount of
cash dividends declared per share for our past two fiscal years. Data prior to
April 3, 2002 has been restated to reflect the 2.28019 exchange of shares of the
former Willow Grove Bancorp, Inc for shares of the new Willow Grove Bancorp,
Inc. stock.
Stock Price
----------- Cash dividends
High Low per share
---- --- ---------
Quarter ended:
June 30, 2003 $17.05 $14.63 $0.080
March 31, 2003 14.89 13.05 0.080
December 31, 2002 14.00 11.35 0.070
September 30, 2002 12.15 10.18 0.070
June 30, 2002 12.33 10.00 0.060
March 31, 2002 9.76 8.29 0.057
December 31, 2001 8.48 7.16 0.057
September 30, 2001 7.67 5.44 0.053
The information for all equity based and individual compensation
arrangements is incorporated by reference from Item 12 hereof.
34
Item 6. Selected Financial Data
At June 30,
------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
Total assets $ 845,124 $ 759,806 $ 625,148 $ 560,123 $ 472,039
Cash and cash equivalents 98,040 31,986 22,209 14,681 4,889
Securities held to maturity 17,320 13,973 -- -- --
Securities available for sale 291,885 254,687 130,358 70,577 80,055
Loans held for sale 5,293 1,574 2,644 35,753 --
Loans receivable, net 413,799 443,855 454,199 424,940 374,584
Deposits 586,643 529,752 497,030 452,857 390,681
Borrowings 132,557 97,824 59,885 37,517 14,986
Total stockholders' equity 117,130 124,369 60,357 60,643 58,442
For the year ended June 30,
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
Interest income $ 46,445 $ 44,818 $ 44,285 $ 38,893 $ 32,015
Interest expense 18,746 21,463 24,216 19,369 16,164
Net interest income 27,699 23,355 20,069 19,524 15,851
Provision for loan losses 1,034 1,212 7,856 706 531
Net interest income after provision for loan losses 26,665 22,143 12,213 18,818 15,320
Non-interest income 3,492 2,461 1,787 1,102 1,009
Non-interest expense 19,058 16,319 13,875 12,076 10,652
Income before income taxes 11,099 8,285 125 7,844 5,677
Income tax expense (benefit) 3,610 2,734 (32) 3,001 2,044
Net income 7,489 5,551 157 4,843 3,633
Earnings per share - diluted (1) (2) $0.71 $0.52 $0.01 $0.43 $0.20
Earnings per share - basic (1) (2) 0.75 0.53 0.01 0.43 0.20
Cash dividends declared per share (1) 0.30 0.24 0.19 0.16 0.04
Dividend payout ratio (2) (3) (4) 45.02% 45.22% n/m 36.68% 11.34%
- -------------------------
(1) Data prior to April 3, 2002 has been adjusted for the 2.28019 exchange ratio
in connection with the April 3, 2002 Reorganization and subscription
offering.
(2) Earnings per share data prior to January 1, 1999 is not applicable.
(3) Data for June 30, 2001 is not meaningful.
(4) For the fiscal years 2002, 2001, 2000 and 1999 includes dividends waived by
the Mutual Holding Company of $1.1 million, $1.2 million, $1.0 million and
$225,000, respectively.
35
Item 6. Selected Financial Data (continued)
At or for the year ended June 30,
------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Return on average assets 0.93% 0.82% 0.03% 0.93% 0.84%
Return on average equity 6.10 7.53 0.25 8.09 7.63
Average interest-earning assets to
Average interest-bearing liabilities 127.06 121.77 120.93 121.64 120.64
Interest rate spread (5) 2.91 2.89 2.59 3.00 2.97
Interest rate margin (6) 3.55 3.61 3.46 3.83 3.76
Non-performing assets to total assets (7) 0.48 0.76 0.83 22.00 0.23
Allowance for loan losses to:
Non-performing loans 143.88 81.57 83.25 310.91 293.82
Total loans less deferred fees 1.27 1.03 0.94 0.91 0.83
Average stockholders'equity to average assets 15.19 10.89 10.64 11.87 11.02
Tangible stockholders' equity to end of period assets 13.52 16.23 9.45 10.55 11.97
Total capital to risk-weighted assets (8) 19.61 20.40 14.99 15.71 18.10
- -------------------------
(5) The weighted average yield on interest-earning assets less the weighted
average cost of interest-bearing liabilities.
(6) This represents net interest income as a percentage of average
interest-earning assets.
(7) Non-performing assets equal non-accrual loans, troubled debt restructurings
plus accruing loans 90 or more days past due and real estate owned.
(8) Bank only.
36
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to assist in understanding our
financial condition, and the results of operations for Willow Grove Bancorp,
Inc., (the "Company") and its subsidiary Willow Grove Bank, (the "Bank") for the
fiscal years ended June 30, 2003, 2002 and 2001. The information in this section
should be read in conjunction with the Company's financial statements and the
accompanying notes included elsewhere herein.
General
Our net income is primarily based upon our net interest income, which
is the difference between the income earned on interest-earning assets and the
interest paid on interest-bearing liabilities and the relative amount of our
interest-earning assets to interest-earning liabilities. Non-interest income and
expenses, the provision for loan losses and income tax expense also affect our
results of operations.
Critical Accounting Policies
The following discussion and analysis of our financial condition and
results of operations is based upon consolidated financial statements which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions or
conditions.
In management's opinion, the most critical accounting policies
affecting our consolidated financial statements are:
1. Evaluation of the allowance for loan losses. The determination
of the allowance for loan losses involves significant
judgments and assumptions by management which may have a
material impact on the carrying value of net loans and,
potentially, on the amount of net income we recognize from
period to period. For a description of the methods we use to
determine our allowance for loan losses, see "Results of
Operations - Provision for Loan Losses."
2. Accrual and recognition of interest on loans. These policies
involve significant judgments and assumptions by management
which may have a significant impact on the amount of interest
income recognized from period to period. For a description of
our policies for recognizing interest income on loans, see
Note 1 (Summary of Significant Accounting Policies) of our
consolidated financial statements at and for the fiscal year
ended June 30, 2003.
3. Realization of deferred income tax items. We include in our
other assets a "net deferred tax asset" which is an estimate
of net deferred tax assets and deferred tax liabilities. These
estimates involve significant judgments and assumptions by
management which may have a material effect on the carrying
value of this asset for financial reporting purposes. For a
more detailed description of these items and estimates, see
Note 8 (Income Taxes) to our audited consolidated financial
statements at and for the fiscal year ended June 30, 2003.
The Notes to Consolidated Financial Statements identify other
significant accounting policies used in the development and
presentation of our financial statements. This discussion and analysis,
the significant accounting policies and other financial statement
disclosures identify and address key variables and other qualitative
and quantitative factors that are necessary for an understanding and
evaluation of the Company and its results of operations.
Changes in Financial Condition
General. Our total assets increased by $85.3 million, or 11.2%, to $845.1
million at June 30, 2003 compared to $759.8 million at June 30, 2002. This
increase was primarily due to increases in cash and cash equivalents of $66.0
million, and securities available for sale ($37.2 million) and held to maturity
($3.3 million). These increases were
37
partially offset by a $30.1 million decrease in net loans receivable. The
increase in total assets during the fiscal year ended June 30, 2003 was funded
by a $56.9 million increase in deposits and a $34.7 million increase in
borrowings from the Federal Home Loan Bank ("FHLB") of Pittsburgh.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of cash
on hand and in other banks in interest-earning and non-interest earning
accounts, amounted to $98.0 million and $32.0 million at June 30, 2003 and 2002,
respectively. The increase in cash and cash equivalents of $66.0 million or
206.5% was a result of the combination of increased loan prepayments associated
with the continuing low interest rate environment as well as proceeds received
from the sale of recently securitized single family residential mortgage loans
and from the liquidation of our education loan portfolio. In the quarter ended
June 30, 2003, the Company securitized and sold $30.7 million of single-family
residential mortgage loans at a gain of $680,000. The loans securitized were on
the Company's books at a premium and management believed that they had an
increased likelihood of prepayment. As a part of its asset/liability management
strategy, the Company used a portion of the proceeds from this sale of
securities to repay $17.0 million of FHLB advances which had a weighted average
interest rate of 5.29% and an average remaining term of 2.4 years. The Company
also paid $1.4 million of prepayment penalties to the FHLB as part of this
transaction which reduced its non-interest income in fiscal 2003. In addition,
during the fiscal year ended June 30, 2003, the Company sold its $7.7 million
portfolio of education loans at a gain of $440,000. The sale of the Company's
education loan portfolio was due to its determination that the returns of such
portfolio, which had an average interest yield of 3.6 %, were not sufficient in
light of the administrative costs involved as well as the relatively limited
growth in this sector of the Company's total loan portfolio. Cash and cash
equivalents are available as a source of funds for originations of new loans and
purchases of additional securities investments.
Securities Available for Sale. At June 30, 2003, we had securities that
were classified available for sale ("AFS") totaling $291.9 million, compared to
$254.7 million in AFS securities at June 30, 2002. The Company's AFS securities
are comprised primarily of mortgage-backed securities issued by Fannie Mae,
Freddie Mac and Ginnie Mae, as well as US government agency securities, stock in
the FHLB and certain equity securities. The increase in available for sale
securities was part of the Company's investment strategy to increase its
securities portfolio in light of relatively limited demand for originations of
new loans at rates deemed acceptable to the Company. Securities classified as
AFS are accounted for at fair value with unrealized gains and losses, net of
tax, reflected as an adjustment to equity. Primarily as a result of interest
rates remaining relatively the same, at June 30, 2003, we had unrealized gains
on AFS securities of $3.0 million compared to unrealized gains on AFS securities
of $3.0 million at June 30, 2002.
Securities Held to Maturity. At June 30, 2003, we had securities that were
classified held to maturity totaling $17.3 million, compared to $14.0 million in
held to maturity securities at June 30, 2002. Our held to maturity securities at
June 30, 2003 and June 30, 2002 were comprised solely of municipal bonds. The
increase in held to maturity securities was part of the Company's investment
strategy to increase its municipal bond portfolio due to the tax advantages of
municipal bonds. In January 2002 we changed the classification on our municipal
bond portfolio from available for sale to held to maturity based upon our
intention and our ability to hold these securities until their maturity. Held to
maturity securities are carried at amortized cost, and assets transferred from
available for sale to held to maturity are transferred at fair value.
Loans. Our net loan portfolio declined to $413.8 million at June 30, 2003
from $443.9 million at June 30, 2002. During the fiscal year ended June 30,
2003, new loan originations and purchases of $237.1 million were offset by loan
repayments of $222.7 million and loan securitizations and sales of $43.5
million. This decrease in our net portfolio of $30.1 million, or 6.8%, was due
primarily to a decline in our single-family residential mortgage loan portfolio.
Our single-family residential mortgage loans amounted to $131.8 million, or
31.4% of our total loan portfolio, at June 30, 2003 compared to $181.5 million,
or 40.4% of the total loan portfolio, at June 30, 2002. The $49.7 million, or
27.4%, decline in our single-family residential mortgage loans is primarily the
result of the continuing low interest rate environment and accelerated
prepayment levels as our customers refinanced their mortgage loans. The decrease
in our single-family residential mortgage loans occurred despite new
originations and purchases of $91.9 million of single-family residential
mortgage loans in the year ended June 30, 2003. Other significant changes in the
types of loans in our portfolio during the year ended June 30, 2003 were: an
increase of $21.6 million (16.1%) in commercial real estate and multi-family
residential mortgage loans; an increase of $6.9 million (23.5%) in construction
mortgage loans; an increase of $1.5 million (7.8%) in commercial business loans;
a $7.8 million (77.0%) decrease in consumer loans primarily related to the sale
of $7.7 million of our education loan
38
portfolio; and a $2.0 million (2.7%) decrease in home equity loans. As of June
30, 2003, our single-family residential mortgage loans and home equity loans
amounted to an aggregate of 48.8% of our total loans. In recent years we have
increased our emphasis on commercial real estate and construction loans.
Commercial real estate and multi-family residential loans amounted to 37.1% of
loans, while construction loans amounted to 8.6% of the total loans at June 30,
2003. Commercial real estate and multi-family residential loans and construction
loans generally have higher yields and shorter terms to maturity and/or
repricing compared to single-family residential mortgage loans. However,
commercial real estate and construction loans generally are considered to
involve a higher degree of risk of loss compared to single-family residential
mortgage loans. Our allowance for loan losses amounted to $5.3 million at June
30, 2003 representing a net increase of $686,000 (14.8%) from the allowance of
$4.6 million at June 30, 2002.
Loans Held for Sale. Mortgage loans originated or purchased with the
intention of being sold into the secondary market are classified as held for
sale and are carried at the lower of cost or market value with any unrealized
loss reflected in the statements of income. At June 30, 2003, $5.3 million of
fixed-rate, single-family residential mortgages were classified as held for sale
compared to $1.6 million in loans classified as held for sale at June 30, 2002.
The increase of $3.7 million is related to increased secondary market activity
as a result of the low interest rate environment. Since fiscal 2001, we have
become more active in the residential mortgage loan secondary market in an
attempt to take advantage of market opportunities and realize gains upon the
sale of loans.
Intangible Assets. At June 30, 2003, the amount of our intangible assets
totaled $1.0 million. This compares to $1.1 million at June 30, 2002. Our
intangible assets include a core deposit intangible and an unidentified
intangible asset, which represents the excess cost over fair value of assets
acquired over liabilities assumed in a branch acquisition which occurred in
1994. The core deposit intangible is being amortized over a 12-year life. At
June 30, 2003 the Company had goodwill of $848,000 which is periodically
measured for impairment.
Deposits. Total deposits increased by $56.9 million, or 10.7%, to $586.6
million at June 30, 2003 compared to $529.8 million at June 30, 2002. At June
30, 2003, checking accounts totaled $121.1 million, representing an increase of
$18.1 million or 17.6% compared to the balance of checking accounts at June 30,
2002 of $102.9 million. Savings accounts increased approximately $13.2 million,
or 18.1% to $86.4 million at June 30, 2003 compared to $73.2 million at June 30,
2002, and money market accounts increased $31.5 million or 65.9% to $79.3
million at June 30, 2003 compared to $47.8 million at June 30, 2002. At June 30,
2003, certificates of deposit, which comprise the largest component of our
deposit portfolio, amounted to $299.8 million or 51.1% of our deposit portfolio,
a decrease of $6.0 million from $305.8 million or 57.7% of total deposits at
June 30, 2002. We believe the changes in our deposit portfolio are due to our
efforts to increase core deposit accounts and balances through targeted
marketing as well as many depositor's unwillingness to extend the maturity of
their certificate accounts into longer-term certificate of deposit accounts in
the current low interest rate environment.
Federal Home Loan Bank Advances. We use advances from the FHLB of
Pittsburgh as an additional source of funds to meet our loan demand, as leverage
to fund certain revenue enhancing investment strategies and for other
asset/liability management purposes. At June 30, 2003, the total amount of these
borrowings outstanding was $132.6 million, which is a $34.7 million or 35.5%
increase from the $97.8 million outstanding at June 30, 2002. During the fiscal
year ended June 30, 2003 the average balance of FHLB advances was $129.6 million
compared to $73.8 million in the year ended June 30, 2002. The maximum amount of
borrowings at any month-end in fiscal 2003 was $139.1 million compared to $100.8
million in fiscal 2002. During the year ended June 30, 2003, the Company prepaid
$17.0 million in FHLB advances. Of the total amount of borrowings outstanding,
$63.1 million and $39.4 million were designated for use to fund revenue
enhancement investment strategies at June 30, 2003 and 2002, respectively. Such
revenue enhancement strategies consist primarily of using FHLB advances as
leverage, that is, the Company obtains advances at a specified interest rate and
then reinvests the proceeds into securities yielding a higher interest rate
resulting in a net differential or "spread" for the Company which increases net
interest income.
Stockholders' Equity. At June 30, 2003, our total stockholders' equity
amounted to $117.1 million or 13.9% of assets compared to $124.4 million or
16.4% of assets at June 30, 2002. This decrease of $7.2 million, or 5.8% was
primarily due to the repurchase of 657,000 shares of stock in the open market at
an aggregate cost of $10.4 million under the Company's stock buyback program,
the purchase of 256,000 shares of Company stock at an aggregate cost of $3.2
million for the Company's 2002 Recognition and Retention Plan ("RRP") Plan which
were partially offset by $500,000 in plan amortization, and cash dividend
payments of $3.1 million. These decreases were partially
39
offset by net income of $7.5 million for fiscal 2003. Other changes in
stockholders' equity for the year ended June 30, 2003 were additional paid-in
capital increasing $1.0 million to $83.5 million primarily as a result of
director and employee stock option exercises, and a $26,000 change in
comprehensive income, which was the result of the change in the unrealized
market value of available for sale securities, and a decrease of $461,000 in
unallocated shares held by Employee Stock Ownership Plan ("ESOP") primarily as a
result of amortization related to the plan which is currently being amortized
over 15 years.
40
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents the average daily balances for various
categories of assets and liabilities, and income and expense related to those
assets and liabilities for the years ended June 30, 2003, 2002 and 2001. The
table also shows the average yields and costs on interest-earning assets and
interest-bearing liabilities for each of the fiscal years and at June 30, 2003.
Loans receivable include non-accrual loans. To adjust nontaxable securities to a
taxable equivalent, a 32.5%, 33.0% and 38.0% effective rate has been used for
the fiscal years ending June 30, 2003, 2002, and 2001, respectively. The
adjustment of tax exempt securities to a tax equivalent yield in the table below
may be considered to include non-GAAP financial information. Management believes
that it is a standard practice in the banking industry to present net interest
margin, net interest rate spread and net interest income on a fully tax
equivalent basis. Therefore, management believes, these measures provide useful
information to investors by allowing them to make peer comparisons. A GAAP
reconciliation also is included below.
At
June 30, For the Year Ended June 30,
2003 2003 2002 2001
------ --------------------------------------------------------------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------ ------ -------- -------- ------ -------- -------- ------ -------- -------- ------
Interest-earning assets:
Loans receivable:
Real estate loans 6.85% $434,800 $ 31,252 7.19% $419,327 $ 32,682 7.79% $417,547 $ 33,412 8.00%
Consumer loans 8.01 10,291 498 4.84 10,127 535 5.28 9,091 612 6.73
Commercial business loans 6.39 20,260 1,417 6.99 19,904 1,544 7.76 24,807 2,124 8.56
-------- -------- -------- -------- -------- --------
Total loans 6.83 465,351 33,167 7.13 449,358 34,761 7.74 451,445 36,148 8.01
Securities - taxable 4.49 268,923 12,136 4.51 159,983 9,126 5.70 115,005 7,731 6.72
Securities - nontaxable - adjusted 6.70 17,325 1,090 6.29 7,451 507 6.80 2,751 183 6.65
to a taxable equivalent yield
Other interest-earning assets 0.96 38,789 378 0.97 35,175 581 1.65 10,275 283 2.75
-------- -------- -------- -------- -------- --------
Total interest-earning assets 5.35 790,388 46,771 5.92 651,967 44,975 6.90 579,476 44,345 7.64
Non-interest-earning assets 17,764 13,806 14,078
-------- -------- --------
Total assets $808,152 $665,773 $593,554
======== ======== ========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts 1.00 $104,617 $ 1,317 1.26% $ 80,507 $ 1,346 1.67% $ 62,292 $ 1,464 2.35
Savings accounts 1.05 78,584 923 1.17 65,272 1,175 1.80 53,472 1,102 2.06
Certificates of deposit 3.10 306,565 10,569 3.45 313,117 14,810 4.73 300,064 17,806 5.93
-------- -------- -------- -------- -------- --------
Total deposits 2.22 489,766 12,809 2.62 458,896 17,331 3.78 415,828 20,372 4.90
Total borrowings 3.84 129,633 5,927 4.57 73,830 4,117 5.58 60,201 3,825 6.35
Total escrows 0.34 2,674 10 0.37 2,668 15 0.56 3,151 19 0.60
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 2.54 622,073 18,746 3.01 535,394 21,463 4.01 479,180 24,216 5.05
Non-interest-bearing liabilities:
Non-interest checking 58,703 52,194 45,412
Other 4,648 5,658 5,750
-------- -------- --------
Total liabilities 685,424 593,246 530,342
Total equity 122,728 72,527 63,212
-------- -------- --------
Total liabilities and equity $808,152 $665,773 $593,554
======== ======== ========
Net interest-earning assets $168,315 $116,573 $100,296
======== ======== ========
Net interest income $ 28,025 $ 23,512 $ 20,129
======== ======== ========
Net interest rate spread 2.91% 2.89% 2.59%
====== ====== ======
Net interest margin 3.55% 3.61% 3.46%
====== ====== ======
Ration of average interest-earning
assets to average interest-bearing
liabilities 127.06% 121.77% 120.93%
====== ====== ======
41
Although management believes that the above mentioned non-GAAP
financial measures enhance investors' understanding of the Company's business
and performance, these non-GAAP financial measures should not be considered an
alternative to GAAP. The reconciliation of these non-GAAP financial measures
from GAAP to non-GAAP is presented below.
(Dollars in thousands) For the Year Ended June 30,
-----------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
Average Average Average
Interest Yield/Cost Interest Yield/Cost Interest Yield/Cost
---------- ---------- ---------- ---------- ---------- ----------
Securities - nontaxable ................... $ 764 4.41% $ 350 4.70% $ 123 4.47%
Tax equivalent adjustments ................ 326 157 60
---------- ---------- ----------
Securities - non taxable to a taxable
equivalent yield ...................... $ 1,090 6.29% $ 507 6.80% $ 183 6.65%
========== ========== ==========
Net interest income ....................... $ 27,699 $ 23,355 $ 20,069
Tax equivalent adjustment ................. 326 157 60
---------- ---------- ----------
Net interest income, tax equivalent ....... $ 28,025 $ 23,512 $ 20,129
========== ========== ==========
Net interest rate spread, no tax adjustment 2.87% 2.86% 2.58%
Net interest margin, no tax adjustment .... 3.50% 3.58% 3.46%
42
Rate/Volume Analysis
The following table shows the effect of changing rates and volumes on
net interest income for the years ended June 30, 2003 and 2002, compared to the
prior fiscal year. Information provided shows the effect on net interest income
of (1) rates (changes in rate multiplied times prior volume), (2) volume
(changes in volume times prior rate) and (3) rate/volume (changes in rate times
change in volume).
Increase (decrease) in net interest income for Increase (decrease) in net interest income for
the year ended June 30, 2003 compared to the year ended June 30, 2002 compared to
the year ended June 30, 2002 due to the year ended June 30, 2001 due to
---------------------------------------------- ----------------------------------------------
Rate/ Increase/ Rate/ Increase/
(Dollars in thousands) Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
- --------------------------------- ---------- ---------- --------- ----------- ---------- ---------- --------- -----------
Interest-earning assets
Loans receivable
Real estate mortgage loans $(2,542) $ 1,206 $ (94) $(1,430) $ (869) $ 142 $ (3) $ (730)
Consumer loans (45) 9 (1) (37) (132) 70 (15) (77)
Commercial business loans (152) 28 (3) (127) (200) (420) 40 (580)
------- ------- ------- ------- ------- ------- ------- -------
Total loans (2,739) 1,243 (98) (1,594) (1,201) (208) 22 (1,387)
Securities (1,897) 6,836 (1,346) 3,593 (1,079) 3,313 (455) 1,779
Other interest-earning assets (238) 60 (25) (203) (114) 687 (275) 298
------- ------- ------- ------- ------- ------- ------- -------
Total net change in income on
interest-earning assets (4,874) 8,139 (1,469) 1,796 (2,394) 3,792 (708) 690
------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities
Deposits
NOW and money market (333) 403 (100) (30) (424) 428 (122) (118)
Savings accounts (408) 240 (84) (252) (139) 243 (31) 73
Certificates of deposit (4,015) (310) 84 (4,241) (3,613) 775 (158) (2,996)
------- ------- ------- ------- ------- ------- ------- -------
Total deposits (4,756) 333 (100) (4,523) (4,176) 1,446 (311) (3,041)
Borrowings (741) 3,112 (560) 1,811 (468) 866 (106) 292
Advance payments for taxes
and insurance (5) -- -- (5) (1) (3) -- (4)
------- ------- ------- ------- ------- ------- ------- -------
Total net change in expense on
interest-bearing liabilities (5,502) 3,445 (660) (2,717) (4,645) 2,309 (417) (2,753)
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income $ 628 $ 4,694 $ (809) $ 4,513 $ 2,251 $ 1,483 $ (291) $ 3,443
------- ------- ------- ------- ------- ------- ------- -------
43
Results of Operations
General. Net income for the year ended June 30, 2003 was $7.5 million
compared to $5.6 million and $157,000 for the years ended June 30, 2002 and
2001, respectively. Fiscal 2003 net income increased compared to fiscal 2002
primarily due to increased net interest income and non-interest income of $4.3
million and $1.0 million, respectively. These were partially offset by increases
in non-interest expense of $2.7 million and income tax expense of $876,000.
Provisions for loan losses aggregating $7.9 million, primarily related to two
non-performing commercial business loans were the primary reason for the results
for fiscal 2001.
Net Interest Income. Net interest income is determined by our interest rate
spread (i.e., the difference between the average yields on interest-earning
assets and the average rates paid on interest-bearing liabilities) and also the
amount of interest-earning assets relative to interest-bearing liabilities. Our
average interest rate spread for the years ended June 30, 2003, 2002 and 2001
was 2.91%, 2.89% and 2.59%, respectively. Our net interest margin (i.e., net
interest income expressed as a percentage of average interest-earning assets)
was 3.55%, 3.61% and 3.46% for the same three fiscal years. The changes in our
interest spread have been due primarily to the fluctuations in market interest
rates whereby rates on our interest-earning assets and interest-bearing
liabilities changed by different amounts and at different times. In fiscal year
2003, the average cost of our interest-bearing liabilities decreased by 100
basis points from 4.01% during fiscal 2002 to 3.01% during fiscal 2003. This
decrease was due primarily to the re-pricing of maturing certificates of
deposits at lower rates. Because our certificates of deposit bear a stated
interest for a specified term to maturity, there usually is a lagging effect on
our cost of funds when market rates of interest change. When interest rates
fall, as they have recently, we continue to pay the higher rate on certificates
of deposit until their maturity at which time they are re-priced to approximate
market conditions at the time of their maturity. During the fiscal year ended
June 30, 2003, the average yield on our interest-earning assets declined by 98
basis points from 6.90% during fiscal 2002 to 5.92% during fiscal 2003. Average
yields on both loans and securities decreased in fiscal 2003. The similar
decline in our average cost of interest-bearing liabilities as compared to the
slightly lesser decline in the average yield on our interest-earning assets
caused our interest rate spread to increase by two basis point to 2.91% for
fiscal 2003 from 2.89% in fiscal 2002. During fiscal 2002 compared to fiscal
2001, the average cost of our interest-bearing liabilities decreased faster than
the decline in average yields on our interest-earning assets. This contributed
to the increase of our spread from 2.59% in fiscal 2001 to 2.89% in fiscal 2002.
Net interest margin for the fiscal year ended June 30, 2003 decreased by six
basis points to 3.55% primarily due to the impact of the decline in yield on our
interest-earning assets more than offsetting the increase in our ratio of
interest-earning assets to interest-bearing liabilities. Average
interest-earning assets increased by $138.4 million in fiscal 2003 compared to
fiscal 2002, and were funded by increases in interest-bearing liabilities of
$86.7 million and $55.7 million of non-interest-bearing liabilities and
stockholders' equity. In fiscal 2002 compared to fiscal 2001, net interest
margin increased 15 basis points, due primarily to increased net interest rate
spread and the increase in the ratio of interest-earning assets to
interest-bearing liabilities. The ratio of average interest-earning assets to
average interest-bearing liabilities was 127.06%, 121.77%, and 120.93% for
fiscal years 2003, 2002 and 2001, respectively.
For the fiscal year ended June 30, 2003, net interest income totaled
$27.7 million compared to $23.4 million and $20.1 million in fiscal 2002 and
2001, respectively. The increase in fiscal 2003 compared to fiscal 2002 of $4.3
million or 18.6% was primarily due to increases in the amount of our average
interest-earning assets compared to average interest-bearing liabilities and to
a lesser degree decreases in rates paid on interest-bearing liabilities. In
fiscal year 2002 compared to fiscal 2001, the increase in net interest income of
$3.3 million or 16.4%, were primarily due to decreases in costs on average
balances of interest-bearing liabilities greater than the decline in yields on
average balances of interest-earning assets.
Interest Income. Interest income includes the interest earned on our
various loans and securities, as well as yield adjustments for the premiums,
discounts and deferred fees or costs recorded in connection with the acquisition
of these assets. Our total interest income for the year ended June 30, 2003 was
$46.4 million compared to $44.8 million and $44.3 million for fiscal 2002 and
2001, respectively.
The increase in interest income in fiscal 2003 compared to 2002 was
$1.6 million, or 3.6%. This increase was primarily due to an increase of $108.9
million in the average balance of securities, which was partially offset by
declining average yields on all of our interest-earning assets. During the year
ended June 30, 2003 compared to the year ended June 30, 2002, the average
balance of our loans receivable increased by $16.0 million. For fiscal 2003, the
yield on average interest-earning assets dropped 98 basis points to 5.92% from
6.90% in fiscal 2002. The major
44
factors for this decline were the decrease in the average yield on loans, which
decreased 61 basis points from 7.74% to 7.13%, and the increase in the average
balance of securities outstanding together with a decline in the average yield
earned on securities from 5.70% to 4.51%. These yield declines were the result
of the current interest rate environment, which has accelerated loan repayments
which have been reinvested in lower yielding assets.
The increase in interest income in fiscal 2002 compared to 2001 was
$533,000, or 1.2%. This increase was primarily due to an increase of $49.7
million in the average balance of securities, which was partially offset by
declining average yields on all our interest earning assets.
Interest Expense. Interest expense consists of the interest paid to our
depositors on their interest-bearing deposit accounts with us, and to a lesser
extent, interest paid on funds borrowed from the FHLB and certain escrow
accounts. For the fiscal year ended June 30, 2003, our total interest expense
was $18.7 million compared to $21.5 million and $24.2 million, for the fiscal
years ended June 30, 2002 and 2001, respectively.
For the fiscal year ended June 30, 2003, interest expense decreased by
$2.8 million, or 12.7% compared to the fiscal year ended June 30, 2002. This
decrease was due to a $4.5 million decrease in interest paid on deposits
primarily attributed to lower rates paid on our deposit accounts and a reduction
in certificates of deposit as a percent of the total deposit portfolio, which
was partially offset by a $1.8 million increase in interest expense on borrowed
money due mostly to larger average balances of borrowings outstanding during the
fiscal year. Compared to fiscal 2002, our average cost of deposits in fiscal
2003 decreased by 116 basis points from 3.78% to 2.62% while the average balance
of interest-bearing deposits increased by $30.9 million from $458.9 million to
$489.8 million. The average balance of borrowings outstanding during fiscal 2003
was $129.6 million compared to $73.8 million in fiscal 2002. The average cost of
these borrowings for fiscal 2003 was 4.57% compared to 5.58% during fiscal 2002.
The primary reason for the $2.7 million, or 11.4%, decrease in interest expense
for the year ended June 30, 2002 compared to fiscal 2001, was due to a $3.0
million decrease in interest paid on deposit accounts which was partially offset
by a $292,000 increase in interest expense on borrowed money. Our average cost
of deposits declined 112 basis points to 3.78% during fiscal 2002 compared to
4.90% during fiscal 2001.
During fiscal year 2003, the average balance of our certificates of
deposit ("CDs") decreased $6.6 million to $306.6 million, a 2.1% decrease
compared to fiscal 2002. At June 30, 2003 and June 30, 2002, CDs made up 51.1%
and 57.7%, respectively, of our total deposits. The average balance on our core
deposit categories (interest and non-interest checking, savings and money market
accounts) increased $43.9 million (22.2%) to $241.9 million during fiscal 2003
compared to an average balance of $198.0 million during fiscal 2002. Interest
rates on core deposits are typically significantly less than rates paid on CDs.
We believe that increasing our core deposits as a percentage of total deposits
should decrease our weighted average cost of funds in a stable interest rate
environment.
Provision for Loan Losses. We establish provisions for loan losses, which
are charges to our operating results, in order to maintain our total allowance
for losses at a level that we deem adequate to absorb known and unknown losses
which are both probable and can be reasonably estimated. Our determination of
the adequacy of the allowance is based upon the Company's regular review of
credit quality and is based upon, but not limited to, the following factors: an
evaluation of our loan portfolio, loss experience, current economic conditions,
volume, growth, composition of the loan portfolio and other relevant factors.
The amount of our allowance for loan loss is only an estimate and actual losses
may vary from these estimates. We assess our allowance for loan loss at least
quarterly and make any necessary adjustment to maintain our allowance for loss
at a level deemed adequate. For the years ended June 30, 2003, 2002 and 2001,
our provisions for loan losses were $1.0 million, $1.2 million and $7.9 million,
respectively. In fiscal 2003, we charged-off a total of $391,000 of loans,
consisting of $103,000 in commercial business loans, $284,000 in mortgage loans,
and $4,000 in consumer loans.
At June 30, 2003, the amount of our allowance for loan losses was $5.3
million compared to $4.6 million at June 30, 2002. We believe that the allowance
for loan losses at June 30, 2003 was appropriate given, among other things, the
continuing growth of certain sectors of our loan portfolio and the inherent
credit risk associated with our loan portfolio diversification into other than
single-family residential loans. The percentage of the allowance for losses to
loans increased to 1.27% at June 30, 2003 compared to 1.03% at June 30, 2002 and
0.94% at June 30, 2001.
45
We believe, to the best of our knowledge, that at such date the
allowance for loan loss was adequate at June 30, 2003 and represents all known
and inherent loses in the portfolio that are both probable and reasonably
estimable, however, no assurance can be given as to the amount or timing of
additional provisions for loan losses in the future as a result of potential
increases in the amount of the Company's non-performing loans in the remainder
of the Company's loan portfolio. Regulatory agencies, in the course of their
regular examinations, review the allowance for loss and carrying value of
non-performing assets. No assurance can be given that these agencies might not
require changes to the allowance for losses in the future. Subsequent to June
30, 2003, the Company became aware that one of its largest commercial business
credits became delinquent. This credit relationship consisted of two loans with
an outstanding balances aggregating $953,000 as of August 31, 2003 and was 123
days delinquent. The Company is carefully monitoring these loans and understands
that the borrower is experiencing financial difficulties. Management believes
that certain additional provisions to loan losses may be necessary in the
quarter ending September 30, 2003 due to these loans.
Non-Interest Income. Non-interest income is comprised of account service
fees and charges, loan servicing fees, realized gains and losses on assets
available or held for sale and increases in the cash surrender value of bank
owned life insurance ("BOLI"). During fiscal 2003 the Company also recognized a
loss on the disposition of borrowings which reduced its non-interest income.
Total non-interest income for the years ended June 30, 2003, 2002, and 2001 was
$3.5 million, $2.5 million and $1.8 million, respectively. The increase in
non-interest income of $1.0 million or 41.9% for fiscal 2003 compared to fiscal
2002, was due primarily to realized gains on loans held for sale and securities
available for sale and an increase in service fees and charges. Gains on sales
of loans were $1.2 million in fiscal 2003 compared to $519,000 in fiscal 2002
while gains on available for sale securities were $1.7 million in fiscal 2003
compared to $310,000 in fiscal 2002. These increases were the result of our
continuing efforts to sell a portion of the fixed-rate single-family loans we
originate and re-positioning our securities portfolio in our efforts to meet our
asset/liability management strategies. Other asset/ liability strategies
incorporated during the fiscal year ended 2003 included the Company incurring
costs of $1.4 million in penalties associated with the prepayment of $17.0
million in longer term FHLB advances averaging 5.29% with the intent of
benefiting future periods. We had no such penalties in the prior year periods.
During fiscal year 2002, we realized gains on sales of investments amounting to
$437,000, but this was negatively impacted by a $93,000 adjustment on equity
investments in accordance with SFAS 115 whereby unrealized losses deemed to be
other than temporary are recorded as a realized loss. For the year ended June
30, 2003, non-interest income included $63,000 in increased cash surrender value
of BOLI. The Company invested $5.0 million in BOLI in March 2003. BOLI is a bank
owned life insurance policy on the selected group of employees which is used to
help defray employee benefit costs. BOLI is recorded on the consolidated
Statement of Financial Condition at its cash value and changes in the cash
surrender value are recorded in non-interest income. BOLI income is tax-exempt.
Non-Interest Expense. The primary components of non-interest expense are
compensation and employee benefits, occupancy and equipment expenses, data
processing costs, deposit account services and a variety of other expenses. For
the years ended June 30, 2003, 2002, and 2001, non-interest expense totaled
$19.1 million, $16.3 million and $13.9 million, respectively. The primary reason
for the increase in non-interest expenses in fiscal 2003 was due to a $2.4
million increase in compensation and employee benefits.
Compensation and benefits expenses totaled $11.9 million, $9.5 million
and $8.0 million, respectively, for the fiscal years ended June 30, 2003, 2002,
and 2001. Some of the factors affecting the increase in compensation and
benefits include our continued efforts in opening new branches, increased costs
to expand and support our lending function and costs of stock benefit plans that
have increased due to the appreciation of our stock value and the full year
impact of additional allocated shares in both the Employee Stock Option Plan
("ESOP") and the Recognition and Retention Plan ("RRP"). As part of the April
2002 Reorganization, 513,000 shares of our common stock were acquired by the
2002 ESOP trust and the related expense is being recognized over a 15-year
period. ESOP associated benefit expense is based upon the market value of our
stock at the time shares are released over the 15-year term. Due to the
increased number of shares in the ESOP as well as increases in the market value
of our common stock during fiscal 2003, our ESOP expense was $824,000 for June
30, 2003, compared to $338,000 and $138,000 for the years ended June 30, 2002
and 2001, respectively. During fiscal 2003, 236,468 shares were released from
the 2002 RRP trust. Expenses relating to RRP grants were $500,000, $162,000 and
$162,000 for fiscal years 2003, 2002 and 2001, respectively. In January 2003, we
opened our fourteenth branch office in Philadelphia, Pennsylvania and we
incurred full year expenses of $323,000 for our Holland branch office which we
opened in April 2002. At June 30, 2003, we had 245 full and part-time employees
compared to 238 at June 30, 2002.
46
Occupancy and furniture and equipment expenses were $2.5 million, $2.2
million and $1.8 million for the fiscal years ended June 30, 2003, 2002, and
2001, respectively. The $324,000 increase in fiscal 2003 compared to fiscal 2002
was primarily due to our branch expansion. Advertising expenses for fiscal 2003,
2002 and 2001 were $560,000, $567,000 and $404,000, respectively.
For the fiscal years ended June 30, 2003, 2002, and 2001, amortization
of intangible assets was $104,000, $138,000 and $276,000, respectively; data
processing expenses were $705,000, $666,000, and $563,000, respectively, deposit
account service expenses were $822,000, $789,000, and $675,000, respectively,
and professional fees were $456,000, $650,000 and $576,000, respectively. For
the fiscal years ended June 30, 2003, 2002, and 2001, other expenses, which
include miscellaneous operating items, were $1.8 million, $1.6 million and $1.4
million, respectively. Other expenses increased primarily due to our growth and
diversification efforts.
Income Tax Provision/(Benefit). Expense for income taxes amounted to $3.6
million for the year ended June 30, 2003. This compares to a tax expense of $2.7
million, and tax benefit of $32,000 for the years ended June 30, 2001 and 2000,
respectively. A significant reduction in pre-tax income caused by the large
provisions for loan losses that were made in fiscal 2001 was the primary reason
for the variances in our provision for income tax during that year. The
effective tax rates for fiscal 2003, 2002 and 2001 were 32.53%, 33.00% and
(26.00)%, respectively.
Liquidity and Commitments
Our primary sources of funds are from deposits, amortization of loans,
loan and securities prepayments and repayments, interest income from
mortgage-backed securities and other investments, and other funds provided from
operations. While scheduled payments from the amortization of loans and
mortgage-backed securities and maturing investment securities are relatively
predictable sources of funds, deposit flows and loan prepayments can be greatly
influenced by general interest rates, economic conditions and competition. We
also maintain excess funds in short-term, interest-bearing assets that provide
additional liquidity. We have also utilized outside borrowings, primarily from
the FHLB of Pittsburgh as an additional funding source.
We use our liquidity resources to fund existing and future loan
commitments, to fund maturing certificates of deposit and demand deposit
withdrawals, to invest in other interest-earning assets, and to meet operating
expenses. At June 30, 2003, we had outstanding approved loan commitments
totaling $29.0 million and certificates of deposit maturing within the next
twelve months amounting to $195.5 million. Based upon historical experience, we
anticipate that a significant portion of the maturing certificates of deposit
will be reinvested in the Bank.
Due to the interest rate environment during the year ended June 30,
2003, we experienced increases in the amount of prepayments of loans and
mortgage-backed securities as borrowers repaid higher rate loans and refinanced
those loans at lower rates. We also experienced an increase in the amount of
bonds with call provisions having those call provisions exercised by the issuer
so that they could take advantage of a lower borrowing cost. These accelerated
repayments have increased our liquidity.
We recently have also increased our use of borrowings from the FHLB of
Pittsburgh as a cost effective means to obtain funds at varying maturities to
implement some of our asset/liability strategies. Our outstanding borrowings
from the FHLB of Pittsburgh have increased to $132.6 million at June 30, 2003
compared to $97.8 million at June 30, 2002. Under terms of our borrowing
agreement with the FHLB of Pittsburgh, we pledge certain residential mortgage
loans and mortgage-backed securities as well as our stock in the FHLB as
collateral for these advances. At June 30, 2003, we had $290.6 million in
additional borrowing capacity available from the FHLB of Pittsburgh.
We have not used, and currently are not intending to use, any
significant off-balance sheet financing arrangement for liquidity or other
purposes. Our financial assets with off-balance sheet risk are limited to our
obligations to fund loans to borrowers pursuant to existing loan commitments.
Additionally, we have not had any transactions, arrangements or other
relationships with any unconsolidated, limited purpose entities that could
affect our liquidity or capital resources, nor do we, or currently intend to,
engage in trading commodity contracts.
47
We anticipate that we will continue to have sufficient funds and
alternative funding sources to meet our current commitments.
Impact of Inflation and Changing Prices
The financial statements, accompanying notes, and related financial
data presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of our operations. Most of our assets and
liabilities are monetary in nature; therefore, the impact of interest rates has
a greater impact on our performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Item 7A. Quantitative and Qualitative Disclosure of Market Risk
Asset/Liability Management and Interest Rate Risk
The market value of assets and liabilities, as well as future earnings,
can be affected by interest rate risk. Market values of financial assets have an
inverse relationship to rates, i.e., when interest rates rise, the market value
of many of the Company's assets declines and when rates fall, the market value
of many of the Company's assets rise. The primary assets of the Company are
loans to borrowers who often have the ability to prepay their loan. Therefore,
in a falling rate environment, the increase in the market value of the Company's
assets is limited by this option for the borrower to prepay the loan.
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest spread that can be maintained during
fluctuations in prevailing interest rates. Interest rate sensitivity gap ("gap")
is a measure of the difference between interest-earning assets and
interest-bearing liabilities that either mature or re-price within a specified
time period. A gap is considered positive when the amount of interest-earning
assets exceeds the amount of interest-bearing liabilities, and is considered
negative when interest-bearing liabilities exceed interest-earning assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would generally result in an increase in net interest income, and a
positive gap would result in a decrease in net interest income. This is usually
the case; however, interest rates on differing financial instruments will not
always change at the same time or to the same extent.
The following gap table shows the amount as of June 30, 2003 of assets
and liabilities projected to mature or re-price within various time periods.
This table includes certain assumptions we have made that affect the rate at
which loans will prepay and the duration of core deposits. Changes in interest
rates may affect these assumptions which would impact our gap position.
48
0 to 3 3 to 12 1 to 3 3 to 5 over 5
months months years years years Total
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Interest-earning deposits $ 86,956 $ -- $ -- $ -- $ -- $ 86,956
Securities 40,287 62,894 94,497 87,271 24,255 309,205
Fixed-rate loans 5,802 19,548 49,371 51,212 99,041 224,974
Adjustable rate loans 27,316 50,322 47,330 57,387 17,739 200,094
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 160,361 132,764 191,198 195,870 141,036 821,229
--------- --------- --------- --------- --------- ---------
Certificates of deposit $ 52,249 $ 143,255 $ 82,075 $ 16,644 $ 5,571 $ 299,794
Other interest-bearing deposits 10,631 32,055 86,685 87,897 -- 217,268
FHLB advances 6,155 18,822 52,917 54,663 -- 132,557
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 69,034 194,132 221,677 159,205 5,571 649,619
--------- --------- --------- --------- --------- ---------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 91,326 $ (61,368) $ (30,479) $ 36,666 $ 135,465 $ 171,610
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 91,326 $ 29,959 $ (520) $ 36,145 $ 171,610 $ 343,221
Cumulative excess (deficiency) of
interest-earning assets to
interest-bearing liabilities as a
percent of total assets 10.81% 3.54% -0.06% 4.28% 20.31% 40.61%
Ratio of interest-earning assets to
interest-bearing liabilities 232.29% 68.39% 86.25% 123.03% 2531.72% 126.42%
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 232.29% 111.38% 99.89% 105.61% 126.42%
At June 30, 2003, the ratio of the cumulative interest-earning assets
maturing or re-pricing in one-year or less to interest-bearing liabilities
maturing or re-pricing in one-year or less is 111.38%, which results in a
cumulative one-year gap to total assets ratio of 3.54%.
We have adopted asset/liability management policies designed to
quantify the interest rate risk caused by mismatches in the maturities and
re-pricing of our interest-earning assets and interest-bearing liabilities.
These interest rate risk and asset/liability management actions are taken under
the guidance of the Asset/Liability Management Committee ("ALCO"). The ALCO's
purpose is to communicate, coordinate and control asset/liability management
consistent with our business plan and Board approved policies. The objective of
the ALCO is to manage assets and funding sources to produce results that are
consistent with liquidity, capital adequacy, growth, risk and profitability
goals. The ALCO meets at least quarterly and monitors the volume and mix of
assets and funding sources taking into account the relative costs and spreads,
the interest rate sensitivity gap and liquidity needs. The ALCO also reviews
economic conditions and interest rate projections, current and projected
liquidity needs and capital positions, anticipated changes in the mix of assets
and liabilities, and interest rate exposure limits versus current projections
pursuant to gap analysis and interest income simulations. At each meeting, the
ALCO recommends changes in strategy as appropriate. Interest rate risk issues
are also discussed by the Board of Directors
49
on a regular basis. Management meets weekly to monitor progress in achieving
asset/liability targets approved by the Board, particularly the type and rate on
asset generation and sources of funding.
In order to manage our assets and liabilities and improve our interest
rate risk position, emphasis has been placed on the origination of assets with
shorter maturities or adjustable rates such as commercial and multi-family real
estate loans, construction loans, home equity loans and to a lesser extent
commercial business loans. At the same time, other actions include attempts to
increase our core deposits and the use of FHLB advances as additional sources of
funds. We also classify a portion of the longer-term fixed rate loans we
originate as held for sale. During the years ended June 30, 2003 and 2002, we
sold long-term, generally 30 year, fixed rate single-family residential mortgage
loans totaling $74.8 million and $77.8 million, respectively.
The ALCO regularly reviews interest rate risk by, among other things,
examining the impact of alternative interest rate environments on net interest
income and net portfolio value ("NPV"), and the change in NPV. NPV is the
difference between the market value of assets and the market value of
liabilities and off-balance sheet items under various interest rate scenarios.
Sensitivity is the difference (measured in basis points) between the NPV to
assets ratio at market rate and the NPV to assets ratio determined under each
rate scenario. The ALCO monitors both the NPV and sensitivity according to
guidelines established by the Office of Thrift Supervision ("OTS") in Thrift
Bulletin 13A "Management of Interest Rate Risk, Investment Securities and
Derivative Activities," and board approved limitations.
Presented below, as of June 30, 2003 and 2002, is an analysis of the
interest rate risk position as measured by NPV and sensitivity based upon
various rate scenarios. These values have been obtained from data submitted by
the Bank to the OTS. The OTS performs scenario analysis to estimate current or
base case economic value and estimates NPV that would result from instantaneous,
parallel shifts of the yields on various financial instruments of plus and minus
100, 200 and 300 basis points. The model does not value new business activities.
It only provides an estimate of economic value at a point in time and the
economic value of the same portfolio under the above referenced interest rate
scenarios.
Estimated change in NPV and Sensitivity
At June 30, 2003
Net Portfolio Value
---------------------------------------------
Amount of Percent of To
change change assets Sensitivity
------ ------ ------ -----------
(in thousands)
Hypothetical change in interest rates
up 300 basis points $(25,510) (25)% 9.40% (257)bp
up 200 basis points (16,491) (16) 10.33 (164)
up 100 basis points (8,163) (8) 11.17 (80)
no change - base case -- -- 11.97 --
down 100 basis points 4,774 5 12.42 45
down 200 basis points n/a n/a n/a n/a
down 300 basis points n/a n/a n/a n/a
Due to the level of current interest rates, no values are calculated
for hypothetical rate scenarios of down 200 or down 300 basis points.
50
Estimated change in NPV and Sensitivity
At June 30, 2002
Net Portfolio Value
---------------------------------------------
Amount of Percent of To
change change assets Sensitivity
------ ------ ------ -----------
(in thousands)
Hypothetical change in interest rates
up 300 basis points $(48,118) (45)% 8.12% (556)bp
up 200 basis points (32,180) (30) 10.05 (362)
up 100 basis points (15,623) (15) 11.96 (172)
no change - base case -- -- 13.68 --
down 100 basis points 9,613 9 14.68 100
down 200 basis points n/a n/a n/a n/a
down 300 basis points n/a n/a n/a n/a
The Bank's sensitivity in the plus 200 basis point rate scenario
improved from negative 362 basis points at June 30, 2002 to negative 164 points
at June 30, 2003. The primary reasons for this improvement were increases in the
estimates of prepayments due to the general level of interest rates which
shortened the projected lives of mortgage-related assets and also higher levels
of cash and short-term investments.
NPV is more sensitive and may be more negatively impacted by rising
interest rates than by declining rates. This occurs primarily because as rates
rise, the market value of long-term fixed rate assets, like fixed rate mortgage
loans, declines due to both the rate increase and slowing prepayments. When
rates decline, these assets do not experience similar appreciation in value.
This is due to the decrease in the duration of the asset resulting from the
increase in prepayments.
Recent Accounting Pronouncements
Acquisitions of Certain Financial Institutions
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
within the scope of this Statement. In addition, this Statement amends Statement
No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that Statement
No. 144 requires for other long-lived assets that are held and used.
Effective September 30, 2002 the Company adopted Statement No. 147 with
retroactive application effective June 30, 2001. With the adoption of Statement
No. 147 an adjustment to fiscal 2002 statements is included to eliminate the
accumulated amortization associated with the retroactive adjustment. The results
of this adjustment was an increase in income, for an average of $23,000, net of
taxes, for each quarter and $92,000, net of taxes, for fiscal year ended June
30, 2002. The Company continues to conduct periodic impairment assessment of its
goodwill. At June 30, 2003 the Company determined that its goodwill of $848,000
was not impaired and, correspondingly, no adjustment to earnings was required.
51
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FASB Interpretation No. 45)
Requires a guarantor to include disclosure of certain obligations, and if
applicable, at the inception of the guarantee, recognize a liability for the
fair value of other certain obligations undertaken in issuing a guarantee.
Effective for financial statements ending March 31, 2003 and thereafter. The
provisions of this Statement had no expected impact on earnings, financial
condition or stockholders' equity.
Consolidation of Variable Interest Entities- an interpretation of ARB No. 51
(FASB Interpretation No. 46)
Clarifies the application of ARB No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. Applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that is
acquired before February 1, 2003. Applies to nonpublic enterprises as of the end
of the applicable annual period. Requires that an enterprise review its degree
of involvement in a variable interest entity to determine of it is the primary
beneficiary of that entity. The provisions of this Statement have no expected
impact on earnings, financial condition or stockholders' equity.
Stock-Based Compensation
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123." This statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The Statement also amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement is
effective for fiscal years ending after December 15, 2002. This Statement
announces that "in the near future, the Board plans to consider whether it
should propose changes to the U.S. standards on accounting for stock-based
compensation." The provisions of this Statement have no expected impact on
earnings, financial condition or stockholders' equity.
Amendments of Statement 133 on Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including derivatives embedded
in other contracts and hedging activities. This Statement amends Statement No.
133 for decisions made by the FASB as part of its Derivatives Implementation
Group process. This Statement also amends Statement No. 133 to incorporate
clarifications of the definition of a derivative. This Statement is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003. The provisions of this Statement have no expected impact on
earnings, financial condition or stockholders' equity.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Some of the provisions of
this Statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the
52
issuer. For nonpublic entities, mandatorily redeemable financial instruments are
subject to the provisions of this Statement for the first fiscal period
beginning after December 15, 2003. The provisions of this Statement have no
expected impact on earnings, financial condition or stockholders' equity.
Selected Quarterly Financial Data
The following table presents selected quarterly operating data for the
fiscal years ended June 30, 2003 and 2002. Per share data for periods prior to
April 3, 2002 have been adjusted to reflect the effect of the exchange of
2.28019 shares of the former Willow Grove Bancorp, Inc. common stock for each
share of our common stock as a result of the April 2002 Reorganization.
(Unaudited) For the quarter ended
6/30/03 3/31/03 12/31/02 9/30/02
-------- -------- -------- --------
(Dollars in thousands, except per share data)
Total interest income $ 10,674 $ 11,484 $ 12,034 $ 12,253
Total interest expense 4,366 4,524 4,783 5,073
Net interest income 6,308 6,960 7,251 7,180
Provision for loan losses 172 110 422 330
Total non-interest income 1,530 817 650 495
Total non-interest expense 5,047 4,787 4,632 4,592
Income tax expense 806 943 933 928
Net income $ 1,813 $ 1,937 $ 1,914 $ 1,825
Earnings per share
Basic $ 0.18 $ 0.19 $ 0.19 $ 0.17
Diluted $ 0.17 $ 0.18 $ 0.18 $ 0.17
For the quarter ended
6/30/02 3/31/02 12/31/01 9/30/01
-------- -------- -------- --------
(Dollars in thousands, except per share data)
Total interest income $ 11,637 $ 10,649 $ 11,014 $ 11,518
Total interest expense 4.980 4,913 5,536 6,034
Net interest income 6,657 5,736 5,478 5,484
Provision for loan losses 118 100 620 374
Total non-interest income 406 561 958 536
Total non-interest expense 4,487 4,154 3,893 3,785
Income tax expense 817 655 641 621
Net income $ 1,641 $ 1,388 $ 1,282 $ 1,240
Earnings per share
Basic $ 0.17 $ 0.13 $ 0.12 $ 0.11
Diluted $ 0.16 $ 0.13 $ 0.12 $ 0.11
53
Item 8. Financial Statements and Supplementary Data
Page
----
Management's Responsibility for Financial Reporting. 55
Independent Auditors' Report.................................. 56
Consolidated Statements of Financial Condition................ 57
Consolidated Statements of Income............................. 58
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income............................... 59
Consolidated Statements of Cash Flows......................... 60-61
Notes to Consolidated Financial Statements.................... 62-87
54
Willow Grove Bancorp, Inc.
MANAGEMENT REPORT
Financial Statements
- --------------------
Willow Grove Bancorp, Inc. (the "Company") and its wholly owned subsidiary,
Willow Grove Bank (the "Bank") are responsible for the preparation, integrity
and fair presentation of its published financial statements as of June 30, 2003
and 2002 and for each of the years in the three-year period ended June 30, 2003.
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, and as such,
include amounts, some of which are based on judgments and estimates of
management.
Internal Control Over Financial Reporting
- -----------------------------------------
Management of the Company and the Bank are responsible for establishing and
maintaining effective internal control over financial reporting presented in
conformity with both accounting principles generally accepted in the United
States of America. The Bank's financial statements also are subject to
regulations established by the Office of Thrift Supervision (the "OTS"). This
internal control contains monitoring mechanisms, and actions are taken to
correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal controls can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may vary
over time.
Management assessed the Company and the Bank's internal control over financial
reporting presented in conformity with both accounting principles generally
accepted in the United States of America and, with respect to the Bank, OTS
regulations and the instructions for the Thrift Financial Reports ("TFR") as of
June 30, 2003. This assessment was based on criteria for effective internal
control over financial reporting described in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that, as of June 30,
2003, The Company and the Bank maintained effective internal control over
financial reporting presented in conformity with generally accepted accounting
principles and that the Bank's internal control over financial reporting was in
compliance with the OTS regulations and TFR instructions.
Compliance With Laws And Regulations
- ------------------------------------
Management assessed the Bank's compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that Willow Grove Bank complied, in all significant
respects, with the designated laws and regulations relating to safety and
soundness for the year ended June 30, 2003.
/s/ Frederick A. Marcell Jr. /s/ Christopher E. Bell
- ------------------------------------- ---------------------------------
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
July 24, 2003
55
Independent Auditors' Report
To the Board of Directors and Stockholders of
Willow Grove Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Willow Grove Bancorp, Inc. and subsidiary as of June 30, 2003 and 2002, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2003. These consolidated financial statements are the
responsibility of the Company'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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 Willow Grove
Bancorp, Inc. and subsidiary as of June 30, 2003 and 2002 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
- ---------------------------
Philadelphia, Pennsylvania
July 24, 2003
56
Willow Grove Bancorp, Inc.
Consolidated Statements of Financial Condition
At At
(Dollars in thousands, except share data) June 30, 2003 June 30, 2002
- ---------------------------------------------------------------------------- ------------- -------------
Assets
Cash and cash equivalents:
Cash on hand and non-interest-earning deposits $ 11,084 $ 5,710
Interest-earning deposits 86,956 26,276
------------- -------------
Total cash and cash equivalents 98,040 31,986
Securities
Available for sale (amortized cost of $288,893 and $251,651, respectively) 291,885 254,687
Held to maturity (fair value of $17,995 and $14,117, respectively) 17,320 13,973
Loans (net of allowance for loan losses of $5,312 and $4,626, respectively) 413,799 443,855
Loans held for sale 5,293 1,574
Accrued income receivable 3,520 4,138
Property and equipment, net 6,364 6,515
Intangible assets 1,021 1,126
Other assets 7,882 1,952
------------- -------------
Total assets $ 845,124 $ 759,806
============= =============
Liabilities and Stockholders' Equity
Deposits $ 586,643 $ 529,752
Federal Home Loan Bank advances 132,557 97,824
Advance payments from borrowers for taxes 2,904 3,605
Accrued interest payable 933 868
Other liabilities 4,957 3,388
------------- -------------
Total liabilities 727,994 635,437
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; (40,000,000 authorized; 11,363,613 and
11,285,096 issued at June 30, 2003 and 2002, respectively) 114 113
Additional paid-in capital 83,542 82,521
Retained earnings -- substantially restricted 51,049 46,708
Accumulated other comprehensive income 1,855 1,881
Treasury stock at cost, 656,700 shares at June 30, 2003 (10,356) --
Unallocated common stock held by
Employee Stock Ownership Plan (ESOP) (5,959) (6,420)
Recognition and Retention Plan Trust (RRP) (3,115) (434)
------------- -------------
Total stockholders' equity 117,130 124,369
------------- -------------
Total liabilities and stockholders' equity $ 845,124 $ 759,806
============= =============
See accompanying Notes to Consolidated Financial Statements
57
Willow Grove Bancorp, Inc.
Consolidated Statements of Income
For the year ended
(Dollars in thousands, except per share data) June 30, 2003 June 30, 2002 June 30, 2001
- --------------------------------------------------- ------------- ------------- -------------
Interest and dividend income:
Loans $ 33,167 $ 34,761 $ 36,148
Securities, primarily taxable 13,278 10,057 8,137
------------- ------------- -------------
Total interest income 46,445 44,818 44,285
------------- ------------- -------------
Interest expense:
Deposits 12,809 17,331 20,372
Borrowings 5,927 4,117 3,825
Advance payments from borrowers for taxes 10 15 19
------------- ------------- -------------
Total interest expense 18,746 21,463 24,216
------------- ------------- -------------
Net interest income 27,699 23,355 20,069
Provision for loan losses 1,034 1,212 7,856
------------- ------------- -------------
Net interest income after provision for loan losses 26,665 22,143 12,213
------------- ------------- -------------
Non-interest income:
Service charges and fees 1,823 1,572 1,340
Realized gain (loss) on sale of:
Loans held for sale 1,194 519 381
Securities available for sale 1,712 310 (15)
Increase in cash surrender value of life insurance 63 -- --
Loss on disposition of borrowings (1,407) -- --
Loan servicing income, net 107 60 81
------------- ------------- -------------
Total non-interest income 3,492 2,461 1,787
------------- ------------- -------------
Non-interest expense:
Compensation and employee benefits 11,915 9,472 8,004
Occupancy 1,463 1,270 1,087
Furniture and equipment 1,025 894 670
Federal insurance premium 88 89 88
Amortization of intangible assets 104 138 276
Data processing 705 666 563
Advertising 560 567 404
Community enrichment 150 173 150
Deposit account services 822 789 675
Professional fees 456 650 576
Other expense 1,770 1,611 1,382
------------- ------------- -------------
Total non-interest expense 19,058 16,319 13,875
------------- ------------- -------------
Income before income taxes 11,099 8,285 125
Income tax expense (benefit) 3,610 2,734 (32)
------------- ------------- -------------
Net Income $ 7,489 $ 5,551 $ 157
============= ============= =============
Earnings per share:
Basic $ 0.75 $ 0.53 $ 0.01
Diluted $ 0.71 $ 0.52 $ 0.01
See accompanying Notes to Consolidated Financial Statements
58
Willow Grove Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
Accumulated Common
other stock
Additional comprehensive acquired by
Common paid in Retained income Treasury benefit Total
(Dollars in thousands, except per share data) stock capital earnings (loss) stock plans Equity
- ----------------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
Balance - June 30, 2000 51 22,270 43,291 (2,340) (211) (2,418) 60,643
Net income -- -- 157 -- -- -- 157
Other comprehensive income -- -- -- 2,311 -- -- 2,311
ESOP shares committed to be released -- 18 -- -- -- 119 137
Amortization of RRP shares -- (23) -- -- -- 186 163
Treasury stock acquired (206,500 shares at cost) -- -- -- -- (2,140) -- (2,140)
Cash dividends paid - ($0.19 per share) -- -- (914) -- -- -- (914)
--------- --------- --------- --------- --------- --------- ---------
Balance - June 30, 2001 $ 51 22,265 42,534 (29) (2,351) (2,113) $ 60,357
Net income -- -- 5,551 -- -- -- 5,551
Other comprehensive income -- -- -- 1,910 -- -- 1,910
Issuance of 6,414,125 $.01 par shares of common stock 64 64,077 -- -- -- -- 64,141
Exchange of common stock due to reorganization (2) 3 -- -- -- -- 1
Payment of Deferred Acquisition Costs -- (1,788) -- -- -- -- (1,788)
Common stock (513,130 shares) acquired by ESOP -- -- -- -- -- (5,131) (5,131)
MHC Capital Consolidation -- 97 -- -- -- -- 97
Exercise of Stock Options -- 6 -- -- -- -- 6
ESOP shares committed to be released -- 133 -- -- -- 205 338
Amortization of RRP shares -- (24) -- -- -- 185 161
Treasury stock acquired (195,000 shares at cost) -- -- -- -- 104 -- 104
Treasury stock retired -- (2,247) -- -- 2,247 -- --
Cash dividends paid - ($0.24 per share) -- -- (1,378) -- -- -- (1,378)
--------- --------- --------- --------- --------- --------- ---------
Balance - June 30, 2002 $ 113 82,522 46,707 1,881 -- (6,854) $ 124,369
--------- --------- --------- --------- --------- --------- ---------
Net income -- -- 7,489 -- -- -- 7,489
Other comprehensive loss -- -- -- (26) -- -- (26)
Exercise of Stock Options 1 335 -- -- -- -- 336
ESOP shares committed to be released -- 361 -- -- -- 461 822
Common stock (256,565 shares) acquired by RRP -- -- -- -- -- (3,194) (3,194)
Amortization of RRP shares -- (13) -- -- -- 513 500
Treasury stock acquired (656,700 shares at cost) -- -- -- -- (10,356) -- (10,356)
Tax benefit -- 337 -- -- -- -- 337
Cash dividends paid - ($0.30 per share) -- -- (3,147) -- -- -- (3,147)
--------- --------- --------- --------- --------- --------- ---------
Balance - June 30, 2003 $ 114 83,542 51,049 1,855 (10,356) (9,074) $ 117,130
--------- --------- --------- --------- --------- --------- ---------
For the year ended June 30,
-------------------------------
2003 2002 2001
--------- --------- ---------
Net unrealized (losses) gains on securities available for sale arising during the period $ (1,738) $ 2,220 $ 2,326
Less: reclassifications adjustment for gains (losses) included in net income 1,712 310 (15)
--------- --------- ---------
Other comprehensive (loss) income (26) 1,910 2,311
Net income 7,489 5,551 157
--------- --------- ---------
Comprehensive income $ 7,463 $ 7,461 $ 2,468
--------- --------- ---------
See accompanying Notes to consolidated financial statements.
59
Willow Grove Bancorp, Inc.
Consolidated Statements of Cash Flows
For the year ended June 30,
---------------------------------------
(Dollars in thousands) 2003 2002 2001
- --------------------------------------------------- --------- --------- ---------
Net cash flows from operating activities:
Net income $ 7,489 $ 5,551 $ 157
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 959 883 722
Amortization of premium and accretion
of discount, net 1,173 228 (283)
Amortization of intangible assets 104 138 277
Provision for loan losses 1,034 1,212 7,856
Gain on sale of loans available for sale (1,194) (519) (381)
Gain (loss) on sale of securities available for sale (1,712) (310) 15
Increase (decrease) in deferred loan fees 331 71 (109)
Decrease (increase) in accrued income receivable 618 (471) (872)
Increase (decrease) in other assets (5,548) 1,495 (2,371)
Increase (decrease) in accrued interest payable 65 (278) (328)
Increase (decrease) in other liabilities 1,569 537 (56)
Expense of ESOP and RRP 1,324 501 300
Modifications of Debt Expense 1,407 -- --
Originations and purchases of
loans available for sale (77,339) (76,188) (59,477)
Proceeds from sale of loans available for sale 74,814 77,777 92,967
--------- --------- ---------
Net cash provided by operating activities 5,094 10,627 38,417
--------- --------- ---------
Cash flows from investing activities:
Net decrease (increase) in loans 28,913 9,061 (37,152)
Purchase of securities available for sale (267,981) (247,796) (112,926)
Purchase of securities held to maturity (3,961) -- --
Proceeds from sales, calls and maturities
of securities available for sale 153,163 83,947 42,705
Proceeds from sales, calls and maturities
of securities held to maturity 600 -- --
Principal repayments of securities
available for sale 78,130 28,655 14,374
Proceeds from sale of other
real estate owned 85 157 147
Purchase of property and equipment (808) (1,210) (678)
--------- --------- ---------
Net cash used in investing activities (11,859) (127,186) (93,530)
--------- --------- ---------
See accompanying notes to consolidated financial statements.
60
Willow Grove Bancorp, Inc.
Consolidated Statements of Cash Flows - Continued
For the year ended June 30,
---------------------------------------
(Dollars in thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------- --------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 56,891 32,722 44,173
Net increase in advances
with original maturity less than 90 days 5,000 -- 3,000
Increase in FHLB advances with
original maturity greater than 90 days 68,250 59,000 51,000
Repayment of FHLB advances with
original maturity greater than 90 days (39,924) (21,061) (31,632)
Net Decrease in advance
payments from borrowers for taxes (701) (274) (846)
Dividends paid (3,147) (1,378) (914)
Acquisition of stock for Recognition
and Retention Plan (3,194) -- --
Stock subscription orders -- 80,404 --
Return of subscription orders -- (21,393) --
Repayment of stock subscription expenses -- (1,788) --
Purchase of treasury stock (10,356) 104 (2,140)
--------- --------- ---------
Net cash provided by financing activities 72,819 126,336 62,641
--------- --------- ---------
Net increase in cash and cash equivalents 66,054 9,777 7,528
Cash and cash equivalents:
Beginning of year 31,986 22,209 14,681
--------- --------- ---------
End of year $ 98,040 $ 31,986 $ 22,209
========= ========= =========
Supplemental disclosures of cash and cash flow information
Interest paid $ 18,681 $ 21,741 $ 24,544
Income taxes paid $ 2,454 $ 1,239 $ 2,275
Noncash items:
Change in unrealized (loss) gain on securities
available for sale (net of taxes of $16, $1,172, and ($1,423)
in 2003, 2002 and 2001, respectively) (26) 1,910 2,311
Loans transferred to other real estate owned 391 -- --
See accompanying notes to consolidated financial statements.
61
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Description of Business
Willow Grove Bancorp, Inc. (the "Company") provides a full range of banking
services through its wholly-owned subsidiary, Willow Grove Bank (the "Bank" or
"Willow Grove") which has 14 branches in Dresher, Willow Grove, Maple Glen,
Warminster (2), Hatboro, Huntington Valley, Roslyn, Philadelphia (3 - Somerton,
Rhawnhurst and Bustleton), North Wales, Southampton and Holland, Pennsylvania.
All of the branches are full-service and offer commercial and retail banking
products and services. These products include checking accounts (interest and
non-interest bearing), savings accounts, certificates of deposit, business
loans, real estate loans, and home equity loans. The Company is subject to
competition from other financial institutions and other companies that provide
financial services. The Company is subject to the regulations of certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
On April 3, 2002 Willow Grove Bank completed its reorganization from the
two-tier mutual holding company form of organization to the stock form of
organization (the "April 2002 Reorganization"). The former Willow Grove Bancorp,
Inc. was a federally chartered mid-tier mutual holding company with
approximately 56.9% of its stock being held by Willow Grove Mutual Holding
Company and the remaining 43.1% being held by public shareholders. As part of
the April 2002 Reorganization, the former Willow Grove Bancorp, Inc., the
federal corporation was merged into Willow Grove Bank and the current Willow
Grove Bancorp Inc., a Pennsylvania corporation was incorporated by the Bank for
the purpose of becoming the holding company for the Bank. Willow Grove Bancorp,
Inc., the new Pennsylvania corporation through a public subscription offering
sold 6,414,125 shares of stock at $10.00 per share and issued 4,869,375 to the
stockholders of Willow Grove Bancorp, Inc., the former federal corporation which
represented an exchange of 2.28019 shares of its stock for each share of the
former company. Willow Grove Bank is now the wholly-owned subsidiary of Willow
Grove Bancorp, Inc., the Pennsylvania corporation. All per share data and
information prior to April 3, 2002 refers to the former Willow Grove Bancorp,
Inc., the federal corporation and has been restated to reflect the effect of the
increased shares resulting from the share issuance and exchange in the April
2002 Reorganization. The stock has traded under the symbol "WGBC" for both the
former federal corporation and the current Pennsylvania corporation.
In September 2000, Willow Grove Investment Corporation ("WGIC"), a Delaware
corporation was formed as a wholly owned subsidiary of the Bank to conduct the
investment activities of the Bank. In May 2003, Willow Grove Insurance Agency,
LLC (the "Agency"), a Pennsylvania limited liability company was formed by the
Bank to conduct permitted fixed rate annuity transaction activities for the
Bank.
Basis of Financial Statement Presentation
The Company has prepared its accompanying consolidated financial statements in
accordance with generally accepted accounting principles ("GAAP") as applicable
to the banking industry. Certain amounts in prior years are reclassified for
comparability to current year's presentation. Such reclassifications, when
applicable have no effect on net income. The consolidated financial statements
include the balances of the Company and its wholly owned subsidiary. All
material inter-company balances and transactions have been eliminated in
consolidation.
In preparing the consolidated financial statements, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenue
and expense for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term include the determination of the allowance for loan
losses.
Risks and Uncertainties
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk, and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or re-price at different speeds, or on a different basis from
its interest-earning assets. The Company's primary credit risk is the risk of
default on the Company's loan portfolio that results from the borrower's
inability to make contractually required payments. The
62
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
Company's lending activities are concentrated in Pennsylvania. The largest
concentration of the Company's loan portfolio is located in eastern
Pennsylvania. The ability of the Company's borrowers to repay amounts owed is
dependent on several factors, including the economic conditions in the
borrower's geographic region and the borrower's financial condition. Market risk
reflects changes in the value of collateral underlying loans, the valuation of
real estate held by the Company, the valuation of loans held for sale,
securities available for sale and mortgage servicing assets. The Company is
subject to certain regulations as further described herein and in note 12.
Compliance with regulations causes the Company to incur significant costs. In
addition, the possibility of future changes to such regulations presents the
risk that future costs will be incurred which may impact the Company.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include
cash and interest- bearing deposits with original maturities of three months or
less.
The Company is required to maintain certain daily balances in accordance with
Federal Reserve Bank requirements. The reserve balances maintained in accordance
with such requirements at June 30, 2003 and 2002 were $7.9 million and $6.5
million, respectively. Such reserve requirements are satisfied through a
combination of vault cash balances and sterile reserve deposits held at the
Federal Home Loan Bank of Pittsburgh.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or market calculated on an aggregate basis, with
any unrealized losses reflected in the statement of income. Loans transferred
from loans held for sale to loans receivable are transferred at the lower of
cost or market value at the date of transfer.
Securities
The Company divides its securities portfolio into two segments: (a) held to
maturity and (b) available for sale. Securities in the held to maturity category
are carried at cost, adjusted for amortization of premiums and accretion of
discounts, using the level yield method, based on the Company's intent and
ability to hold the securities until maturity. Marketable securities included in
the available for sale category are carried at fair value, with unrealized gains
or losses which are temporary in nature, net of taxes, reflected as an
adjustment to equity. Unrealized losses which are other than temporary in nature
are reflected in the statement of operations. The fair value of marketable
securities for sale is determined from publicly quoted market prices. Securities
available for sale which are not readily marketable, which include Federal Home
Loan Bank of Pittsburgh stock, are carried at cost which approximates
liquidation value. Premiums and discounts on securities are amortized/accreted
using the interest method.
At the time of purchase, the Company makes a determination of whether or not it
will hold the securities to maturity, based upon an evaluation of the
probability of future events. Securities, which the Company believes may be
involved in interest rate risk, liquidity, or other asset/liability decisions,
which might reasonably result in such securities not being held to maturity, are
classified as available for sale. If securities are sold, a gain or loss is
determined by the specific identification method and is reflected in the
operating results in the period the trade occurs.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level we believe is adequate to
cover known and inherent losses in the loan portfolio that are both probable and
reasonable to estimate at each reporting date. Our determination of the adequacy
of the allowance is based upon an evaluation of the portfolio, loss experience,
current economic conditions, volume, growth, composition of the portfolio, and
other relevant factors. With the expansion of our lending activities into
commercial real estate, business and other consumer loans in recent years, we
consider industry-wide loss experience in our process when we determine the
adequacy of our allowance for loan losses. We believe that due to the changing
mix of our loan portfolio and our relative lack of historical loss experience
with these types of loans, considering loan loss data from other banking
institutions with loan portfolios similar to ours and in a similar geographic
setting will provide us with a more representative approach to evaluating the
credit risks
63
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
in our loan portfolio. During the year ended June 30, 2001, based upon a more
detailed stratification of the loan portfolio, we modified the formulas we use
to calculate the allowance on various loan types. In some cases, such as
business lending and home equity lending where the combined LTV exceeds 80%, the
percentage used to calculate the allowance was increased. In other cases, such
as single-family first mortgage lending with LTVs below 60%, the percentage used
was decreased. The overall effect of this modification did not materially impact
the amount of the allowance for loan loss. During the fiscal year ended June 30,
2002 we modified the methodology for calculating the allowance for loan loss
based upon the guidance provided by the SEC and the Federal Financial
Institutions Examination Council ("FFIEC"). We continue to use historical loss
factors for each loan type and for loans that we consider higher risk for all
but single-family mortgage loans and guaranteed consumer loans, we now add a
component for factors that may not be included in the historical loss
calculation. This component establishes a range for factors such as, but not
limited to, delinquency trends, asset classification trends and current economic
conditions. Management then assesses these conditions and establishes, to the
best of its ability, the allowance for loan loss from within the range
calculated, based upon the facts known at that time. At June 30, 2003, our
allowance for loan loss was in the lower quartile of the range established by
this methodology. The result of this change in methodology is to allocate the
entire allowance for loan loss to specific loan types, whereas prior methodology
had an unallocated component. The change in methodology does not imply that any
portion of the allowance for loan loss is restricted, but the allowance for loan
loss applies to the entire loan portfolio.
Mortgage Servicing Rights
The Company recognizes mortgage servicing rights as assets, regardless of how
such assets were acquired. Impairment of mortgage servicing rights is assessed
based upon a fair market valuation of those rights on a disaggregated basis.
Impairment, if any, is recognized in the statement of income. There was no
impairment in the mortgage servicing rights for the years ended June 30, 2003,
2002 and 2001 (see note 5).
Loans, Loan Origination Fees, and Uncollected Interest
Loans are recorded at cost, net of unearned discounts, deferred fees, and
allowances. Discounts or premiums on purchased loans are amortized using the
interest method over the remaining contractual life of the portfolio, adjusted
for actual prepayments. Loan origination fees and certain direct origination
costs are deferred and amortized over the contractual life of the related loans
using the level yield method.
Interest receivable on loans is accrued to income as earned. Non-accrual loans
are loans on which the accrual of interest has ceased because the collection of
principal or interest payments is determined to be doubtful by management. It is
the policy of the Company to discontinue the accrual of interest and reverse any
accrued interest when principal or interest payments are delinquent more than 90
days (unless the loan principal and interest are determined by management to be
fully secured and in the process of collection), or earlier if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the terms of the loan.
Interest income on such loans is not accrued until the financial condition and
payment record of the borrower demonstrates the ability to service the debt.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. The Company computes depreciation and amortization using the
straight-line method over the estimated useful lives of the assets which range
from three to 40 years. Significant renovations and additions are capitalized.
Leasehold improvements are depreciated over the shorter of the useful lives of
the assets or the related lease term. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income for the period.
The cost of maintenance and repairs is charged to expense as incurred.
Intangible Assets
Intangible assets include a core deposit intangible and an unidentified
intangible asset, which represents the excess cost over fair value of assets
acquired over liabilities assumed in a branch acquisition which occurred in
1994. The
64
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
core deposit intangible is being amortized to expense over a twelve-year life.
The carrying amount of intangible assets at June 30, 2003 and 2002 is net of
accumulated amortization of $3.1 million and $3.0 million, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
Earnings per share ("EPS") consists of two separate components, basic EPS and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented, see Note
2 (Earnings Per Share). Diluted EPS is calculated by dividing net income by the
weighted average number of common shares outstanding plus dilutive common stock
equivalents ("CSEs"). CSEs consist of dilutive stock options granted through the
Company's stock option plan and unvested common stock awards. Common stock
equivalents which are considered antidilutive are not included for the purposes
of this calculation. At June 30, 2003 there were no antidilutive shares.
Stock Options
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, as permitted by statement No.
123, "Accounting for Stock-Based Compensation". As such, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. Statement No. 123 requires entities which
continue to apply the provisions of APB Opinion No. 25 to provide pro-forma
earnings per share disclosures for stock option grants made in 1995 and
subsequent years as if the fair value based method defined in Statement No. 123
had been applied, see Note 9 (Benefit Plans).
Recent Accounting Pronouncements
Acquisitions of Certain Financial Institutions
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
within the scope of this Statement. In addition, this Statement amends Statement
No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that Statement
No. 144 requires for other long-lived assets that are held and used.
Effective September 30, 2002 the Company adopted Statement No. 147 with
retroactive application effective June 30, 2001. With the adoption of Statement
No. 147 an adjustment to fiscal 2002 statements is included to eliminate the
accumulated amortization associated with the retroactive adjustment. The results
of this adjustment was an increase in income, for an average of $23,000, net of
taxes, for each quarter and $92,000, net of taxes, for fiscal year ended June
30, 2002. The Company continues to conduct periodic impairment assessment of its
goodwill. At June 30, 2003 the Company determined that its goodwill of $848,000
was not impaired and, correspondingly, no adjustment to earnings was required.
65
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FASB Interpretation No. 45)
Requires a guarantor to include disclosure of certain obligations, and if
applicable, at the inception of the guarantee, recognize a liability for the
fair value of other certain obligations undertaken in issuing a guarantee.
Effective for financial statements ending March 31, 2003 and thereafter. The
provisions of this Statement had no expected impact on earnings, financial
condition or stockholders' equity.
Consolidation of Variable Interest Entities- an interpretation of ARB No. 51
(FASB Interpretation No. 46)
Clarifies the application of ARB No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. Applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that is
acquired before February 1, 2003. Applies to nonpublic enterprises as of the end
of the applicable annual period. Requires that an enterprise review its degree
of involvement in a variable interest entity to determine of it is the primary
beneficiary of that entity. The provisions of this Statement have no expected
impact on earnings, financial condition or stockholders' equity.
Stock-Based Compensation
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123." This statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The Statement also amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement is
effective for fiscal years ending after December 15, 2002. This Statement
announces that "in the near future, the Board plans to consider whether it
should propose changes to the U.S. standards on accounting for stock-based
compensation." The provisions of this Statement have no expected impact on
earnings, financial condition or stockholders' equity.
Amendments of Statement 133 on Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including derivatives embedded
in other contracts and hedging activities. This Statement amends Statement No.
133 for decisions made by the FASB as part of its Derivatives Implementation
Group process. This Statement also amends Statement No. 133 to incorporate
clarifications of the definition of a derivative. This Statement is effective
for contracts entered into or modified and hedging relationships designated
after June 30, 2003. The provisions of this Statement have no expected impact on
earnings, financial condition or stockholders' equity.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Some of the provisions of
this Statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by
66
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
issuing its own equity shares, depending on the nature of the relationship
established between the holder and the issuer. For nonpublic entities,
mandatorily redeemable financial instruments are subject to the provisions of
this Statement for the first fiscal period beginning after December 15, 2003.
The provisions of this Statement have no expected impact on earnings, financial
condition or stockholders' equity.
(2) Earnings Per Share
For the years ended June 30, 2003, 2002 and 2001 earnings per share, basic and
diluted, were $0.75 and $0.71, $0.53 and $0.52, and $0.01 and $0.01,
respectively.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations.
Year Ended June 30,
--------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except share data)
Net income $ 7,489 $ 7,489 $ 5,551 $ 5,551 $ 157 $ 157
Dividends on unvested
stock awards (73) (73) (29) (29) (33) (33)
------------ ------------ ------------ ------------ ------------ ------------
Income available to common
stock holders $ 7,416 $ 7,416 $ 5,522 $ 5,522 $ 124 $ 124
============ ============ ============ ============ ============ ============
Weighted average
shares outstanding (1) 9,923,968 9,923,968 10,335,262 10,335,262 10,972,607 10,972,607
Effect of dilutive securities:
Options (1) -- 237,157 -- 159,100 -- 63,585
Unvested stock awards (1) -- 301,067 -- 109,187 -- 159,741
------------ ------------ ------------ ------------ ------------ ------------
Adjusted weighted average
shares used in earnings
per share calculation (1) 9,923,968 10,462,192 10,335,262 10,603,549 10,972,607 11,195,933
============ ============ ============ ============ ============ ============
Earnings per share (1) $ 0.75 $ 0.71 $ 0.53 $ 0.52 $ 0.01 $ 0.01
============ ============ ============ ============ ============ ============
- -------------------------
(1) Data prior to April 3, 2002 adjusted for a 2.28019 exchange ratio in
connection with the April 3, 2002 Reorganization and subscription offering.
67
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
(3) Securities
Securities at June 30, 2003 and 2002 consisted of the following:
June 30, 2003
-----------------------------------------------------
Amortized Unrealized Unrealized Estimated
cost gains losses fair value
---------- ---------- ---------- ----------
(Dollars in thousands)
Held to maturity:
Municipal bonds $ 17,320 $ 675 $ -- $ 17,995
Available for sale:
US government agency securities 76,980 1,225 -- 78,205
Mortgage-backed securities
FNMA 128,303 2,456 (69) 130,690
FHLMC 52,912 365 (1,236) 52,041
GNMA 14,969 318 -- 15,287
FHLB stock 9,252 -- -- 9,252
Equity securities 6,477 -- (67) 6,410
---------- ---------- ---------- ----------
Total available for sale 288,893 4,364 (1,372) 291,885
---------- ---------- ---------- ----------
Total securities $ 306,213 $ 5,039 $ (1,372) $ 309,880
========== ========== ========== ==========
June 30, 2002
-----------------------------------------------------
Amortized Unrealized Unrealized Estimated
cost gains losses fair value
---------- ---------- ---------- ----------
(Dollars in thousands)
Held to maturity:
Municipal bonds $ 13,973 $ 147 $ (3) $ 14,117
Available for sale:
US government agency securities 75,692 1,013 (12) 76,693
Mortgage-backed securities
FNMA 87,778 1,649 -- 89,427
FHLMC 40,820 303 (360) 40,763
GNMA 37,847 495 (1) 38,341
FHLB stock 5,042 -- -- 5,042
Equity securities 4,472 -- (51) 4,421
---------- ---------- ---------- ----------
Total available for sale 251,651 3,460 (424) 254,687
---------- ---------- ---------- ----------
Total securities $ 265,624 $ 3,607 $ (427) $ 268,804
========== ========== ========== ==========
Proceeds from the sales of securities available for sale for the years ended
June 30, 2003, 2002, and 2001 were $66.0 million, $23.6 million and $30.1
million, respectively. Gross gains of $1.8 million, $437,000 and $260,000 were
realized in fiscal 2003, 2002 and 2001 respectively. There were no gross losses
in fiscal 2003 compared to gross losses of $34,000 and $17,000 in fiscal 2002
and 2001, respectively. Additionally, we recognized losses of $48,000, $93,000
and $258,000 in fiscal 2003, 2002 and 2001, respectively, resulting from other
than temporary declines in values of certain equity securities.
68
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
Accrued interest receivable on securities amounted to $1.6 million and $2.0
million at June 30, 2003 and 2002, respectively.
The amortized cost and estimated fair value of securities available for sale at
June 30, 2003, by contractual maturity, are shown below.
Securities by stated maturity
-----------------------------------------------------------------------
After 1 After 5 After 10
year but years but years or with
1 year less than less than no stated
or less 5 years 10 years maturity Total
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
US government agency securities $ 3,070 $ 69,088 $ 6,047 $ -- $ 78,205
Mortgage-backed securities -- 19,497 11,554 166,967 198,018
Municipal bonds -- 271 2,771 14,953 17,995
Equity securities -- -- -- 15,662 15,662
----------- ----------- ----------- ----------- -----------
Total securities at fair value 3,070 88,856 20,372 197,582 309,880
Total securities at amortized cost $ 2,999 $ 87,411 $ 19,997 $ 195,806 $ 306,213
=========== =========== =========== =========== ===========
The Company must maintain ownership of specified amounts of stock as a member of
the Federal Home Loan Bank of Pittsburgh ("FHLB"). The Company's ownership of
FHLB stock was $9.3 million and $5.0 million as of June 30, 2003 and 2002,
respectively.
For mortgage-backed securities, expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay the obligation
with or without call or prepayment penalties. Of the Company's $78.2 million
U.S. government agency securities, $52.5 million are callable within one year.
As described in note 10, certain securities available for sale are maintained to
collateralize advances from the FHLB.
(4) Loans
Loans receivable as of June 30, 2003 and 2002 consisted of the following:
69
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2003 June 30, 2002
------------- -------------
(Dollars in thousands)
Mortgage loans:
Single-family $ 131,821 $ 181,454
Multi-family & commercial real estate 155,892 134,294
Construction 36,191 29,306
Home equity 72,990 75,016
------------- -------------
Total mortgage loans 396,894 420,070
Consumer loans 2,324 10,081
Commercial business loans 20,549 19,067
------------- -------------
Total loans receivable 419,767 449,218
Allowance for loan losses (5,312) (4,626)
Deferred loan fees (656) (737)
------------- -------------
Loans receivable, net $ 413,799 $ 443,855
============= =============
Included in loans receivable are loans on non-accrual status in the amounts of
$1.7 million, $4.0 million and $3.6 million at June 30, 2003, 2002 and 2001,
respectively. Interest income that would have been recognized on such
non-accrual loans during the years ended June 30, 2003, 2002 and 2001, had they
been current in accordance with their original terms was $127,000, $257,000, and
$695,000, respectively.
As of June 30, 2003, 2002 and 2001, the Company had impaired loans with a total
recorded investment of $1.9 million, $3.4 million and $3.2 million,
respectively, and an average recorded investment for the years ended June 30,
2003, 2002 and 2001 of $476,000, $1.8 million and $8.5 million, respectively.
Cash of $124,000, $134,000 and $648,000 was collected on these impaired loans
during the years ended June 30, 2003, 2002 and 2001, respectively. Interest
income of $9,000, $80,000 and $366,000 was recognized on such loans during the
years ended June 30, 2003, 2002 and 2001, respectively. As of June 30, 2003,
2002 and 2001, there were no recorded investments in impaired loans for which
there was a related specific allowance for credit losses.
The following is a summary of the activity in the allowance for loan losses for
the years ended June 30, 2003, 2002 and 2001:
For the year ended June 30,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
(Dollars in thousands)
Balance, beginning of the period $ 4,626 $ 4,313 $ 3,905
Provisions for loan losses 1,034 1,212 7,856
Charge-offs (391) (954) (7,449)
Recoveries 43 55 1
----------- ----------- -----------
Balance, end of the period $ 5,312 $ 4,626 $ 4,313
=========== =========== ===========
(5) Mortgage Servicing Activity
A summary of mortgage servicing rights activity follows:
70
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
For the year ended June 30,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
(Dollars in thousands)
Balance, beginning of the period $ 221 $ 340 $ 127
Originated servicing rights 179 -- 350
Amortization (180) (119) (137)
----------- ----------- -----------
Balance, end of the period $ 220 $ 221 $ 340
=========== =========== ===========
At June 30, 2003, 2002 and 2001, the Company serviced loans for others of $68.1
million, $58.3 million, and $91.5 million, respectively. Loans serviced by
others for the Company as of June 30, 2003, 2002 and 2001 were $29.4 million,
$28.9 million, and $6.9 million, respectively.
71
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
(6) Deposits
Deposit balances by type consisted of the following at June 30, 2003, and 2002:
June 30, 2003 June 30, 2002
----------------------- -----------------------
Percent of Percent of
Amount total Amount total
---------- ---------- ---------- ----------
(Dollars in thousands)
Savings accounts (passbooks, statements, clubs) $ 86,447 14.7% $ 73,218 13.8%
Money market accounts 79,280 13.5 47,752 9.0
Certificates of deposit less than $100,000 242,820 41.4 248,873 47.0
Certificates of deposit greater than $100,000(1) 56,974 9.7 56,934 10.7
Interest-bearing checking accounts 51,541 8.8 40,045 7.6
Non-interest-bearing checking accounts 69,581 11.9 62,930 11.9
---------- ---------- ---------- ----------
Total $ 586,643 100.0% $ 529,752 100.0%
========== ========== ========== ==========
- ------------------------
(1) Deposit balances in excess of $100,000 are not federally insured.
While certificates of deposit are frequently renewed at maturity rather than
paid out, a summary of certificates of deposit by contractual maturity and rate
at June 30, 2003 is as follows:
Maturity Date
-----------------------------------------------------------------------
Over Over Over
six months one year two years
Six months through through through Over
Interest rate or less one year two years three years three years
- --------------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
0.00% - 2.99% $ 92,502 $ 49,925 $ 32,814 $ 4,011 $ 2,690
3.00% - 3.99% 8,532 10,206 21,224 3,989 12,946
4.00% - 4.99% 10,578 7,762 15,015 3,602 6,437
5.00% - 6.99% 11,836 3,703 863 558 141
7.00% and over 460 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total $ 123,908 $ 71,596 $ 69,916 $ 12,160 $ 22,214
=========== =========== =========== =========== ===========
Year ending (Dollars in thousands)
- --------------------- ----------------------
June 30, 2004 $ 195,504
June 30, 2005 69,916
June 30, 2006 12,160
June 30, 2007 13,436
June 30, 2008 3,208
Thereafter 5,570
---------------------
$ 299,794
=====================
72
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
Interest expense on deposits for the years ended June 30, 2003, 2002 and 2001
consisted of the following:
For the year ended June 30,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands)
Savings accounts $ 923 $ 1,175 $ 1,102
Checking accounts 1,317 1,346 1,464
Certificates of deposit 10,569 14,810 17,806
---------- ---------- ----------
Total $ 12,809 $ 17,331 $ 20,372
========== ========== ==========
(7) Property and Equipment
Amounts charged to operating expense for depreciation for the years ended June
30, 2003, 2002 and 2001 amounted to $959,000, $883,000 and $723,000,
respectively.
For the year ended June 30,
---------------------------
2003 2002
----------- -----------
(Dollars in thousands)
Depreciable life
----------------
Land $ 1,424 $ 1,423
Buildings nxnxnnxx 15 to 40 years 5,822 5,513
Furniture, fixtures and equipment 3 to 7 years 5,576 5,078
----------- -----------
Total 12,822 12,014
Accumulated depreciated (6,458) (5,499)
----------- -----------
Property and equipment, net $ 6,364 $ 6,515
=========== ===========
(8) Income Taxes
The Small Business Job Protection Act of 1996, enacted on August 20, 1996,
provides for the repeal of the tax bad debt deduction computed under the
percentage of taxable income method. Upon repeal, the Company is required to
recapture into income, over a six-year period, the portion of its tax bad debt
reserves that exceeds its base year reserves (i.e., tax reserves for tax years
beginning before 1988). The base year tax reserves, which may be subject to
recapture if the Company ceases to qualify as a bank for federal income tax
purposes, are restricted with respect to certain distributions. The Company's
total tax bad debt reserves at June 30, 2003 are approximately $6.6 million, of
which $6.2 million represents the base year amount and $400,000 is subject to
recapture. The Company has previously recorded a deferred tax liability for the
amount to be recaptured; therefore, this recapture does not impact the statement
of income.
Income tax expense (benefit) for the years ended June 30, 2003, 2002 and 2001
consisted of the following:
73
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
Current Deferred Total
------- -------- -------
(Dollars in thousands)
For the year ended June 30, 2003 Federal $ 3,925 $ (417) $ 3,508
State 102 -- 102
------- ------- -------
Total $ 4,027 $ (417) $ 3,610
======= ======= =======
For the year ended June 30, 2002 Federal $ 2,988 $ (304) $ 2,684
State 6 -- 6
------- ------- -------
Total $ 2,994 $ (304) $ 2,690
======= ======= =======
For the year ended June 30, 2001 Federal $ 203 $ (244) $ (41)
State 9 -- 9
------- ------- -------
Total $ 212 $ (244) $ (32)
======= ======= =======
The expense (benefit) for income taxes differed from that computed at the
statutory federal corporate rate for the years ended June 30, 2003, 2002 and
2001 as follows:
For the year ended June 30,
-------------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
Percent Percent Percent
of pretax of pretax of pretax
Amount income Amount income Amount income
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
At statutory rate $ 3,774 34.0% $ 2,771 34.0% $ 42 34.0%
State tax, net of federal tax
benefit 67 0.6 4 -- 6 5.0
Low income housing credit (29) (0.3) (29) -- (29) (23.0)
Tax-exempt interest (232) (2.1) (100) (1.0) (34) (28.0)
Meals and entertainment 8 0.1 6 -- 10 9.0
BOLI (22) (0.2)
Dividends on ESOP shares (83) (0.8) -- -- (21) (18.0)
Non-deductible expenses 1 0.0 1 -- -- --
ESOP compensation expense 71 0.6 41
Other 55 0.5 (4) -- (6) (5.0)
--------- --------- --------- --------- --------- ---------
Income tax per statement of
income $ 3,610 32.5% $ 2,690 33.0% $ (32) (26.0)%
========= ========= ========= ========= ========= =========
74
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
Significant deferred tax assets and liabilities of the Company as of June 30,
2003 and 2002 are as follows:
June 30,
------------------------
2003 2002
--------- ---------
(Dollars in thousands)
Impairment reserves $ 113 $ 97
Deferred loan fees 171 250
Retirement plan reserves 452 398
Employee benefits 427 255
Intangible asset amortization 223 330
Capital loss carryover -- --
Charitable contributions -- --
Uncollected interest 53 50
Book bad debt reserves 1,806 1,573
Unrealized loss on available for sale securities -- --
Other, net 16 16
--------- ---------
Gross deferred tax assets 3,261 2,969
--------- ---------
Tax bad debt reserves -- --
Tax bad debt reserves in excess of base year (138) (275)
Prepaid expenses (15) (15)
Originated mortgage servicing rights (75) (75)
Investment in Joint Venture (1) --
Gain on transfer of AFS securities (5) --
Unrealized gain on available for sale securities (1,158) (1,124)
Depreciation (121) (69)
--------- ---------
Gross deferred tax liabilities (1,513) (1,558)
--------- ---------
Net tax deferred asset $ 1,748 $ 1,411
========= =========
During the year ended June 30, 2003. the Company recorded deferred tax
liabilities of $44,000 related to the adoption of FAS 147. The realizability of
deferred tax assets is dependent upon a variety of factors, including the
generation of future taxable income, the existence of taxes paid and
recoverable, the reversal of deferred tax liabilities and tax planning
strategies. Based upon these and other factors, management believes it is more
likely than not that the Company will realize the benefits of these deferred tax
assets.
(9) Benefit Plans
The Company has a money purchase pension plan to which the Company contributes
for all eligible employees. During the first six months of the fiscal year ended
June 30, 2003, this contribution was 7.50% of their base salary and during the
second six months, this contribution was 5.0% of their base salary. The expense
of such plan was $229,000, $301,000, and $269,000 for the years ended June 30,
2003, 2002 and 2001, respectively.
The Company also has a 401(k) plan which covers all eligible employees and
permits them to make certain contributions to the plan on a pretax basis.
Employees are permitted to contribute up to 15% of salary to this plan. The
Company matches fifty cents for every dollar contributed up to 10% of salary.
The expense of such plan was $170,000, $158,000 and $134,000 for the years ended
June 30, 2003, 2002 and 2001, respectively.
Effective June 30, 1998, the Company adopted non-qualified supplemental
retirement plans for the Company's Board of Directors (the "Directors' Plan")
and for the Company's president (the "President's Plan"). The Directors' Plan
provides for fixed annual payments to qualified directors for a period of ten
years from retirement. Benefits to
75
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
be paid accrue at the rate of 20% per year on completion of six full years of
service, with full benefit accrual at ten years of service. At the time these
plans were adopted credit was given for past service. The President's Plan
provides for payments for a period of ten years beginning at retirement based on
a percentage of annual compensation not to exceed an established cap. Full
benefits become accrued at age 68 with partial vesting prior thereto. Both plans
provide for full payments in the event of a change in control of the Company.
The costs of each of the Directors' Plan and President's Plan were $150,000 and
$60,000, $120,000 and $60,000, and $60,000 and $60,000 for fiscal years ended
2003, 2002 and 2001, respectively. The Directors' Plan and President's Plan are
intended to be, and are, unfunded.
ESOP
In December 23, 1998, the Company adopted an ESOP. The ESOP borrowed $1.8
million from the Company and used the funds to purchase 408,769 shares (179,270
shares pre-exchange) of the Company's common stock. The loan has an interest
rate of 7.75% and has an amortization schedule of 15 years. The April 2002
Reorganization resulted in an additional ESOP loan of $5.1 million to purchase
an additional 513,130 shares of the Company's common stock issued in the
Reorganization. This loan has an interest rate of 4.75% and an amortization
schedule of 15 years. Shares purchased are held in a suspense account for
allocation among the participants as the loans are repaid. Contributions to the
ESOP and shares released from the loan collateral will be in an amount
proportional to repayment of the ESOP loans. Shares are allocated to
participants based on compensation as described in the ESOP, in the year of
allocation. At June 30, 2003, there were 127,162 ESOP shares allocated to
participants, representing a fair value of $2.2 million, in addition, there were
30,730 shares committed to be released. The Company recorded compensation
expense of $824,000, $338,000, and $138,000 for the ESOP for the years ended
June 30, 2003, 2002 and 2001, respectively.
RRP
Pursuant to the 1999 Recognition and Retention Plan and Trust Agreement (the
"1999 RRP"), the Company acquired 204,384 shares (89,635 shares pre-exchange) at
a cost of $929,000. Pursuant to the terms of the agreement, all 204,384 shares
have been awarded to directors and management from the 1999 RRP Trust. As of
June 30, 2003, 109,803 granted shares were vested pursuant to the terms of the
1999 Plan. In fiscal 2003, the Company adopted the 2002 Recognition and
Retention Plan and Trust Agreement (the "2002 RRP"), and acquired 256,565 shares
at a cost of $2.2 million. Pursuant to the terms of the 2002 RRP 222,468 shares
have been awarded to directors and management, none of which were vested at June
30, 2003.
At June 30, 2003, the deferred cost of unearned 1999 and 2002 RRP shares totaled
$513,000 and is recorded as a charge against stockholders' equity. Compensation
expense on 1999 and 2002 RRP shares granted is recognized ratably over the five
year vesting period in an amount which totals the market price of the Company's
stock at the date of grant. The Company recorded compensation expense of
$500,000, $162,000 and $162,000 related to both these plans for the years ended
June 30, 2003, 2002 and 2001, respectively.
Stock Option Plan
The stockholders of the Company approved a stock option plan in fiscal 2000 (the
"1999 Plan") for officers, directors and certain employees of the Company and
its subsidiaries. Pursuant to the terms of the 1999 Plan, the number of common
shares reserved for issuance is 510,963 (224,087 shares pre-exchange) of which
11,400 options remain unawarded. Additionally the stockholders of the Company
approved a stock option plan in fiscal 2003 (the "2002 Plan") for officers,
directors and certain employees of the Company and its subsidiaries. Pursuant to
the terms of the 2002 Plan, the number of common shares reserved for issuance is
641,412 of which 93,992 remain unawarded at June 30, 2003. All options were
granted with an exercise price equal to fair market value at the date of grant
and expire in 10 years from the date of grant. All stock options granted vest
over a five year period commencing on the first anniversary of the date of
grant.
76
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
A summary of the status of the 1999 and 2002 Plans as of June 30, 2003 and
changes during the year is presented below:
Year ended June 30, 2003 Year ended June 30, 2002
-------------------------- --------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
shares price shares price
---------- ---------- ---------- ----------
Outstanding at beginning of year 470,695 $ 5.56 327,663 $ 3.97
Granted 547,420 12.87 172,572 8.33
Exercised (78,647) 4.27 (27,818) 3.97
Forfeited (3,762) 6.74 (1,722) 3.97
---------- ---------- ---------- ----------
Outstanding at end of year 935,706 $ 9.94 470,695 $ 5.56
---------- ---------- ---------- ----------
Exercisable at end of year 123,800 $ 4.98 119,660 $ 3.97
SFAS No 123, "Accounting for Stock-based Compensation" encourages, but does not
require, the adoption of fair-value accounting for stock-based compensation to
employees. The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS 123, and has instead continued to apply APB
Opinion 25 and related interpretations in accounting for the 1999 and 2002 Plans
and to provide the required proforma disclosures for SFAS No. 123. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
For the year ended June 30,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands,
except per share data)
Net income
As reported $ 7,489 $ 5,551 $ 157
Pro-forma 7,276 5,443 62
Basic earnings per share
As reported $0.75 $0.53 $0.01
Pro-forma $0.73 $0.52 $0.01
Diluted earnings per share
As reported $0.71 $0.52 $0.01
Pro-forma $0.69 $0.51 $0.01
Dividend yield 2.67% 2.75% n/a
Volatility 21.70% 27.74% n/a
Expected term 7.5 years 7.5 years n/a
Risk-free interest rate 3.88% 4.41% n/a
77
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
The following table summarizes all stock options outstanding for the 1999 and
2002 Plans as of June 30, 2003, segmented by range of exercise prices:
Total outstanding options at June 30, 2003
Range of exercisable prices $3.97 to $15.88
Number outstanding 935,706
Weighted average remaining contractual life 8.52 years
Weighted average exercise price $9.94
Exercisable options at June 30, 2003
Number outstanding 123,800
Weighted average exercise price $4.98
(10) Federal Home Loan Bank Advances
Under terms of its collateral agreement with the FHLB, the Company maintains
otherwise unencumbered qualifying assets (principally qualifying 1-4 family
residential mortgage loans and U.S. government agency, and mortgage-backed
securities) in the amount of at least as much as its advances from the FHLB. The
Company's FHLB stock is also pledged to secure these advances.
At June 30, 2003, such advances have contractual maturities as follows:
Amount Weighted
outstanding average rate
----------- ------------
(dollars in thousands)
Due by:
June 30, 2004 $ 18,706 1.67%
June 30, 2005 13,403 3.32
June 30, 2006 8,820 3.65
June 30, 2007 24,123 4.26
June 30, 2008 5,005 3.68
Thereafter 62,500 4.47
-----------
Total $ 132,557 3.84%
===========
At June 30, 2003, $70.5 million of the above advances were callable at the
direction of the FHLB within certain parameters, of which $56.5 million could be
called within one year.
78
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
(11) Commitments and Contingencies
At June 30, 2003 and 2002, the Company was committed to fund loans as follows:
June 30,
-------------------------
2003 2002
---------- ----------
(Dollars in thousands)
Loans with fixed interest rates $ 16,936 $ 11,090
Loans with variable interest rates 12,072 29,082
---------- ----------
Total commitments to fund loans $ 29,008 $ 40,172
========== ==========
Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. At June 30, 2003 the Company is committed to the funding of first
mortgage loans of approximately $17.4 million, construction loans of
approximately $7.6 million, commercial business loans of approximately $3.0
million, and commercial real estate loans of $ 1.0 million.
The Company uses the same credit policies in extending commitments as it does
for on-balance sheet instruments. The Company attempts to control its exposure
to loss from these agreements through credit approval processes and monitoring
procedures. Commitments to extend credit are generally issued for one year or
less and may require payment of a fee. The total commitment amounts do not
necessarily represent future cash disbursements, as many of the commitments
expire without being drawn upon. The Company may require collateral in extending
commitments, which may include cash, accounts receivable, securities, real or
personal property, or other assets. For those commitments which require
collateral, the value of the collateral generally equals or exceeds the amount
of the commitment.
Concentration of Credit Risk
The Company offers residential and construction real estate loans as well as
commercial and consumer loans. The Company's lending activities are concentrated
in Pennsylvania. The largest concentration of the Company's loan portfolio is
located in eastern Pennsylvania. The ability of the Company's borrowers to repay
amounts owed is dependent on several factors, including the economic conditions
in the borrower's geographic region and the borrower's financial condition.
Legal Proceedings
Brenda DiCicco v. Willow Grove Bank, (United States District Court, Eastern
District of Pennsylvania). On October 11, 2002, a lawsuit was filed against
Willow Grove Bank by Ms. DiCicco in her individual capacity as president and
sole shareholder of ATS Products Corp. ("ATS") alleging eight causes of action
related to a line of credit between the Bank and ATS. The complaint has since
been amended to add Mr. Marcell and one present and one former employee of the
Bank as defendants. The causes of action are: breach of contract, breach of oral
contract, fraud, negligent misrepresentation, breach of fiduciary duty, unjust
enrichment, conversion and negligence. The plaintiff seeks a multi-million
dollar recovery for compensatory damages, punitive damages, attorney fees and
costs. ATS previously filed suit against the Bank in the U.S. Bankruptcy Court
averring similar causes of action. The Bank is vigorously defending the claims
made by the plaintiff in both suits and believes that those claims are without
merit.
Irvine Construction Co. v. Sklaroff, et al., (Court of Common Pleas of
Montgomery County, Pennsylvania). On September 5, 2003, a lawsuit was filed
against Willow Grove Bank and eight additional defendants by Irvine Construction
Co., Inc., alleging thirteen causes of action related to an agreement for the
construction of an office building. Eleven of such causes of action include the
Bank as a defendant and are: breach of contract (two counts), unjust
enrichment/equitable restitution (in the alternative), fraud, civil conspiracy
(two counts), fraudulent transfer and aiding and abetting fraudulent transfers,
constructive trust, abuse of process, and tortuous interference with
79
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
existing contractual relations (two counts). Four counts against the Bank seek
damages in excess of $1.0 million, five counts seek damages in excess of
$50,000, punitive damages and other relief, and two counts seek constructive
relief. Willow Grove Bank anticipates that it will vigorously defend the claims
made by the plaintiff and believes that those claims are without merit .
Other than the above referenced litigation, the Company is involved in various
legal proceedings occurring in the ordinary course of business. Management of
the Company, based on discussions with litigation counsel, believes that such
proceedings will not have a material adverse effect on the financial condition
or operations of the Company. There can be no assurance that any of the
outstanding legal proceedings to which the Company is a party will not be
decided adversely to the Company's interests and have a material adverse effect
on the financial condition and operations of the Company.
Other Commitments
In connection with the operation of fourteen of its banking offices and an
operations center, the Company leases certain office space. The leases are
classified as operating leases, with rent expense of $692,000, $577,000 and
$485,000 for the years ended June 30, 2003, 2002 and 2001, respectively. Minimum
payments over the remainder of the lease are summarized as follows:
Minimum lease payments
----------------------
(Dollars in thousands)
Year ended:
June 30, 2004 $ 634
June 30, 2005 549
June 30, 2006 529
June 30, 2007 499
Thereafter 449
-----------
Total $ 2,660
===========
(12) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet 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 accounting practices.
The Bank's capital amounts and classifications 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 certain minimum amounts and ratios (set forth in
the table below). Management believes that the Bank meets, as of June 30, 2003,
all capital adequacy requirements to which it is subject.
As of June 30, 2003 the most recent notification from the OTS 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
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
80
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios are presented in the following
table.
Required to be well
Required for capitalized under
capital adequacy prompt corrective
Actual capital purposes action provision
------------------- --------------------- --------------------
Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
As of June 30, 2003:
Tangible capital $85,732 $12,685 $16,914
to tangible assets 10.2 % 1.5 % 2.0 %
Core capital 85,732 33,712 42,284
to adjusted tangible assets 10.2 4.0 5.0
Tier 1 capital 85,732 N/A 26,234
to risk-weighted assets 19.6 N/A 6.0
Risk-based capital 91,044 34,978 43,723
to risk-weighted assets 20.8 8.0 10.0
As of June 30, 2002:
Tangible capital $82,668 $11,393 $15,191
to tangible assets 10.9 % 1.5 % 2.0 %
Core capital 82,668 30,267 37,834
to adjusted tangible assets 10.9 4.0 5.0
Tier 1 capital 82,668 N/A 24,311
to risk-weighted assets 20.4 N/A 6.0
Risk-based capital 87,293 32,414 40,518
to risk-weighted assets 21.5 8.0 10.0
The Bank is not under any agreement with the regulatory authorities nor is it
aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have a material effect on liquidity, capital
resources, or operations of the Bank.
(13) Fair Value of Financial Instruments
81
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
The Company's methods for determining the fair value of its financial
instruments as well as significant assumptions and limitations are set forth
below.
Limitations
Estimates of fair value are made at a specific point in time, based upon, where
available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic condition, perceived risks associated
with these financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only and, therefore,
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies is likely to result in significantly different fair
value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking or other businesses, existing
customer relationships, branch banking network, property, equipment, goodwill,
or certain tax implications related to the realization of unrealized gains or
losses. The fair value of non-interest-bearing demand deposits, savings and NOW
accounts, and money market deposit accounts is equal to the carrying amount
because these deposits have no stated maturity. This approach to estimating fair
value excludes the significant benefit that results from the low-cost funding
provided by such deposit liabilities, as compared to alternative sources of
funding. As a consequence, this presentation may distort the actual fair value
of a banking organization that is a going concern.
The following methods and assumptions were used to estimate the fair value of
each major classification of financial instruments at June 30, 2003 and 2002:
Cash and Cash Equivalents, Accrued Interest Receivable, Deposits with No Stated
Maturity, and Accrued Interest Payable
These financial instruments have carrying values that approximate fair value.
Securities Available for Sale
Current quoted market prices were used to determine fair value.
Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type and each loan category was
further segmented by fixed and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
based on estimated maturity and prepayment speeds using estimated market
discounted rates that reflected credit and interest risk inherent in the loans.
The estimate of the maturities and prepayment speeds was based on the Company's
historical experience. Cash flows were discounted using market rates adjusted
for portfolio differences.
Loans Available for Sale
The fair value of mortgage loans originated and intended for sale in the
secondary market is based on contractual cash flows using current market rates,
calculated on an aggregate basis.
Certificates of Deposit
Fair value was estimated by discounting the contractual cash flows using current
market rates offered in the Company's market area for deposits with comparable
terms and maturities.
82
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
FHLB Advances
Fair value was estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rate for similar types of borrowing
arrangements.
Commitments to Extend Credit
The majority of the Company's commitments to extend credit carry current
interest rates if converted to loans. Because commitments to extend credit are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates the
recorded deferred fee amounts.
83
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
The carrying amounts and estimated fair values of the Company's financial
instruments, including off-balance sheet financial instruments, were at June 30,
2003 and 2002:
June 30, 2003 June 30, 2002
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)
Assets:
Cash and cash equivalents $ 98,040 $ 98,040 $ 31,986 $ 31,986
Securities available for sale 291,885 291,885 254,687 254,687
Securities held to maturity 17,320 17,995 13,973 14,117
Loans available for sale 5,293 5,293 1,574 1,574
Loans, net 413,799 434,508 443,855 450,273
Accrued interest receivable 3,520 3,520 4,138 4,138
Liabilities:
Deposits with no stated maturities 286,849 286,849 223,945 223,945
Certificates of deposits 299,794 306,152 305,807 309,999
FHLB Advances 132,557 127,822 97,824 94,686
Accrued interest payable 933 933 868 868
Contract Fair Contract Fair
Amount Value Amount Value
-------- -------- -------- --------
Off balance sheet financial instruments:
Commitments to extend credit $ (1,645) $ (483) $ 40,172 $ 28,974
84
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
(14) Comprehensive Income (Loss)
The tax effects allocated to each component of "Other comprehensive income" are
as follows:
Year ended June 30, 2003
---------------------------------------------
Before tax Tax After tax
amount Effect Amount
----------- ----------- -----------
(Dollars in thousands)
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains during the period $ (1,754) $ 667 $ (1,087)
Reclassification adjustment for gains (losses) 1,712 (651) 1,061
----------- ----------- -----------
included in net income
Total other comprehensive loss $ (42) $ 16 $ (26)
=========== =========== ===========
Year ended June 30, 2002
---------------------------------------------
Before tax Tax After tax
amount Effect Amount
----------- ----------- -----------
(Dollars in thousands)
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) during the period $ 2,722 $ (1,007) $ 1,715
Reclassification adjustment for gains (losses) 310 (115) 195
----------- ----------- -----------
included in net income
Total other comprehensive income $ 3,032 $ (1,122) $ 1,910
=========== =========== ===========
Year ended June 30, 2001
---------------------------------------------
Before tax Tax After tax
amount Effect Amount
----------- ----------- -----------
(Dollars in thousands)
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) during the period $ 3,682 $ (1,362) $ 2,320
Reclassification adjustment for (losses) gains (15) 6 (9)
----------- ----------- -----------
included in net income
Total other comprehensive income $ 3,667 $ (1,356) $ 2,311
=========== =========== ===========
(15) Dividend Policy
The Company's ability to pay dividends is dependent, in part, upon its ability
to obtain dividends from the Bank. The future dividend policy of the Company is
subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, financial conditions, cash needs,
and general business conditions. Holders of common stock will be entitled to
receive dividends as and when declared by the Board of Directors of the Company
out of funds legally available for that purpose. Such payment, however, will be
subject to the regulatory restrictions set forth by the OTS. In addition, OTS
regulations provides that, as a general rule, a financial institution may not
make a capital distribution if it would be undercapitalized after making the
capital distribution.
85
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
(16) Parent Company Financial Information (Willow Grove Bancorp, Inc.)
Condensed Statement of Financial Condition
At At
June 30, 2003 June 30, 2002
------------- -------------
(Dollars in thousands)
Assets:
Cash on deposit with subsidiary $ 559 $ 501
Note receivable from subsidiary 27,793 38,015
Investment in subsidiary 88,609 85,646
Securities (amortized cost of $102 and $150, respectively) 101 126
Other assets 472 414
------------- -------------
Total assets $ 117,534 $ 124,702
============= =============
Liabilities and stockholders' equity:
Other liabilities $ 404 $ 333
------------- -------------
Total liabilities 404 333
Total stockholders' equity 117,130 124,369
------------- -------------
Total liabilities and stockholders' equity $ 117,534 $ 124,702
============= =============
Condensed Statement of Income
For the year ended June 30,
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
(Dollars in thousands)
Interest income:
Interest income on note receivable $ 1,543 $ 599 $ 573
------------ ------------ ------------
Total interest income: 1,543 599 573
Non-interest income:
Realized loss on equity securities (48) (107) (258)
------------ ------------ ------------
Total non-interest income (48) (107) (258)
Equity in undistributed income of subsidiary 6,875 5,522 240
------------ ------------ ------------
Total income 8,370 6,014 555
------------ ------------ ------------
Expense:
Professional fees 253 238 233
Stationery and printing 26 25 38
Other 306 187 187
------------ ------------ ------------
Total expense 585 450 458
------------ ------------ ------------
Income before taxes 7,785 5,564 97
Income tax expense (benefit) 296 13 (60)
------------ ------------ ------------
Net income $ 7,489 $ 5,551 $ 157
============ ============ ============
86
Willow Grove Bancorp, Inc.
Notes to Consolidated Financial Statements
Condensed Statement of Cash Flows
For the year ended June 30,
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
(Dollars in thousands)
Cash flow from operating activities:
Net income: $ 7,489 $ 5,551 $ 157
Less items not affecting cash flows
Equity in undistributed income of subsidiary (6,875) (5,522) (240)
Realized loss on securities available for sale 48 37 258
Decrease (increase) decrease in other assets 270 257 (114)
(Decrease) increase in other liabilities 71 (22) 212
------------ ------------ ------------
Net cash provided by operating activities 1,003 301 273
------------ ------------ ------------
Cash flows from investing activities:
Capital investment in subsidiary bank -- (31,070) --
Acqusition of securities from bank -- -- (727)
Proceeds from sale of securities available for sale -- 175 37
Net repayment (issuance) of notes receivable 12,222 (30,344) 3,954
------------ ------------ ------------
Net cash provided by investing activities 12,222 (61,239) 3,264
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from stock issuance 336 62,141 --
Treasury stock issuances (purchases) (10,356) 104 (2,140)
Dividends paid (3,147) (1,378) (914)
------------ ------------ ------------
Net cash from financing activities (13,167) 60,867 (3,054)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents 58 (71) 483
Cash and cash equivalents at beginning of period 501 572 89
------------ ------------ ------------
Cash and cash equivalents at end of period $ 559 $ 501 $ 572
============ ============ ============
87
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934) as of the end of
the period covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file
or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the SEC's rules and regulations and are operating in an effective
manner.
No change in our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange
Act of 1934) occurred during the fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from pages
3-5 and page 15 of the definitive proxy statement of the Company for the Annual
Meeting of Stockholders to be held on November 12, 2003, which will be filed
within 120 days of June 30, 2003 ("Definitive Proxy Statement").
Item 11. Executive Compensation
The information required herein is incorporated by reference from pages
7 to 12 of the Definitive Proxy Statement.
88
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required herein is incorporated by reference from pages
13 to 15 of the Definitive Proxy Statement.
Equity Compensation Plan Information
The following table sets forth certain information for all equity
compensation plans and individual compensation arrangements (whether with
employees or non-employees, such as directors), in effect as of June 30, 2003.
Number of securities remaining
Number of securities to be Weighted average available for future issuance
issued upon exercise of exercise price of (excluding shares reflected in
Plan Category outstanding options (1) outstanding options the first column)
- --------------------------------- ------------------------------- --------------------- --------------------------------
Equity compensation plans
approved by security holders 1,248,485 $ 9.94 110,204
Equity compensation plans not
approved by security holders -- -- --
---------- ---------- ----------
Total 1,248,485 $ 9.94 110,204
========== ========== ==========
- -------------------
(1) Includes 312,779 shares granted to directors and employees as of June
30, 2003 and held in the recognition plan trust.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page
11 of the Definitive Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required under Item 9 (e) of Schedule 14A of Regulation
S-K is incorporated by reference from page 16 of the Definitive Proxy Statement.
89
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of this Report.
---------------------------------------
(1) The following financial statements are incorporated by
reference from Item 8 hereof:
Independent Auditors' Report
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted
because of the absence of conditions under which they are
required or because the required information is included
in the consolidated financial statements and related notes
thereto.
(3) The following exhibits are filed as part of this Form
10-K, and this list includes the Exhibit Index.
Exhibit Index
-------------
2.1 Plan of Conversion and Agreement and Plan of
Reorganization (1)
3.1 Articles of Incorporation of Willow Grove
Bancorp, Inc. (1)
3.2 Bylaws of Willow Grove Bancorp, Inc. (1)
4.0 Form of Stock Certificate of Willow Grove
Bancorp, Inc. (1)
10.1 Form of Employment Agreement entered into
between Willow Grove Bank and Frederick
A. Marcell, Jr. (2)
10.2 Form of Employment Agreement entered into
between Willow Grove Bank and each of
Joseph M. Matisoff, Christopher E. Bell,
Thomas M. Fewer and John T. Powers (2)
10.3 Supplemental Executive Retirement
Agreement (2)
10.4 Non-Employee Directors Retirement Plan (3)
10.5 1999 Stock Option Plan (4)
10.6 1999 Recognition and Retention Plan and
Trust Agreement (4)
10.7 Amended Directors and Officers Incentive
Compensation Plan (5)
10.8 2002 Stock Option Plan (6)
10.9 2002 Recognition and Retention Plan and
Trust Agreement (6)
21.0 Subsidiaries of the Registrant - Reference
is made to "Item 1. Business
Subsidiaries" for the required
information
23.0 Consent of KPMG LLP
31.1 Section 302 Certification of the Chief
Executive Officer
31.2 Section 302 Certification of the Chief
Financial Officer
32.1 Section 906 Certification of the Chief
Executive Officer
32.2 Section 906 Certification of the Chief
Financial Officer
-------------------------
(1) Incorporated by reference from the Company's
Registration Statement on Form S-1 filed on
December 14, 2001, as amended, and declared
effective on February 11, 2002 (Registration No.
333-75106).
90
(2) Incorporated by reference from the registration
statement on Form S-1 filed by the Company's
predecessor, a federal corporation also known as
Willow Grove Bancorp, Inc. (the "Mid-Tier") on
September 18, 1998, as amended, and declared
effective on November 12, 1998 (Registration No.
333-63737).
(3) Incorporated by reference from the Company's
Form 10-Q for the quarter ended September 30,
2002, filed with the SEC on November 14, 2002
(SEC File No. 000-49706)
(4) Incorporated by reference from the Definitive
Proxy Statement on Schedule 14A filed by the
Mid-Tier on June 23, 1999 (SEC File No.
000-25191).
(5) Incorporated by reference from the Company's
Form 10-K for the fiscal year ended June 30,
2002, filed with the SEC on September 30, 2002
(SEC File No. 000-49706).
(6) Incorporated by reference from the Company's
Definitive Proxy Statement on Schedule 14A filed
on October 9, 2002 (SEC File No. 000-49706).
(b) Reports on Form 8-K
(1) On April 23, 2003, the Company furnished a Form 8-K that
included a press release announcing third quarter results
and the declaration of an cash dividend.
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Willow Grove Bancorp, Inc.
By: /s/ Frederick A. Marcell Jr.
--------------------------------------------
Frederick A. Marcell Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Lewis W. Hull September 23, 2003
- -----------------------------------------------
Lewis W. Hull
Director
/s/ Charles F. Kremp, 3rd September 23, 2003
- -----------------------------------------------
Charles F. Kremp 3rd
Director
/s/ William W. Langan September 23, 2003
- -----------------------------------------------
William W. Langan
Chairman of the Board
/s/ Rosemary C. Loring September 23, 2003
- -----------------------------------------------
Rosemary C. Loring
Director
/s/ Frederick A. Marcell Jr. September 23, 2003
- -----------------------------------------------
Frederick A. Marcell Jr.
Director, President and Chief Executive Officer
/s/ A. Brent O'Brien September 23, 2003
- -----------------------------------------------
A. Brent O'Brien
Director
/s/ Samuel H. Ramsey, III September 23, 2003
- -----------------------------------------------
Samuel H. Ramsey, III
Director
/s/ William B. Weihenmayer September 23, 2003
- -----------------------------------------------
William B. Weihenmayer
Director
/s/ Christopher E. Bell September 23, 2003
- -----------------------------------------------
Christopher E. Bell
Senior Vice President and Chief Financial Officer (principal financial officer)
92