As filed with the Securities and Exchange Commission on November 12, 1998
Registration No. 333-63737
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
FORM S-1
TO THE
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WILLOW GROVE BANCORP, INC.
(In organization)
(Exact name of registrant as specified in its to be filed Federal Stock Charter)
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United States 6035 Requested
- ------------------------------- ------------------------------------- -------------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Code Number) Identification No.)
Welsh and Norristown Roads
Maple Glen, Pennsylvania 19002
(215) 646-5405
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Frederick A. Marcell, Jr.
President and Chief Executive Officer
Welsh and Norristown Roads
Maple Glen, Pennsylvania 19002
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Raymond A. Tiernan, Esq.
Hugh T. Wilkinson, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
12th Floor
Washington, D.C. 20005
-----------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
=====================================================================================================================
Amount
Title of each Class of to be Purchase Price Aggregate Registration
Securities to be Registered Registered Per Share Offering Price Fee
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value
per share (1)............... 2,771,432 shares $10.00 $27,714,320 (2) $8,726.68 (3)
- ---------------------------------------------------------------------------------------------------------------------
Participation interests..... 168,958 shares -- -- -- (4)
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(1) Includes shares of Common Stock to be issued to The Willow Grove Foundation,
a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
(4) The shares of Willow Grove Bancorp, Inc. to be purchased by participants in
the Willow Grove Bank 401(k) Plan are included in the amount shown for
Common Stock. Accordingly, no separate fee is required for the participation
interests. In accordance with Rule 457(h) of the Securities Act, as amended,
the registration fee has been calculated on the basis of the maximum number
of shares of Common Stock which could be purchased through utilization of
the assets of such plan.
The Registrant hereby amends this Registration Statement on such date as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said section 8(a)
may determine.
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PROSPECTUS SUPPLEMENT
WILLOW GROVE BANCORP, INC.
Willow Grove Bank 401(k) Plan and Trust
(Participation Interest in up to 168,959 shares of
Willow Grove Bancorp, Inc.)
This prospectus supplement is being provided to participants of the
Willow Grove Bank 401(k) Plan and Trust (the "Plan"). Willow Grove Bank is
reorganizing from a mutual bank to a stock bank, establishing a stock holding
company, Willow Grove Bancorp, Inc. (the "Company"), to hold all of the
outstanding shares of the Willow Grove Bank, with the Company becoming a
majority-owned subsidiary of the Willow Grove Mutual Holding Company. In
connection with this reorganization, the Company's common stock will be made
available to the general public.
The Company is offering for sale shares of its common stock to the
participants of the Plan (the "Participants"). Participants have two possible
ways of purchasing shares of the Company:
First, those who already have subscription rights as depositors or
borrower members of Willow Grove Bank, may exercise such rights and use
the monies held in his or her individual Plan account. Such shares will
be purchased in the public offering of the Company's shares. Because
the Plan actually purchases the shares, you will acquire a
"participation interest" in the shares and not own the shares directly.
Shares may be purchased in this manner by allocating all or a portion
of the funds in your Plan account into the investment fund established
to invest in the Company's common stock;
Second, after the Company's public offering is completed, a fund
dedicated to investing in the Company's common stock will be available
as an additional investment fund under the Plan. On a quarterly basis
you will be able to allocate all or a portion of your Plan account
between all of the Plan's investment funds including the Employer Stock
Fund.
The prospectus dated November 3, 1998 of Willow Grove Bancorp, Inc., which is
attached to this prospectus supplement, includes detailed information with
respect to Willow Grove Bancorp, Inc., Willow Grove Bank and the offering of
Willow Grove Bancorp, Inc. common stock. This prospectus supplement should be
read only in conjunction with the attached prospectus.
For a discussion of certain factors that you should consider before
investing, see "Restrictions on Resale" at page S-14 in this prospectus
supplement and "Risk Factors" at page ____ in the prospectus.
Neither the Securities Exchange Commission nor any state or federal agency has
approved these securities or determined that this prospectus supplement is
accurate or complete. Any representation to the contrary is a criminal offense.
The participation interests offered by the Willow Grove Bank 401(k) Plan and
Trust are not savings accounts or deposits and are not insured or guaranteed by
any government insurance fund, Willow Grove Bank or Willow Grove Bancorp, Inc.
This type of investment involves risk and you may lose some or all of your
investment.
The date of this prospectus supplement is November 3, 1998.
TABLE OF CONTENTS
THE OFFERING.....................................................................................1
Summary of Reorganization...............................................................1
Securities Offered......................................................................1
Election to Purchase Common Stock in the Offering; Priorities...........................1
Value of Participation Interests........................................................2
How to Use Plan Funds to Invest in Offering.............................................2
Deadline for Participating in Offering..................................................2
Irrevocability of Election to Participate in Offering...................................2
Direction to Purchase Common Stock After the Offering...................................3
Purchase Price of Common Stock..........................................................3
Nature of a Participant's Interest in Common Stock......................................3
Voting Rights of Common Stock...........................................................3
DESCRIPTION OF THE PLAN..........................................................................4
Introduction............................................................................4
Employee Retirement Income Security Act.................................................4
Reference to Full Text of Plan..........................................................4
Eligibility and Participation...........................................................5
Contributions Under the Plan............................................................5
Limitations on Contributions............................................................5
Limitation on Annual Additions and Benefits....................................5
Limitation on 401(k) Plan Contributions........................................6
Limitation on Plan Contribution for Highly Compensated Employees...............6
Top-Heavy Plan Requirements....................................................7
Investment of Contributions.............................................................7
Previous Funds.................................................................8
Employer Stock Fund.....................................................................9
Vesting................................................................................10
Distributions Upon Retirement or Disability ...........................................10
Distribution Upon Death................................................................10
Distribution upon Termination of Employment............................................11
Non-alienation of Benefits.............................................................11
Reports to Profit Sharing Plan Participants............................................11
Plan Administration....................................................................11
Amendment and Termination..............................................................12
Merger, Consolidation or Transfer......................................................12
Federal Income Tax Consequences........................................................12
Lump Sum Distribution.........................................................13
Averaging Rules...............................................................13
Common Stock Included in Lump Sum Distribution................................13
Distribution: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA....14
ERISA and Other Qualifications.........................................................14
Restrictions on Resale.................................................................14
SEC Reporting and Short-Swing Profit Liability.........................................15
LEGAL OPINION...................................................................................16
-i-
THE OFFERING
Summary of the Reorganization
Bank is reorganizing into a federal mutual holding company form,
whereby the Bank will convert to a federally chartered stock savings bank as a
wholly owned subsidiary of the Company, and the Company will become a
majority-owned subsidiary of Willow Grove Mutual Holding Company (the "MHC"), a
federally chartered mutual holding company (the "Reorganization") pursuant to
the Bank's Plan of Reorganization From Mutual Savings Bank to Mutual Holding
Company (the "Plan of Reorganization") and the related offering of its Common
Stock (the "Offering") pursuant to the Bank's Plan of Stock Issuance (the "Plan
of Stock Issuance").
Securities Offered
The securities offered hereby are participation interests in the Plan.
Up to 168,959 shares (at a purchase price of $10.00 per share) of the Company's
par value $.01 per share common stock (the "Common Stock"). Common Stock may be
acquired in the Offering by the Plan to be held in an investment fund
established to primarily invest in the Common Stock of Willow Grove Bancorp,
Inc. (the "Employer Stock Fund"). The Company is the issuer of the Common Stock.
Only employees of the Bank may become participants in the Plan. The Common Stock
to be issued hereby is conditioned on the consummation of the Reorganization. A
Participant's investment in the Employer Stock Fund in the Reorganization is
subject to the priority purchase rights, applicable to the Participant, as set
forth in the Plan of Reorganization, and as described below. Information with
regard to the Plan is contained in this Prospectus Supplement and information
with regard to the Reorganization and the financial condition, results of
operation and business of the Company is contained in the attached Prospectus.
This Prospectus Supplement should be read with the attached Prospectus. The
address of the principal executive office of the Company and the Bank is Welsh
and Norristown Roads, Maple Glen, Pennsylvania 19002. The telephone number of
the Bank is (215) 646-5405.
Election to Purchase Common Stock in the Offering; Priorities
The Plan has recently been amended to permit each Participant to direct
the transfer of all or part of the funds which represent his or her beneficial
interest in the assets of the Plan to be invested in the Employer Stock Fund.
Accordingly, the Trustee of the Plan will subscribe for Common Stock offered for
sale in connection with the Offering in accordance with each Participant's
directions. In the event the Offering is oversubscribed and the Trustee is
unable to use the full amount allocated by a Participant to purchase Common
Stock in the Offering, the amount that is not invested in the Employer Stock
Fund will be reallocated on a pro rata basis to the other investment options
that the Participant has selected. If a Participant chooses not to direct the
investment of his or her Plan account balance, the Participant's Plan account
balance will remain in the other investment options of the Plan previously
directed by the Participant.
The shares of Common Stock to be sold in the Offering are being offered
in the following order of priority: (i) holders of deposit accounts at the Bank
with an aggregate balance of $50 or more on June 30, 1997; (ii) the Bank's;
(iii) holders of deposit accounts at Tax-Qualified Exployee Stock Benefit Plans
with an aggregate balance of $50 or more on _________ ____, 1998; (iv)
depositors and certain borrowers of the Bank as of the close of business on
_________ ___, 1998;
S-1
and (v) employees, officers and directors of the Bank and the Company
(the "Subscription Offering"). (Subject to the prior rights of holders of
subscription rights the Company may also offer shares of Common Stock in a
community offering and/or syndicated community offering.) To the extent that
Participants fall into one of the Subscription Offering categories, they have
subscription rights to purchase shares of Common Stock in the Subscription
Offering and are being permitted to use funds in their Plan account to pay for
the Common Stock that they may subscribe for. Common Stock so purchased will be
placed in the Participant's Employer Stock Fund within his/her Plan account.
The limitations on the amount of Common Stock that a person may
purchase in the Offering, which are described in the Prospectus, see
"Limitations on Common Stock Purchases," in the Prospectus, will be calculated
based on the aggregate amount directly purchased by a person in the Offering
together with the amount purchased with funds allocated to a Participant's Plan
account.
Value of Participation Interests
The assets of the Plan were valued at $1,689,596.89 as of June 30,
1998, representing the aggregate market value of all Participants' accounts and
earnings thereon, less previous withdrawals.
How to Use Plan Funds to Invest in Offering
Accompanying this Prospectus Supplement is a form (the "Investment
Election Form" attached as Annex A) which will enable a Participant to direct
that all or a portion of his or her beneficial interest in the Plan,
representing Plan contributions through ______________ 1998, be transferred
to the Employer Stock Fund. If a Participant wishes to invest all or part of his
or her beneficial interest in the assets of the Plan in the Common Stock issued
in the Offering, he or she should complete the Investment Election Fund.
Deadline for Participating in Offering
Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in the Offering indicated on the Investment
Election Form. Such Form then must be returned to Willow Grove Bank, Welsh and
Norristown Road, Maple Glen, Pennsylvania, 19002 Attn: Mr. John D. Foff, Jr., no
later than noon on _____________________ 1998.
Irrevocability of Election to Participate in Offering
A Participant's direction to transfer amounts credited to his or her
Plan account to the Employer Stock Fund in order to purchase shares
of Common Stock in the Offering is irrevocable.
Direction to Purchase Common Stock After the Offering
After the Offering, a Participant will continue to be able to direct
the investment of past
S-2
balances and current contributions in the investment options available under the
Plan, including the Employer Stock Fund (the percentage invested in any option
must be a whole percent). The allocation of a Participant's interest in the
various investment options offered under the Plan may be changed quarterly.
Special restrictions may apply to transfers directed to or from the Employer
Stock Fund by those Participants who are executive officers, directors and
principal shareholders of the Company and are subject to the provisions of
Section 16(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"),
as amended. In addition, Participants who are officers or directors, of the
Company or the Bank will not be able to transfer their initial investment out of
the Employer Stock Fund for a period of one (1) year following consummation of
the Reorganization.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Offering will be used in full by the Trustee
to purchase shares of Common Stock, except in the event of an over subscription,
as discussed above. The price paid for such shares of Common Stock will be
$10.00 per share, the same price as paid by all other persons who purchase
shares of Common Stock in the Offering.
Subsequent to the Offering, Common Stock purchased by the Trustee will
be acquired in open market transactions or from the Company's treasury stock
account. The prices paid by the Trustee of shares of Common Stock will not
exceed "adequate consideration" as defined in Section 3(18) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Nature of a Participant's Interest in Common Stock
The Common Stock will be held in the name of the Plan, as Trustee, and
will be allocated to a Participant's individual Plan account under the Plan.
Therefore, earnings with respect to a Participant's Plan account should not be
affected by the investment designations (including investments in Common Stock)
of other Participants. The Plan Administrator will vote such allocated shares,
if any, as described in the following paragraph.
Voting Rights of Common Stock
The Plan Administrator generally will exercise voting rights
attributable to all Common Stock held by the Employer Stock Fund. For matters
involving a tender offer for the Company, the Plan Administrator will vote such
allocated shares, if any, as directed by Participants with interests in the
Employer Stock Fund. Each Participant will be allocated voting instruction
rights reflecting such Participant's proportionate interest in the Employer
Stock Fund. The number of negative votes on each matter shall be proportionate
to the number of voting instruction rights exercised by Participants in the
affirmative and negative, respectively. For matters not involving a tender
offer, the Plan Administrator will vote such allocated shares in his own
discretion and Participants will not have an opportunity to direct the voting of
shares.
DESCRIPTION OF THE PLAN
S-3
Introduction
The Bank originally adopted the Plan January 1, 1993. Recently, the
Board of Directors of the Bank voted to include the Employer Stock Fund as an
investment option. The Plan is a profit sharing plan with a cash or deferred
compensation feature established in accordance with the requirements under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Bank has obtained a ruling from the Internal Revenue
Service (the "IRS") that the Plan is qualified under Section 401(a) of the Code,
and its related trust is tax exempt under Section 501(a) of the Code.
Employee Retirement Income Security Act.
The Plan is an "individual account plan" other than a "money purchase
pension plan" within the meaning of ERISA. As such, the Plan is subject to all
of the provisions of Title I (Protection of Employee Benefits Rights) and Title
II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of
ERISA, except the funding requirements contained in Part 3 of Title I of ERISA
which by their terms do not apply to an individual account plan (other than a
money purchase plan). The Plan is not subject to Title IV (Plan Termination
Insurance) of ERISA. The funding requirements contained in Title IV of ERISA are
not applicable to Participants or beneficiaries under the Plan.
Applicable federal law requires the Plan to impose substantial
restrictions on the right of a Participant to withdraw amounts held for his or
her benefit under the Plan prior to the Participant's termination of employment
with the Bank. A substantial Federal tax penalty also may be imposed on
withdrawals made prior to the Participant's attainment of age 59 1/2 ,
regardless of whether such a withdrawal occurs during his or her employment with
the Bank or after termination of employment.
Reference to Full Text of Plan
The following statements are summaries of certain provisions of the
Plan. They are not complete and are qualified in their entirety by the full text
of the Plan. Words capitalized but not defined in the following discussion have
the same meaning as set forth in the Plan. Copies of the Plan are available to
all employees by filing a request with the Bank, Welsh and Norristown Roads,
Maple Glen, Pennsylvania 19005, Attention: Mr. John Foff, Jr. Each employee is
urged to read carefully the full text of the Plan.
S-4
Eligibility and Participation
An employee of the Employer is eligible to become a Participant in the
Plan on the first January 1st or July 1st following the completion of one (1)
Year of Service, as defined below, with the Bank, provided he or she has reached
age 21 at such time. A Year of Service is defined as a 12 consecutive month
period during which an employee completes at least 1,000 hours of service with
the Bank. The plan year is January 1 to December 31 (the "Plan Year").
As of June 30, 1998, there were approximately 75 employees eligible
to participate in the Plan, and 70 employees participating by making elective
deferral contributions.
Contributions Under the Plan
401(k) Contributions. Each Participant in the Profit Sharing Plan is
permitted to elect to reduce his or her Compensation (as defined below) pursuant
to a "Salary Reduction Agreement" by an amount subject to certain restrictions
not to exceed $10,000 for 1998 or such higher amount as may be periodically set
by the IRS and have such amount contributed to the Plan on his or her behalf
(the "Pre-Tax Employee Contribution"). Pre-Tax Employee Contributions are
transferred by the Employer to the Trustee and credited to the Participant's
Plan account. The Plan defines "Compensation" as a Participant's total taxable
compensation paid by the Employer, including certain amounts of compensation
deferred from taxation by reason of Code Sections 125, 402(a)(8), 402(h), or
403(b). Generally, a Participant may elect to modify the amount contributed to
the Plan under his or her Salary Reduction Agreement with 30 days advance notice
of such modification. However, special restrictions apply to those Participants
who are subject to Section 16 of the Exchange Act.
After-Tax Contributions. Employee after-tax contributions are not
allowed under the Plan.
Employer Contributions. The Bank, in its sole discretion, may make a
contribution matching all or some portion of the Participant's Pre-Tax Employee
contribution. Furthermore, the Bank, in its sole discretion, may also make other
discretionary contributions to the Plan. Currently the Bank makes matching
contributions of 50% of the Participant's Pre-Tax Contribution up to 10% of
Compensation. Past contributions are no assurance that the Bank will continue to
make matching contributions in the future.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions and
forfeitures allocated to each Participant's Plan account and during any Plan
Year may not exceed the lesser of 25% of the Participant's Section 415
Compensation (as defined below) for the Plan Year or $30,000 (adjusted for
increases in the cost of living as permitted by the Code). A Participant's
Section 415 Compensation is a Participant's compensation, excluding certain
Employer contributions to the Plan or to any other plan of deferred compensation
or any distributions from a plan of deferred compensation. Annual additions
shall be limited to the extent necessary to prevent the limitations set forth in
the Code for all of the qualified defined benefit plans and defined contribution
plans maintained by the Bank from being exceeded. To the extent that
S-5
these limitations would be exceeded by reason of excess annual additions with
respect to a Participant, such excess will be disposed of as follows:
(i) The Administrator will return any voluntary employee contribution
to the extent that such return would reduce the excess;
(ii) Any excess amount in the Participant's Plan account will be used
to reduce the Employer's contributions for such Participant in the next
Limitation Year, and each succeeding Limitation Year if necessary; and
(iii) If an excess amount still exists, and the Participant is not
covered by the Plan at the end of the Limitation Year, the excess amount during
the succeeding Limitation Year, shall be allocated to each Participant then
actively participating in the Plan.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation under a salary reduction agreement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000 adjusted
for increases in the cost of living as permitted by the Code (the limitation for
1998 is $10,000). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross income for Federal
income tax purposes in the year they are made. In addition, any such excess
deferral will again be subject to Federal income tax when distributed by the
Plan to the Participant, unless the excess deferral (together with any income
allocable thereto) is distributed to the Participant not later than the first
April 15th following the close of the taxable year in which the excess deferral
is made. Any income on the excess deferral that is distributed not later than
such date shall be treated, for Federal income tax purposes, as earned and
received by the Participant in the taxable year in which the excess deferral is
made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of Deferred Compensation
that may be made to the Plan in any Plan Year on behalf of Highly Compensated
Employees (as defined below) in relation to the amount of Deferred Compensation
made by or on behalf of all other employees eligible to participate in the Plan.
Specifically, the actual deferral percentage (i.e., the average of the ratios,
calculated separately for each eligible employee in each group, by dividing the
amount of Deferred Compensation credited to the Plan account of such eligible
employee by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual deferral percentage of all other eligible employees, or (ii) the lesser
of (x) 200% of the actual deferral percentage of all other eligible employees,
or (y) the actual deferral percentage of all other eligible employees plus two
percentage points. In addition, the actual contribution percentage for such Plan
Years (i.e., the average of the ratios calculated separately for each eligible
employee in each group, by dividing the amount of voluntary Employee and
Employer matching contribution credited to the Plan account of such eligible
employee by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual contribution percentage of all other eligible employees, or (ii) the
lesser of (x) 200% of the actual contribution percentage of all other eligible
employees, or (y) the actual contribution percentage of all other eligible
employees plus two percentage points.
S-6
In general, a Highly Compensated Employee includes any employee who,
during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner
(i.e., owns directly or indirectly more than 5% of the stock of the Employer, or
stock possessing more than 5% of the total combined voting power of all stock of
the Employer), or (2) for the preceding year (i) had compensation from the
Employer in excess of $80,000, and (ii) if the Employer elects the application
of this clause for such preceding year, was in the top-group of employees for
such preceding year. An employee is in the top-paid group of employees for any
year if such employee is in the group consisting of the top 20% of employees
when ranked on the basis of Compensation paid during such year. Such amounts are
adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceeds the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Employer will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a
Top-Heavy Plan (as defined below), then (i) the Bank may be required to make
certain minimum contributions to the Profit Sharing Plan on behalf of non-key
employees (as defined below), and (ii) certain additional restrictions would
apply with respect to the combination of annual additions to the Plan and
projected annual benefits under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any
Plan Year if, as of the last day of the preceding Plan Year, the aggregate
balance of the Accounts of Participants who are Key Employees (as defined below)
exceeds 60% of the aggregate balance of the accounts of all Participants. Key
Employees generally include any employee who, at any time during the Plan Year
or any of the four preceding Plan Years, is (1) an officer of the Employer
having annual compensation in excess of 50% of the amount under Section
415(b)(1)(A) of the Code ($130,000 for 1998), (2) one of the ten employees
having annual Compensation greater than the Section 415(c)(1)(A) amount ($30,000
for 1998) and owning, directly or indirectly, the largest interests in the
Employer, (3) a 5% owner of the Employer, (i.e., owns directly or indirectly
more than 5% of the stock of the Employer, or stock possessing more than 5% of
the total combined voting power of all stock of the Employer) or (4) a 1% owner
of the Company having annual compensation in excess of $150,000.
Investment of Contributions
General. All amounts credited to Participants' accounts under the Plan
are held in the Trust Fund which is administered by the Trustee appointed by the
Bank's Board of Directors.
The Accounts of a Participant held in the Trust may be invested by the
Trustee at the direction of the Participant in the following investment funds
(collectively, the "Funds"):
a. Willow Grove Investment (Statement Account)
b. Fixed Income Securities Fund/Short-Term Federal Portfolio
S-7
c. Wellesley Income Fund
d. Wellington Fund
e. Windsor II
f. Explorer Fund
No more than once a quarter may a Participant elect (in increments of
1%) to have both portions of his or her participation interest invested either
in the Employer Stock Fund or among the other Funds changed. These elections
will be effective approximately fifteen business days from the date Willow Grove
Bank receives the properly completed Change of Investment Allocation Form. Any
amounts credited to a Participant's accounts for which investment directions are
not given will be invested in the Willow Grove Investment.
The Trustee, in his/her sole discretion, can make loans to
Participants. Subject to certain limitations, the loans must be made on a
nondiscriminatory basis, bear a reasonable interest rate and be adequately
secured. In the event that a Participant has a loan outstanding and becomes
entitled to payment of benefits from the Plan, the Trustee shall offset, at the
time of distribution, any outstanding indebtedness, including accrued interest,
for the total amount otherwise distributable to the Participant.
The net gain (or loss) of the Funds from investments (including
interest payments, dividends, realized and unrealized gains and losses on
securities, and expenses paid from the Trust) will be determined at least daily
during the Plan Year. For purposes of such allocations, all assets of the Trust
are valued at their fair market value.
Previous Funds. The annual percentage return on these Funds for the
prior three years was:
================================================================================
Fund 1997 1996 1995
- --------------------------------------------------------------------------------
Willow Grove Investment (Statement
Account) 7.0% 7.0% 7.0%
- --------------------------------------------------------------------------------
Fixed Income Securities Fund/
Short-Term Federal
Portfolio 12.3% 4.8% 6.5%
- --------------------------------------------------------------------------------
Wellesley Income Fund 28.9% 9.4% 20.2%
- --------------------------------------------------------------------------------
Wellington Fund 32.9% 16.2% 23.2%
- --------------------------------------------------------------------------------
Windsor II 38.8% 24.2% 32.4%
- --------------------------------------------------------------------------------
Explorer Fund 26.6% 14.0% 14.6%
================================================================================
A brief summary of such funds is as follows:
Willow Grove Investment (Statement Account) - Money invested in this
fund is guaranteed to earn 7% for 1998. This rate is compounded monthly and a
new rate of interest will be set at the beginning of each calendar year. The
principal value is federally insured.
The remaining investment options are mutual funds managed by the
Vanguard Group. Any investment program involving equities is subject to both
market risk (share price volatility over a time) and Fund Risk (meaning the
possibility that the fund's investment strategy may prove unsuccessful due to
its particular approach).
Fixed Income Securities Fund/Short-Term Federal Portfolio - Offers
current income with low credit risk by investing primarily in short-term U.S.
Government agency securities.
S-8
Wellesley Income Fund - Seeks to provide as much current income as is
consistent with reasonable risk. The fund also offers the potential for moderate
growth of capital by investing primarily in U.S. Government and Corporate fixed
income securities of investment grade quality.
Wellington Fund - Seeks conservation of principal, reasonable income
return, and profits without undue risk by investing in a diversified portfolio
of common stocks equities and bonds, with common stocks expected to represent
60% to 70% of total fund assets.
Windsor II - Seeks to provide long-term growth in capital and income by
investing primarily in common stocks equities. The fund's secondary objective is
to provide current income.
Explorer Fund - Invests primarily in equity securities of small
companies deemed to have favorable prospects for growth in market value.
Dividend income is expected to be incidental to this objective.
Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock
made on and after the effective date of the Reorganization and Stock Issuance.
Each Participant's proportionate undivided beneficial interest in the Employer
Stock Fund is measured in units. Each day, a unit value will be calculated by
determining the market value of the shares of Common Stock actually held and
adding to that any cash attributable to the Employer Stock Fund currently held
by the Trustee. This total will be divided by the number of units outstanding to
determine the unit value of the Employer Stock Fund. It is expected that all
purchases will be made at prevailing market prices. Under certain circumstances,
the Trustee may be required to limit the daily volume of shares purchased.
Pending investment in Common Stock assets held in the Employer Stock Fund will
be placed in money market or equivalent account.
Any brokerage commissions, transfer fees and other expenses incurred in
the sale and purchase of Common Stock for the Employer Stock Fund will be paid
out of a cash account managed by the Trustee. Therefore, although Participants'
accounts will not be directly adjusted for such fees, the market value of the
units held in their accounts will be reduced.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Company and the Bank and market conditions for the Common Stock generally.
Investments in the Employer Stock Fund involve certain special risks as
they are an indirect investment in the Common Stock of the Company. For a
discussion of these risk factors, see "Risk Factors" on page ______ in the
Prospectus.
Vesting
A Participant at all times has a fully vested nonforfeitable interest
in his or her Pre-Tax
S-9
Employee Contributions and the earnings thereon under the Plan. However,
Participants' vested interests in any matching or other discretionary
contributions allocated to his/her Plan account shall be determined in
accordance with the following schedule, based on the number of Years of Service
(as defined in the Plan) the Participant completes:
----------------------------------------------------
Years of Service Vested Interest
----------------------------------------------------
3 20%
----------------------------------------------------
4 40%
----------------------------------------------------
5 60%
----------------------------------------------------
6 80%
----------------------------------------------------
7 100%
----------------------------------------------------
A Participant leaving the employ of the Employer prior to complete
vesting, will forfeit the unvested portion of his/her Plan account upon five
consecutive 1-Year Breaks in Service. Amounts subject to forfeiture in the Plan
are then reallocated to the accounts of the remaining Participants based upon
each Participant's Compensation as compared to aggregate Compensation. The
allocation of forfeitures is done as of December 31.
Distribution Upon Retirement or Disability. Upon retirement or
Disability, a Participant may elect to have his/her vested account balance
distributed in either a (1) single lump-sum payment; or (2) equal monthly,
quarterly, semi-annual or annual installments. In any event the payment of the
Participant's benefits must begin no later than the April 1 following the
calendar year in which the Participant attains age 70 1/2 or the calendar year
in which the employee retires. Additionally, a Participant who suffers a
Disability (as defined in the Plan) shall become 100% vested in his/her Plan
account.
Distribution Upon Death. A Participant who dies before his or her
entire vested interest has been distributed shall have his or her benefits paid
to the surviving spouse in either a (1) single lump-sum payment; or (2) equal
monthly, quarterly, semi-annul, or annual installments. If the Participant
elected to and began receiving a distribution in the form of installments, such
beneficiary shall receive distributions over the remaining period, at the times
set forth in such election. Absent an election by the Participant, the Trustee,
subject to certain conditions, will either (1) determine the payment, interval
in which the installment payments shall be made or (2) invest the deceased
Participant's vested Plan account balance in a nontransferable annuity policy.
With respect to an unmarried Participant, and in the case of a married
Participant with special consent to the designation of a beneficiary other than
their spouse, payment of benefits to the deceased Participant's chosen
beneficiary shall be accomplished in the same manner as described above.
Distribution upon Termination of Employment. A Participant who has a
termination of employment shall be entitled to his/her Vested Plan account upon
the earlier of death, Disability, or their attainment of the Plan's normal
retirement age.
S-10
Non-alienation of Benefits. Except with respect to Federal income tax
withholdings and Qualified Domestic Relations (as defined in the Code), benefits
payable under the Plan shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, charge,
garnishment, execution, or levy of any kind, either voluntary or involuntary,
and any attempt to anticipate, alienate, sell, transfer, assign, pledge,
encumber, charge or otherwise dispose of any rights to benefits payable under
the Plan shall be void.
Reports to Profit Sharing Plan Participants
The Administrator (as defined below) will furnish to each Participant a
statement at least yearly showing (i) the balance in the Participant's Plan
account as of the end of that period, (ii) the amount of contributions allocated
to such Participant's Plan account for that period, and (iii) the adjustments to
such Participant's Plan account to reflect earnings or losses, distributions,
loans disbursed, loan repayments and/or transfers between investment funds.
Plan Administration
The Trustee with respect to the Plan is the named fiduciary of the Plan
for purposes of Section 402 of ERISA. Willow Grove Bank currently serves as
Trustee of the Plan's Trust. The Trustee receives, holds and invests the
contributions to the Plan in trust and distributes them to Participants and
beneficiaries in accordance with the terms of the Plan and the directions of the
Plan Administrator. The Trustee is responsible for investment of the assets of
the Trust.
Pursuant to the terms of the Plan, the Plan is administered by one or
more persons who are appointed by and who serve at the pleasure of the Bank (the
"Administrator"). Currently, the Plan Administrator is Willow Grove Bank. The
address and telephone number of the Administrator is Welch and Norristown Roads,
Maple Glen, Pennsylvania 19002; Attn: Mr. John Foff, Jr. (215) 646-5405. The
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of Plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
It is the current intention of the Bank to continue the Plan
indefinitely. Nevertheless, the Bank may terminate the Plan at any time. If the
Plan is terminated in whole or in part, then regardless of other provisions in
the Plan, each Participant affected by such termination shall have a fully
vested interest in his/her Plan account. The Bank reserves the right to make,
from time to time, any amendment or amendments to the Plan which do not cause
any part of the Trust to be used for, or diverted to, any purpose other than the
exclusive benefit of Participants or their beneficiaries; provided, however,
that the Bank may make any amendment it determines necessary or desirable, with
or without retroactive effect, to comply with ERISA and/or the Code.
S-11
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust assets to another plan, the Plan requires
that each Participant will (if either the Plan or the other plan were then
terminated) receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he or she would have been
entitled to receive immediately before the merger, consolidation or transfer (if
the Plan had then terminated).
Federal Income Tax Consequences
General. The following is only a brief summary of certain Federal
income tax aspects of the Plan which are of general application under the Code
and is not intended to be a complete or definitive description of the Federal
income tax consequences of participating in or receiving distributions from the
Plan. The summary is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
Participants are urged to consult their tax advisors with respect to any
distribution from the Plan and transactions involving the Plan.
The amended Plan will be submitted to the IRS in a timely manner for a
determination that it is qualified under Section 401(a) and 401(k) of the Code,
and that the related Trust is exempt from tax under Section 501(a) of the Code.
A plan that is "qualified" under these sections of the Code is afforded special
tax treatment which include the following: (1) the sponsoring employer is
allowed an immediate tax deduction for the amount contributed to the Plan each
year; (2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and (3) earnings of the plan are tax-exempt thereby
permitting the tax-free accumulation of income and gains on investments. The
Plan will be administered to comply in operation with the requirements of the
Code as of the applicable effective date of any change in the law. The Bank will
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Bank will
submit the Plan to the IRS for a determination that the Plan, as amended,
continues to qualify under Sections 401(a) and 501(a) of the Code and that it
continues to satisfy the requirements for a qualified cash or deferred
arrangement under Section 401(k) of the Code. Should the Plan receive from the
IRS an adverse determination letter regarding its tax exempt status, all
Participants would generally recognize income equal to their vested interest in
the Plan, the Participants would not be permitted to transfer amounts
distributed from the Plan to an Individual Retirement Account ("IRA") or to
another qualified retirement plan, and the Bank may be denied certain deductions
taken with respect to the Plan.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a Lump Sum Distribution if it
is made: (i) within one taxable year to the Participant or beneficiary; (ii) on
account of the Participant's death, Disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Participant's or
S-12
beneficiary's taxable income for Federal income tax purposes (the "Total Taxable
Amount") consists of the entire amount of such Lump Sum Distribution less the
amount of after-tax contributions, if any, made by the Participant to any other
profit sharing plans maintained by the Bank which is included in such
distribution.
Averaging Rules. The Small Business Job Protection Act of 1996 repealed
five-year income averaging for Lump Sum Distributions for taxable years
beginning after 1999. Ten-year averaging which was grandfathered for individuals
who attained the age of 50 before January 1, 1986 was retained. The portion of
the total taxable amount of a Lump Sum Distribution that is attributable to
participation after 1973 in this Plan or in any other profit sharing plan
maintained by the Bank (the "Ordinary Income Portion") will be taxable generally
as ordinary income for Federal income tax purposes. However for distributions
prior to the effective date, a Participant who has completed at least five years
of participation in this Plan before the taxable year in which the distribution
is made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in this Plan or any other profit sharing plan maintained by the Employer), may
elect to have the Ordinary Income Portion of such Lump Sum Distribution taxed
according to a special averaging rule ("Five-Year Averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
on or after the Participant turns 50 1/2 and the recipient elects to have any
other Lump Sum Distribution from a qualified plan received in the same taxable
year taxed under the special averaging rule. Under a special grandfathering
rule, individuals who turned 50 by 1986 may elect to have their Lump Sum
Distribution taxed under either the Five-Year Averaging rule or under the prior
laws; ten-year averaging rule. Such individuals also may elect to have that
portion of the Lump Sum Distribution attributable to the participant's pre-1974
participation in the Plan taxed at a flat 20% rate as gain from the sale of a
capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such Common
Stock, i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost of the Plan. The tax basis of such Common Stock, to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations to be issued by the IRS.
Distribution: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. Virtually all distributions from the Plan may be rolled over to
another qualified retirement plan or to an IRA without regard to whether the
distribution is a Lump Sum Distribution or a partial distribution. Participants
have the right to elect
S-13
to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Participant does not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
IRA, the distribution will be subject to a mandatory Federal withholding tax
equal to 20% of the taxable distribution. The principal types of distributions
which do not constitute eligible rollover distributions are (i) an annuity type
distribution made over the life expectancy of the Participant (or Participant
and another) or for a period of 10 years or more, (ii) a minimum distribution
required by Section 409(a)(9) of the Code, or (iii) the portion of any
distribution not includable in gross income, except that unrealized appreciation
in employee securities can be included in an eligible rollover distribution. The
tax law change described above did not modify the special tax treatment of Lump
Sum Distributions that are not rolled over or transferred, i.e., forward
averaging, capital gains tax treatment and the nonrecognition of net unrealized
appreciation, discussed earlier.
ERISA and Other Qualification
As noted above, the Plan is subject to certain provisions of ERISA, and
will be submitted to the IRS for a determination that it is qualified under
Section 401(a) of the Code.
The foregoing is only a brief summary of certain Federal income tax
aspects of the profit sharing plan which are of general application under the
code and is not intended to be a complete or definitive description of the
Federal income tax consequences of participating in or receiving distributions
from the profit sharing plan. Accordingly, each Participant is urged to consult
a tax advisor concerning the Federal, state and local tax consequences of
participating in and receiving distributions from the profit sharing Plan.
Restrictions on Resale
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Company as the term "affiliate" is used in Rules 144 and 405
under the Securities Act of 1933, as amended (the "Securities Act"), (e.g.,
directors, officers and substantial stockholders of the Company) may reoffer or
resell such shares only pursuant to a registration statement filed under the
Securities Act assuming the availability thereof, pursuant to Rule 144 or some
other exemption of the registration requirements of the Securities Act. Any
person who may be an "affiliate" of the Company may wish to consult with counsel
before transferring any Common Stock owned by him or her. In addition,
Participants are advised to consult with counsel as to the applicability of
Section 16 of the Exchange Act which may restrict the sale of Common Stock when
acquired under the Profit Sharing Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the
time of resale will be free to resell any shares of Common Stock allocated to
them under the Plan, either publicly or privately, without regard to the
Registration and Prospectus delivery requirements of the Securities Act or
compliance with the restrictions and conditions contained in the exemptive rules
thereunder. An "affiliate" of the Company is someone who directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control, with the Company. Normally, a director, principal officer or
major stockholder of a corporation may be deemed to be an "affiliate" of that
corporation. A person who may be deemed an "affiliate" of the Company at the
time of a proposed resale will be permitted to make public resales of the Common
Stock only
S-14
pursuant to a "reoffer" prospectus or in accordance with the restrictions and
conditions contained in Rule 144 under the Securities Act or some other
exemption from registration, and will not be permitted to use this Prospectus in
connection with any such resale. In general, the amount of the Common Stock
which any such affiliate may publicly resell pursuant to Rule 144 in any
three-month period may not exceed the greater of one percent of the Common Stock
then outstanding or the average weekly trading volume reported on the Nasdaq
National Market during the four calendar weeks prior to the sale. Such sales may
be made only through brokers without solicitation and only at a time when the
Company is current in filing the reports required of it under the Exchange Act.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Exchange Act imposes reports and liability
requirements on officers, directors and persons beneficially owning more than
10% of public companies such as the Company. Section 16(a) of the Exchange Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a Form
3 reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission ("SEC"). Certain changes in beneficial ownership, such as
purchases, sales, gifts and participation in savings and retirement plans must
be reported periodically, either on a Form 4 within ten days after the end of
the month in which a change occurs, or annually on a Form 5 within 45 days after
the close of the Company's fiscal year. Participation in the Employer Stock Fund
of the Plan by officers, directors and persons beneficially owning more than ten
percent of the Common Stock must be reported to the SEC at least annually on a
Form 4 or a Form 5 by such individuals.
In addition to the reporting requirements described above, Section
16(b) of the 1934 Act provides for the recovery by the Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Common Stock ("Section 16(b) Persons") resulting from the
purchase and sale or sale and purchase of the Common Stock within any six-month
period.
The SEC has adopted rules that provide exemption from the profit
recovery provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided certain
requirements are met.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D. C., which firm acted as
special counsel for the Company, the MHC and the Bank in connection with the
Reorganization and Stock Issuance.
S-15
ANNEX A
WILLOW GROVE BANK 401(k) PLAN AND TRUST
Investment Election Form
---------------------
Name of Plan Participant: ___________________________
Social Security Number: ___________________________
1. INSTRUCTIONS. The Willow Grove Bank 401(k) Plan and Trust ("Plan")
permits participants to direct their account balances into an fund: the Employer
Stock Fund. The percentage of a participant's account transferred at the
direction of the participant into the Employer Stock Fund will be used to
purchase shares of common stock of Willow Grove Bancorp, Inc. (the "Common
Stock").
To direct a transfer of all or part of the funds credited to your
account to the Employer Stock Fund, you should complete and file this form with
the Human Resources Department, no later than ________ __, 1998. A
representative for Willow Grove Bank will retain a copy of this form and return
a copy to you. If you need any assistance in completing this form, please
contact Valerie Winters If you do not complete and return this form to the
Willow Grove Bank by _______ __, 1998, the funds credited to your accounts under
the Plan will continue to be invested in accordance with your prior investment
direction, or in accordance with the terms of the Plan if no investment
direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan Administrator to
direct the Willow Grove Bank to sell the units currently credited to my account
and to purchase units in the Employer Stock Fund. Transfers of units from
existing investment Funds must be in multiples of 1% or whole percentages.
Purchases of units in the Employer Stock Fund will always be 100%:
===============================================================
SELL UNITS FROM Purchase Units in Employer Stock
Fund
---------------------------------------------------------------
Sell _____% of A Willow Grove Investment (Statement
Account)
---------------------------------------------------------------
Sell _____% of B Fixed Income Securities Fund/
Short-Term Federal Portfolio
---------------------------------------------------------------
Sell _____% of C Wellesley Income Fund
---------------------------------------------------------------
Sell _____% of D Wellington Fund
---------------------------------------------------------------
Sell _____% of E Windsor II
---------------------------------------------------------------
Sell _____% of F Explorer Fund
===============================================================
3. PURCHASER INFORMATION. The ability of a participant in the Plan to
purchase Common Stock in the reorganization of Willow Grove Bank and the related
stock issuance and to direct his or her current balances into the Employer Stock
Fund is based upon the participant's status as an Eligible Account Holder
Supplemental Eligible Account Holder, Other Member, and/or Director, Officer or
Employee of Willow Grove Bank, as defined in the William Grove Bancorp, Inc.
prospectus (the "Prospectus"). To the extent your order cannot be filled with
Common Stock purchased in the reorganization of Willow Grove Bank and the
related stock issuance, the amount not used to purchase Common Stock will be
returned to the other investment funds of the Plan pursuant to your existing
investment directions. Please indicate your status.
A-1
a. |_| Eligible Account Holder - Check here if you were a
depositor with $50.00 or more on deposit with the
Bank as of June 30, 1997.
b. |_| Supplemental Eligible Account Holder - Check here
if you were a depositor with $50.00 or more on
deposit with the Bank as of ______ __, 1998, but
are not an Eligible Account Holder.
c. |_| Other Members - Check here if you are a
depositor of the Bank on _________ 1998 or a
borrower Willow Grove Bank on May 15, 1995 and your
loan is outstanding on _________ 1998 and you are
not classified as either an Eligible Account Holder
or a Supplemental Account Holder.
d. |_| Directors, Officers and Employees - Check here if
you are a Director, Officer or Employee Willow
Grove Bank.
4. ACKNOWLEDGMENT OF PARTICIPANT. I understand that this Investment
Election Form shall be subject to all of the terms and conditions of the Plan. I
acknowledge that I have received a copy of the Prospectus and the Prospectus
Supplement.
______________________________
Signature of Participant
Date: ________________________
ACKNOWLEDGMENT OF RECEIPT BY PLAN ADMINISTRATOR. This Investment Form was
received by the Plan Administrator and will become effective on the date noted
below.
By:__________________________
Date:________________________
A-2
PROSPECTUS
WILLOW GROVE BANCORP, INC.
(Proposed Holding Company for Willow Grove Bank)
2,664,838 Shares of Common Stock Anticipated Maximum, As Adjusted
Willow Grove Bancorp, Inc. (the "Company"), a Federal corporation, is
offering up to 2,664,838 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the reorganization of Willow Grove
Bank, a Federally chartered mutual savings bank ("Willow Grove" or the "Bank"),
into the federal mutual holding company form of ownership, whereby the Bank will
convert to a federally chartered stock savings bank as a wholly owned subsidiary
of the Company, and the Company will become a majority-owned subsidiary of
Willow Grove Mutual Holding Company (the "MHC"), a federally chartered mutual
holding company (the "Reorganization"). The shares of Common Stock are being
offered hereby pursuant to the Company's Plan of Stock Issuance (the "Plan of
Stock Issuance"), which is an integral part of the Bank's Plan of Reorganization
from Mutual Savings Bank to Mutual Holding Company (the "Plan of
Reorganization"). The issuance of shares of the Company's Common Stock to the
MHC pursuant to the Plan of Reorganization and the issuance and sale of up to
2,664,838 shares of Common Stock offered by this Prospectus pursuant to the Plan
of Stock Issuance is referred to hereinafter as the "Stock Issuance." The number
of shares of Common Stock to be sold will be based on an independent appraisal
and, based on such appraisal, it is expected that the number of shares to be
sold will be within the range of 1,712,250 shares and 2,317,250 shares
(2,664,838 shares, as adjusted) (the "Estimated Offering Range"). Throughout
this prospectus, references to the "maximum" of the Estimated Offering Range
refer to the sale and issuance of 2,317,250 shares of Common Stock. A minimum of
at least 1,712,750 shares of Common Stock must be sold (the "minimum" of the
Estimated Offering Range). Under certain circumstances, the Company may increase
the number of shares of Common Stock offered hereby to up to 1,712,250 shares,
which is referred to herein as the "maximum, as adjusted" of the Estimated
Offering Range. References to the "mid-point" of the Estimated Offering Range
shall refer to the sale and issuance of 2,015,000 shares of Common Stock. See
"The Reorganization and Stock Issuance - Stock Pricing and Number of Shares to
be Issued." The purchase price of the shares of Common Stock being offered
hereby is $10.00 per share (the "Purchase Price"). Based on the Purchase Price,
the gross proceeds from the sale of shares of Common Stock will be between $17.1
million at the minimum of the Estimated Offering Range and $23.2 million at the
maximum of the Estimated Offering Range ($26.6 million at the maximum, as
adjusted of the Estimated Offering Range). The Company will use 50% of the
proceeds from the sale of shares of Common Stock (net of Reorganization-related
expenses and the loan to be made to the Company's ESOP, as defined below) to
purchase all of the to-be-issued shares of capital stock of the Bank; the Bank
is an affiliate of the Company.
Nontransferable rights to subscribe for the shares of Common Stock have
been granted, in order of priority, to (i) depositors of the Bank with account
balances of $50.00 or more as of the close of business on June 30, 1997
("Eligible Account Holders"), (ii) the Company's employee stock ownership plan
("ESOP"), (iii) depositors of the Bank with account balances of $50.00 or more
as of the close of business on __________, 1998 ("Supplemental Eligible Account
Holders"), (iv) depositors and certain borrowers of the Bank as of the close of
business on ___________, 1998 ("Other Members") and (v) officers, directors and
employees of the Bank, subject to the limitations described herein (the
"Subscription Offering"). In the event that there are any shares of Common Stock
which are not sold in the Subscription Offering, the Company anticipates that it
will offer any such shares of Common Stock in a community offering (the
"Community Offering"). If necessary, any shares of Common Stock not subscribed
for in the Subscription Offering or purchased in the Community Offering will be
offered to members of the general public on a best efforts basis by a selling
group of broker-dealers managed by Charles Webb & Company ("Webb"), a division
of Keefe, Bruyette & Woods, Inc. ("Keefe, Bruyette"), in a syndicated community
offering (the "Syndicated Community Offering"). (The Subscription Offering,
Community Offering and Syndicated Community Offering are referred to
collectively as the "Offerings").
With the exception of the ESOP, the maximum amount that any person may
purchase in any particular priority category in the Offerings is generally
limited to 15,000 shares of Common Stock ($150,000 aggregate Purchase Price). No
person, together with associates and persons acting in concert with such person,
may purchase in the aggregate more than 50,000 shares of the Common Stock sold
in the Offerings ($500,000 aggregate Purchase Price, assuming the sale of the
maximum, as adjusted of the Estimated Offering Range) (subject to adjustment).
The minimum purchase is 25 shares. See "The Reorganization and Stock Issuance -
Limitations on Common Stock Purchases."
The Subscription Offering will close at 12:00 noon, Eastern Time, on
__________, 1998 (the "Expiration Date"), unless extended by the Company and the
Bank, with regulatory approval if necessary. The Community Offering or any
Syndicated Community Offering must be completed within 45 days after the close
of the Subscription Offering, or ___________, 1998, unless extended by the
Company and the Bank, with regulatory approval if necessary. No single extension
can exceed 90 days, and the extensions may not go beyond __________, 2000. Any
extension of the Offerings will be conducted in accordance with the terms
described herein. Orders submitted are irrevocable until the completion of the
Stock Issuance; provided that, if the Stock Issuance is not completed within the
45-day period referred to above, unless such period has been extended, all
subscribers will have their funds returned promptly with interest at the Bank's
passbook rate, and all withdrawal authorizations will be canceled. Funds
submitted to subscribe for shares of Common Stock will be held at a segregated
account at the Bank until completion of the Stock Issuance. The completion of
the Subscription Offering is subject to potential delay and subscribers will
have no access to funds used to subscribe for shares of Common Stock, regardless
of any such delay. See "The Reorganization and Stock Issuance - Subscription
Offering and Subscription Rights."
Consummation of the Reorganization will result in certain additional
benefits to directors and officers of the Company and the Bank, with respect to
officers, participation in the ESOP. The Company expends to use a portion of the
net proceeds from the Offerings to make a loan to the ESOP, which loan is
anticipated to range from $1.4 million to $2.1 million. See "Summary--Benefits
of Reorganization to Officers and Directors."
The Company has applied to the National Association of Securities
Dealers, Inc. to have its Common Stock quoted on the Nasdaq National Market
under the symbol "WGBC." Prior to the Offerings, there has not been a public
market for the Common Stock, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that the Common Stock
will trade at or above the Purchase Price. See "Market for the Common Stock."
THE SHARES OF COMMON STOCK BEING OFFERED BY THIS PROSPECTUS WILL
REPRESENT A MINORITY OWNERSHIP INTEREST IN THE COMPANY. THE REMAINING ISSUED AND
OUTSTANDING SHARES OF COMMON STOCK, REPRESENTING A MAJORITY OF THE OUTSTANDING
SHARES OF COMMON STOCK, WILL BE OWNED BY WILLOW GROVE MUTUAL HOLDING COMPANY.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK SALES CENTER AT
(___) ___-____.
SEE "RISK FACTORS" BEGINNING ON PAGE __ HEREOF FOR A LIST OF FACTORS
THAT EACH PROSPECTIVE INVESTOR SHOULD CONSIDER BEFORE INVESTING.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION OR ANY OTHER FEDERAL AGENCY OR STATE SECUR-
ITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Estimated
Underwriting Estimated
Subscription Fees and Other Net
Price(1) Expenses(2) Proceeds(3)
- --------------------------------------------------------------------------------
Minimum Per Share $10.00 $0.52 $9.48
Midpoint Per Share $10.00 $0.46 $9.54
Maximum Per Share $10.00 $0.41 $9.59
Maximum Per Share, as adjusted $10.00 $0.37 $9.63
Total Minimum(1) $17,127,500 $889,000 $16,238,500
Total Midpoint(1) $20,150,000 $924,000 $19,226,000
Total Maximum(1) $23,172,500 $959,000 $22,213,500
Total Maximum, as adjusted(4) $26,648,380 $999,000 $25,649,380
================================================================================
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") dated September 4, 1998, which states that
the pro forma market value of the Common Stock that would be offered in a
full mutual-to-stock conversion of the Bank, assuming that a contribution
to a charitable foundation would be made in an amount equal to 4.0% of the
shares sold, ranged from $39.4 million to $53.3 million (the "Estimated
Valuation Range"), with a midpoint of $46.3 million. Upon consummation of
the Offerings, the Company anticipates that it will contribute shares of
Common Stock to the Willow Grove Foundation (the "Foundation") in an amount
equal to 4.0% of the shares sold in the Offerings. The Board of Directors
has established a public offering range such that the public ownership of
the Company will constitute a 44.3% ownership interest prior to the
issuance of shares to the Foundation. Accordingly, the Estimated Offering
Range to the public of the minority stock will be 1,712,750 shares at the
minimum, 2,015,000 shares at the midpoint, 2,317,250 shares at the maximum
and 2,664,838 shares, at the maximum, as adjusted. Based on the Estimated
Offering Range, and giving effect to the proposed contribution of shares of
Common Stock of the Foundation, the shares of Common Stock owned by the
public (other than the Foundation) will represent 43.5% of the shares of
Common Stock to be outstanding following consummation of the Reorganization
and Stock Issuance.
(2) Consists of the estimated costs to the Bank and the Company arising from
the Reorganization, including estimated fixed expenses of $725,000 and fees
to be paid to Webb in connection with the Offerings, which fees are
estimated to be $164,000, $199,000, $234,000, and $274,000, respectively,
at the minimum, midpoint, maximum and maximum, as adjusted. Webb is not
obligated to purchase any shares of Common Stock in the Offerings. Such
fees paid to Webb may be deemed to be underwriting fees. See "The
Reorganization and Stock Issuance - Marketing Arrangements." The actual
fees and expenses may vary from the estimates. See "Pro Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts. Includes
the purchase of shares of Common Stock by the ESOP, which initially will be
deducted from the Company's stockholders' equity. For the effects of such
purchase, see "Capitalization" and "Pro Form Data."
(4) Reflects a 15% increase in the Estimated Offering Range, which may occur
without a resolicitation of subscribers or any right of cancellation, due
to regulatory considerations or changes in market or general financial and
economic conditions prior to completion of the Reorganization or to fill
the order of the ESOP.
-----------------------------------------------
Charles Webb & Company
a Division of Keefe, Bruyette & Woods, Inc.
-----------------------------------------------
The date of this Prospectus is ____________, 1998.
[MAP of Montgomery and Bucks Counties, Pennsylvania identifying branch
office locations of Willow Grove Bank together with a smaller map of the
Commonwealth of Pennsylvania showing Montgomery and Bucks Counties and
identifying the cities of Harrisburg and Philadelphia, Pennsylvania to be
produced here.]
SUMMARY
This summary is qualified in its entirety by the more detailed
information regarding the Company, the Bank and the MHC (collectively, the
"Parties") and the Financial Statements of the Bank appearing elsewhere in this
Prospectus. This Prospectus contains certain forward looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Parties. Prospective investors are cautioned that
such forward looking statements are not guarantees of future performance and are
subject to various factors which could cause actual results to differ materially
from these estimates. These factors include changes in general economic and
market conditions, and the development of an interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Parties' operations and investments. See "Risk Factors" for a discussion of
other factors that might cause actual results to differ from such estimates.
Willow Grove Bancorp, Inc.
Willow Grove Bancorp, Inc. is being organized by the Bank for the
purpose of serving as the savings association holding company of the Bank upon
consummation of the Reorganization. The Company will be incorporated under
Federal law and, upon consummation of the Reorganization and Stock Issuance,
will purchase all of the capital stock of the Bank to be issued in the
Reorganization in exchange for 50% of the proceeds of the Stock Issuance (net of
Reorganization expenses and the loan to be made to the Company's ESOP) and will
retain the remaining net proceeds as its initial capitalization. Following the
Reorganization, the only significant assets of the Company will be the capital
stock of the Bank, the Company's loan to the ESOP and the remainder of the net
proceeds of the Stock Issuance retained by the Company. The business and
management of the Company initially will consist primarily of the business and
management of the Bank. Initially, the Company will neither own nor lease any
property, but will instead use the premises and equipment of the Bank. At the
present time, the Company does not intend to employ any persons other than
officers of the Bank, and the Company will utilize the support staff of the Bank
from time to time. Additional employees will be hired as appropriate to the
extent the Company expands or changes its business in the future. See "Business"
and "Management - Management of the Company."
The Company's executive office will be located at the executive office
of the Bank at Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002, and
its telephone number will be (215) 646-5405.
Willow Grove Bank
Willow Grove is a federally chartered, federally insured mutual savings
bank conducting business from its executive offices located in Maple Glen,
Pennsylvania and six branch offices in Willow Grove, Warminster (where two
branch offices are located), Dresher, Huntingdon Valley and Hatboro,
Pennsylvania. At June 30, 1998, the Bank had total assets of $405.4 million,
total deposits of $340.8 million and equity of $35.9 million.
1
Willow Grove is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured primarily by single-family residences
located in Bucks and Montgomery Counties, Pennsylvania. At June 30, 1998, Willow
Grove's net loans in portfolio totaled $315.7 million or 77.9% of total assets,
and its total loans receivable, including loans available for sale, amounted to
$340.5 million or 84.0% of total assets. Single family first mortgage loans
amounted to $243.1 million or 71.4% of the Bank's total loans receivable at such
date.
During the 1980's, the Bank experienced adverse results of operations
due to, among other factors, the economic downturn and increases in the levels
of the Bank's non-performing and underperforming assets. Under the direction of
its Board of Directors and its senior officers the Bank implemented a strategic
plan to improve the Bank's results of operations and improve its asset quality.
As a result, the Bank has reported net income in each of the past five fiscal
years while maintaining strong asset quality. More recently, the Bank has
implemented a strategic plan that has focused on diversifying its products and
services in order to be more like a full-service community bank, continuing to
maintain strong asset quality and increasing its deposits and overall market
presence.
o Diversification and Expansion of Products and Services. In recent
years the Bank has begun its efforts to become more like a
full-service community bank and, as a result, has concentrated its
efforts on diversifying and expanding both its lending and deposit
products. The Bank has reduced its emphasis on the origination of
single-family residential first mortgage loans. The Bank has
instead focused its efforts on increased originations of home
equity, commercial and multi-family real estate, construction and
commercial business loans, all of which generally have higher yields
and shorter terms to maturity and/or repricing than single-family
residential mortgage loans. In the deposit area, the Bank has
concentrated on reducing its cost of funds by emphasizing lower
costing checking and commercial business accounts. For the year
ended June 30, 1998, the Bank's interest rate spread and margin were
3.36% and 3.71%, respectively. In a further effort to expand its
traditional services, in the fall of 1998 the Bank will commence
offering securities and annuities sales through Willow Financial
Services.
o Growth. The Bank has increased its total assets by $172.8 million,
or 74.3%, from $232.6 million at June 30, 1994 to $405.4 million at
June 30, 1998. In recent years the Bank has added four new branch
offices to its network. The Bank expects that it will continue to
further expand its branch office network in the future. See
"Business."
o Asset Quality. While it has embarked on a diversification and
expansion policy, management believes that maintenance of strong
asset quality is imperative to Willow Grove's long-term
profitability. The Bank's total nonperforming assets, which consist
of non-accruing loans and loans 90 days or more delinquent and still
accruing interest (the Bank currently has no real estate acquired
through foreclosure or by deed-in-lieu thereof ("REO")), amounted to
$1.5 million, or 0.37% of total
2
assets, at June 30, 1998. The Bank's total charge-offs amounted to
$6,000, $445,000 and zero for the fiscal years ended June 30, 1998,
1997 and 1996, respectively. See "Business - Asset Quality."
o Capital Position. As of June 30, 1998, Willow Grove had total equity
of $35.9 million and it exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of
8.3%, 8.3% and 14.9%, as compared to the minimum regulatory
requirements of 1.5%, 3.0% and 8.0%, respectively.
o Community Orientation. Willow Grove is committed to meeting the
financial needs of the communities in which it operates. Management
believes that the Bank provides superior customer service on a
personalized and efficient basis. At June 30, 1998, substantially
all of the Bank's deposits and loans were to residents of its market
area. The Bank intends to continue its practice of investing in
loans and obtaining deposits from residents of its market area and
surrounding communities.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary federal regulator. The Bank is also regulated by the Federal Deposit
Insurance Corporation ("FDIC"), the administrator of the Savings Association
Insurance Fund ("SAIF"). The Bank is also subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") and is a member of the Federal Home Loan Bank ("FHLB")
of Pittsburgh, which is one of the 12 regional banks comprising the FHLB System.
Willow Grove's executive office is located at Welsh and Norristown
Road, Maple Glen Pennsylvania 19002, and its telephone number is (215) 646-5405.
Willow Grove Mutual Holding Company
As part of the Reorganization, the Bank will organize the MHC as a
federal mutual holding company. Upon consummation of the Reorganization and the
Stock Issuance as well as the proposed contribution of shares of Common Stock to
the Foundation, the MHC will own more than a majority (54.7%) of the issued and
outstanding shares of Common Stock. As long as they remain depositors of the
Bank, persons who had membership or liquidation rights with respect to the Bank
as of the date of the Reorganization will continue to have such rights solely
with respect to the MHC after the Reorganization.
The MHC's principal assets will be the shares of Common Stock received
in the Reorganization. Immediately after consummation of the Reorganization, it
is expected that the MHC will not engage in any business activity other than its
investment in, and control of, more than a majority of the issued and
outstanding shares of Common Stock of the Company. The MHC will be a mutual
corporation chartered under federal law and regulated by the OTS. The MHC will
be subject to the limitations and restrictions imposed on savings and loan
holding companies by Section 10(o)(5) of the Home Owner's Loan Act of 1933, as
amended (the "HOLA"). See "Regulation - The Mutual Holding Company."
3
The Reorganization
On July 28, 1998, the Board of Directors of the Bank adopted the Plan
of Reorganization, pursuant to which the Bank will reorganize into the federal
mutual holding company form of organization as a wholly owned subsidiary of the
Company, which in turn will be a majority-owned subsidiary of the MHC. The Plan
of Reorganization must be approved by members of the Bank as of the voting
record date ("Voting Record Date") established for a special meeting of members
("Special Meeting") to be called in order to consider the Plan of
Reorganization. Following receipt of all required regulatory approvals, the
approval of the members of the Bank entitled to vote on the Plan of
Reorganization, and the satisfaction of all other conditions precedent to the
Reorganization, the Bank will consummate the Reorganization. Following
completion of the Reorganization, the Bank in its stock form will continue to
conduct its business and operations from the same offices with the same
personnel as the Bank conducted prior to the Reorganization. The Reorganization
will not affect the balances, interest rates or other terms of the Bank's loans
or deposit accounts, and the deposit accounts will continue to be insured by the
FDIC to the same extent as they were prior to the Reorganization. The MHC
initially will be capitalized with $100,000. Upon consummation of the
Reorganization, such capital will be used for general corporate purposes. See
"The Reorganization and Stock Issuance."
Those persons who currently serve as directors of the Bank will be the
initial directors of the Bank in its stock form. The directors of the Company
and the MHC initially also will be the same as the current members of the Board
of Directors of the Bank. As a holding company parent of a federally chartered
savings bank, the Company will be required to register as a savings and loan
holding company pursuant to the HOLA, and will be subject to regulation,
examination and supervision by the OTS. For additional information, see
"Regulation - The Company."
The Reorganization will (i) enable the Bank to raise new equity capital
through the sale of its shares of capital stock, (ii) enhance the ability of the
Bank to continue to grow, through acquisitions and/or internally, and diversify
and (iii) enable the establishment of stock-based compensation plans for
directors, officers and employees of the Bank thereby providing additional
incentives to improve the performance of the Bank. Rather than reorganizing into
the second-tier mutual holding company form, the Bank could have reorganized
into a wholly owned stock-form subsidiary of a stock-form holding company (a
"standard conversion"). However, the amount of equity capital that would be
raised in a standard conversion would be substantially more than that which is
to be raised by the Bank in a minority stock issuance as a second-tier
subsidiary of a mutual holding company, which would make it more difficult for
the Bank to maximize the return on equity. A standard conversion also would
eliminate all aspects of the mutual form of organization. Formation of the
Company as a subsidiary of the MHC will facilitate any determination by
management to make future repurchases of Common Stock, subject to OTS
regulations, while preserving the mutual nature of the MHC. See "The
Reorganization and Stock Issuance--Purposes of the Reorganization." Upon
consideration of the foregoing, as well as other factors, the Board of Directors
of the Bank unanimously approved the Plan of Reorganization and the related Plan
of Stock Issuance as being in the best interest of the Bank, its members and the
customers served by the Bank.
The Stock Issuance
The Plan of Stock Issuance authorizes the Company to offer Common Stock
to persons other than the MHC in an amount less than 50% of the to-be issued and
outstanding shares of the Common Stock. The Company is offering between a
minimum of 1,487,500 and a maximum of 2,012,500 shares of Common Stock, subject
to adjustment of up to 2,314,375 shares of Common Stock, in the Offerings, which
will represent 43.5% of the Common Stock to be outstanding upon completion of
4
the Reorganization and Stock Issuance and the establishment of, and contribution
of shares to, the Foundation.
The corporate structure of the Bank, upon consummation of the
Reorganization the Stock Issuance and the proposed contribution of shares of
Common Stock to the Foundation, is diagramed below:
- ------------------------------------- -------------------------------------------- ---------------------------------
| Willow Grove | | Minority Stockholders | | Foundation |
| Mutual Holding Company | | (Excluding Foundation) | | |
- ------------------------------------- -------------------------------------------- ---------------------------------
| 54.74% of the | 43.51% of the | 1.74% of the
| Common | Common | Common
| Stock | Stock | Stock
- ----------------------------------------------------------------------------------------------------------------------------
| Willow Grove Bancorp, Inc. |
- ----------------------------------------------------------------------------------------------------------------------------
| 100% of the Common
| Stock
- ----------------------------------------------------------------------------------------------------------------------------
| Willow Grove Bank |
- ----------------------------------------------------------------------------------------------------------------------------
The illustration above is a projection based upon the number of shares of Common
Stock assured to be sold in the offerings.
Under current law, the MHC is not permitted to have its percentage
ownership of the Common Stock be less than a majority in interest. By virtue of
its ownership of more than a majority of the outstanding shares of Common Stock,
the MHC will be able to elect all members of the Board of Directors of the
Company and generally will be able to control the outcome of all matters
presented to the stockholders of the Company for resolution by vote. The
Reorganization also may tend to perpetuate the management of the Company and the
Bank. See Risk Factors -- Control of the Company by the MHC."
As a mutual institution, the MHC will have no authorized capital stock
and, thus, no stockholders. Holders of deposit accounts in the Bank and certain
borrowers will be members of the MHC entitled to vote on all matters presented
to members of the MHC for resolution by vote, including, without limitation,
election of directors of the MHC. Holders of deposit accounts in the Bank shall
be entitled, pro rata to the value of their accounts, to distribution of any
assets of the MHC remaining upon a voluntary or involuntary liquidation,
dissolution or winding-up of the MHC following the Reorganization. Stockholders
of the Company shall be entitled to a pro rata distribution of any assets of the
Company remaining upon a voluntary or involuntary liquidation, dissolution or
winding-up of the Company following the Reorganization, and will have no voting,
liquidation or other rights with respect to the MHC in their capacities as such
stockholders.
Pursuant to the Plan of Stock Issuance and in connection with the
Reorganization, the Company is offering up to 2,317,250 shares of Common Stock
in the Offerings (which may be increased to up to 2,664,838 shares without any
resolicitation). The shares of Common Stock are first being offered in the
Subscription Offering with nontransferable subscription rights being granted, in
the following order of priority, to (i) depositors of the Bank with account
balances of $50.00 or more as of the close of business on June 30, 1997
("Eligible Account Holders"), (ii) the ESOP, (iii) depositors of the Bank with
account balances of $50.00 or more as of the close of business on
5
_________, 1998 ("Supplemental Eligible Account Holders"), (iv) depositors and
certain borrowers of the Bank as of the close of business on _________, 1998
(other than Eligible Account Holders and Supplemental Eligible Account Holders)
("Other Members"), and (v) directors, officers and employees of the Bank.
Subscription rights will expire if not exercised by 12:00 noon, Eastern Time, on
__________, 1998, unless extended.
It is anticipated that any shares of Common Stock not subscribed for in
the Subscription Offering and Community Offering will be offered to certain
members of the general public in a Syndicated Community Offering.
Payments for subscriptions made by cash, check or money order will be
placed in a segregated account at the Bank and will earn interest at the Bank's
passbook rate (____% as of the date of this Prospectus) from the date of receipt
until the Reorganization is completed or terminated. Payments authorized by
withdrawal from deposit accounts at the Bank will continue to earn interest at
the contractual rate until the Reorganization is completed or terminated; these
funds will be otherwise unavailable to the depositor until such time. If a
withdrawal is authorized to fund the purchase of shares of Common Stock, the
funds will be withdrawn upon consummation of the Reorganization without penalty.
The Company and the Bank have retained Webb as consultant and advisor
in connection with the Offerings and to assist in soliciting subscriptions in
the Offerings. Webb may also manage a selling group of broker-dealers in the
Syndicated Community Offering to facilitate the Offerings. Webb is not obligated
to take or purchase any shares of Common Stock in the Offerings. See "The
Reorganization and Stock Issuance - Subscription Offering and Subscription
Rights," "- Community Offering" and "- Marketing Arrangements."
Restrictions on Transfer of Subscription Rights
Prior to the completion of the Reorganization, no person may transfer
or enter into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan of Stock Issuance or
the shares of Common Stock to be issued upon their exercise. Each person
exercising subscription rights will be required to certify that the purchase of
shares of Common Stock is solely for the purchaser's own account and that there
is no agreement or understanding regarding the sale or transfer of such shares.
See "The Reorganization and Stock Issuance - Restrictions on Transfer of
Subscription Rights and Shares." Subscription rights are nontransferable and
persons found to be attempting to transfer subscription rights will be subject
to the forfeiture of such rights and possible further sanctions and penalties
imposed by the OTS. The Company and the Bank will refer to the OTS any
situations that they believe may involve a transfer of subscription rights and
will not honor orders believed by them to involve the transfer of such rights.
Purchase Limitations
With the exception of the ESOP, which intends to purchase up to an
aggregate of 8% of the shares of Common Stock sold in the Offerings, or 137,020
shares and 185,380 shares at the minimum
6
and maximum of the Estimated Offering Range, respectively, the maximum amount
that any person may purchase in any priority category in the Subscription
Offering, as well as in the Community Offering and any Syndicated Community
Offering, is generally limited to 15,000 shares of Common Stock. No person,
together with associates of or persons acting in concert with such person, may
purchase in the aggregate more than 50,000 shares of Common Stock sold ($500,000
aggregate Purchase Price). For a definition of the terms "associate" and "acting
in concert," see "The Reorganization and Stock Issuance - Limitations on Common
Stock Purchases." At any time during the Offerings, and without further approval
by the members of the Bank, the Company and the Bank may, in their sole
discretion, increase the individual purchase limitations up to 5% of the shares
offered (115,562 shares at the maximum of the Estimated Offering Range). If the
purchase limitation is increased, persons who submitted an order for 15,000
shares of Common Stock will be given the opportunity to increase their order. In
the event of a decrease in the purchase limitation, any orders in excess of the
revised purchase limitation will be reduced to the extent necessary. The minimum
purchase is 25 shares. In the event of an oversubscription, shares will be
allocated in accordance with the Plan as described in "The Reorganization and
Stock Issuance - Subscription Offering and Subscription Rights" and "- Community
Offering."
Stock Pricing and Number of Shares to be Issued in the Stock Issuance
Federal regulations require the aggregate purchase price of the shares
of Common Stock to be consistent with an independent appraisal of the estimated
pro forma market value of the shares of Common Stock to be issued to the MHC and
sold in the Offerings following the Reorganization (including the contribution
of 4.0% of the shares of Common Stock sold to the Foundation). RP Financial, an
independent appraiser, has advised the Company that, in its opinion, dated
September 4, 1998, as amended on October 30, 1998 and November 11, 1998, the
Estimated Valuation Range of the shares of Common Stock if they were sold in a
full mutual-to-stock conversion was from $39.4 million to $53.3 million, with a
midpoint of $46.3 million. This appraisal of the Common Stock is not intended
and should not be construed as a recommendation of any kind as to the
advisability of purchasing such stock, nor can any assurance be given that
purchasers of the Common Stock will be able to sell such shares after the
Reorganization at or above the Purchase Price.
All shares of Common Stock issued in the Offerings will be sold at the
Purchase Price of $10.00 per share, which was established by the Board of
Directors of Willow Grove. The actual number of shares to be issued in the Stock
Issuance will be determined by the Company and the Bank based upon the final
updated valuation of the estimated pro forma market value of the Common Stock,
giving effect to the Reorganization and the Stock Issuance, at the completion of
the Offerings. The Company and the Bank have determined that the MHC, upon
consummation of the Reorganization and the Stock Issuance and prior to the
contribution to the Foundation, will own 55.7% of the issued and outstanding
shares of Common Stock. Accordingly, the Estimated Offering Range of the shares
of Common Stock to be sold in the Stock Issuance is expected to range from a
minimum of 1,712,750 shares to a maximum of 2,317,250 shares. Subject to
approval of the OTS, the Estimated Offering Range may be increased or decreased
to reflect market and economic conditions prior to the completion of the
Reorganization to fill the order of the ESOP, and under such circumstances the
Company and the Bank may increase or decrease the number of shares of Common
Stock to be issued in the Stock Issuance. No resolicitation of subscribers will
be made and
7
subscribers will not be permitted to modify or cancel their subscriptions unless
the gross proceeds from the sale of the shares of Common Stock are less than the
minimum or more than 15% above the maximum of the current Estimated Offering
Range (or 2,664,838 shares). An affirmative response to any resolicitation must
be received by the Bank in order to confirm subscriptions. In connection with a
resolicitation, to the extent that subscriptions are canceled, rescinded or
reduced, all funds delivered to the Company or the Bank will be promptly
returned with interest earned from the date of receipt, and withdrawal
authorizations will be reduced or canceled. See "Pro Forma Data," "Risk Factors
- - Possible Dilutive Effect of Issuance of Additional Shares" and "The
Reorganization and Stock Issuance - Stock Pricing and Number of Shares to be
Issued."
In connection with the Reorganization, the Company and Willow Grove
intend to establish the Foundation, with the Company contributing to the
Foundation shares of Common Stock equal to 4.0% of the shares sold in the
Offerings immediately following completion of the Reorganization. The
establishment of the Foundation was taken into account in determining the
estimated pro forma market value of the Common Stock. In the event the
Reorganization and Stock Issuance did not include the Foundation, the mid-point
of the Estimated Offering Range, based on the appraisal of RP Financial, would
be $21.3 million rather than $20.2 million. See "Risk Factors - Establishment of
the Foundation - Comparison of Valuation and Other Factors Assuming the
Foundation is Not Established as Part of the Reorganization" and "Comparison of
Valuation and Pro Forma Information with No Foundation."
The Willow Grove Foundation
As a community oriented institution, the Bank has implemented a
community enrichment program (the "Community Enrichment Program") in order to
support charitable organizations within the communities served by the Bank. In
the fiscal year ended June 30, 1998 and 1997, the Bank's contributions to its
Community Enrichment Program amounted to $373,000 and $259,000, respectively.
In furtherance of the Bank's commitment to the communities that it
serves, the Plan of Reorganization provides for the establishment of a private
charitable foundation in connection with the Reorganization. The Plan provides
that the Bank and the Company will create The Willow Grove Foundation, which
will be incorporated under Delaware law as a nonstock corporation, and will fund
the Foundation with shares of Common Stock contributed by the Company, as
further described below. The Company and the Bank believe that the funding of
the Foundation with Common Stock of the Company is a means of enhancing the bond
between the Bank and the communities that it serves and thereby enable such
communities to share in the potential growth and success of the Company over the
long term. By further enhancing the Bank's visibility and reputation in the
communities that it serves, the Bank believes that the Foundation will benefit
the long term value of the Bank's community banking franchise. See "The
Reorganization Establishment of the Foundation - Structure of the Foundation."
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation, which initially will be comprised of two
members of the Company's and the Bank's Board of Directors and four other
individuals chosen in light of their commitment and service to charitable
8
and community purposes. The directors of the Foundation will be responsible for
establishing the policies of the Foundation with respect to grants or donations
by the Foundation, consistent with the purposes for which the Foundation was
established, and will also be responsible for directing the activities of the
Foundation, including matters related to ownership of the Common Stock held by
the Foundation. However, it is expected that establishment of the Foundation
will be subject to certain conditions, including, among others, a requirement
that the Common Stock of the Company held by the Foundation be voted in the same
ratio as all other shares of the Company's Common Stock on all proposals
considered by stockholders of the Company. See "The Reorganization and Stock
Issuance - Establishment of the Foundation-Regulatory Conditions Imposed on the
Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Reorganization authorized but unissued
shares of Common Stock in an amount equal to 4.0% of the shares of Common Stock
sold in the Offerings. Such contribution, once made, will not be recoverable by
the Company or the Bank. Assuming the sale of shares at the maximum of the
Estimated Offering Range, 92,690 shares would be contributed to the Foundation,
the Company will have 5,325,190 shares outstanding of which the Foundation will
own 92,690 shares, or 1.7%. Due to the issuance of additional shares of Common
Stock to the Foundation, persons purchasing shares in the Stock Issuance will
have their ownership and voting interests in the Company diluted from 44.3% to
43.5% and the MHC will have its ownership and voting interests diluted from
55.7% to 54.7%. See "Pro Forma Data."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, offset in part by a
corresponding tax benefit, during the quarter in which the contribution is made,
which is expected to be the second quarter of fiscal 1999. Such expense will
reduce earnings and have a material impact on the Company's earnings for such
quarter and for the year. Assuming a contribution of $927,000 in Common Stock,
and assuming an effective tax rate of 34.0%, the Company estimates a net tax
effected expense of $612,000.
In addition to the contribution of shares of Common Stock to the
Foundation, after consummation of the Reorganization, the Bank may make
additional cash contributions to the Foundation or for other charitable
purposes. Although no decision has been made as to the amount of such additional
cash contributions, the Bank is committed to continuing to support charitable
organizations in the communities served by the Bank. It is anticipated that any
decision by the Bank to make additional cash contributions will be based on,
among other factors, the Bank's profitability, the needs of charitable
organizations in the community and the deductibility of such expenses. Given the
expenses associated with the Community Enrichment Program, which amounted to
approximately 9.8% and 6.6% of the Bank's pre-tax net income in fiscal 1998 and
1997, respectively, expenses related to the Foundation and additional
contributions pursuant to the Bank's Community Enrichment Program may be
significant. For further discussion of the Foundation and its impact on
purchasers in the Stock Issuance, see "Risk Factors - Establishment of the
Foundation," "Pro Forma Data," "Comparison of Valuation and Pro Forma
Information With No Foundation" and "The Reorganization and Stock Issuance -
Establishment of the Foundation."
9
Reorganization to Officers and Directors
General. In connection with the Reorganization, the Bank's directors
and executive officers as a group (12 persons) have proposed to purchase 200,000
shares of Common Stock, or 11.7% and 8.6% of the shares at the minimum and
maximum of the Estimated Offering Range, respectively, excluding shares to be
issued to the Foundation.
The ESOP. The Company has adopted the ESOP, a tax-qualified benefit
plan for officers and employees of the Company and the Bank, which intends to
purchase 8% of the shares of Common Stock sold in the Offerings, or 137,000
shares ($1.4 million) and 185,000 shares ($1.9 million) at the minimum and
maximum of the Estimated Offering Range, respectively. The Company intends to
use a portion of the net proceeds retained by it to make a loan directly to the
ESOP to enable the ESOP to purchase such shares. See "Management - Benefits -
Employee Stock Ownership Plan."
Stock Option Plan. Following consummation of the Reorganization, the
Company intends to adopt a stock option plan for the benefit of the directors,
officers and employees of the Company and the Bank (the "Stock Option Plan"),
pursuant to which the Company intends to reserve a number of shares of Common
Stock equal to an aggregate of 10% of the shares of Common Stock sold in the
Offerings (231,725 shares at the maximum of the Estimated Offering Range) for
issuance pursuant to stock options and stock appreciation rights. The Stock
Option Plan will not be implemented prior to the receipt of stockholder approval
of the plan. For stock option plans implemented within one year of a mutual
holding company reorganization and stock issuance, OTS regulations currently
permit an aggregate of up to 30% of the shares available under the Stock Option
Plan to be granted to non-employee directors. In addition, OTS regulations
further provide that under such stock option plans, no officer may receive stock
options for more than 25% of the shares available under the stock option plan,
which, in the Company's case, would amount to 57,931 maximum of the Estimated
Offering Range. See "Management - Benefits - Stock Option Plan."
Recognition and Retention Plan. Following consummation of the
Reorganization, the Company intends to adopt a recognition and retention plan
for the benefit of the directors, officers and employees of the Company and the
Bank (the "Recognition Plan" or "RRP"). The Recognition Plan will not be
implemented prior to the receipt of stockholder approval of the plan. It is
expected that the Recognition Plan will be submitted to stockholders for
approval at the same time as the Stock Option Plan. Upon the receipt of such
approval, the Recognition Plan is expected to purchase a number of shares of
Common Stock either from the Company or in the open market equal to an aggregate
of 4% of the shares of Common Stock sold in the Offerings (80,500 shares or
$805,000 at the maximum of the Estimated Offering Range). Similar to the
treatment of the Stock Option Plan, current OTS regulations provide that, with
respect to stock benefit plans such as the Recognition Plan implemented within
one year of a mutual holding company reorganization and stock issuance, an
aggregate of no more than 30% of the shares available under such plan may be
awarded to non-employee directors and no more than 25% of the shares available
under such plan may be awarded to any individual officer. See "Management -
Benefits - Recognition Plan."
The following table presents the dollar value at the minimum and the
maximum of the Estimated Offering Range of the shares to be reserved for, or
purchased for distribution by, the proposed stock benefit plans to be
implemented upon consummation of the Reorganization, as well as the percentage
of issued and outstanding shares of Common Stock which will be represented by
such shares.
Value of Shares(1)
--------------------------------------------
At the At the
Minimum of Maximum of Percentage of
Estimated Estimated Issued and
Stock Benefit Plans: Valuation Range Valuation Range Outstanding Shares(2)
- -------------------- --------------- --------------- ---------------------
(Dollars in Thousands)
Stock Option Plan NA(3) NA(3) 4.17%
RRP $ 806 $ 927 1.74
ESOP 1,370 1,854 3.48
- -----------------
(1) Assumes that the value is equal to the Purchase Price of $10.00 per
share.
(2) Reflects shares in stock benefit plans as a percentage of total issued
and outstanding shares including shares to be issued to the MHC and the
Foundation. Shares to be reserved for issuance under the Stock Option
Plan are assumed to be issued and outstanding pursuant to option
exercises only for purposes of computing the percentage of the Stock
Option Plan. Otherwise, no exercise of stock options is assumed, and
shares for the RRP are assumed to be purchased on the open market.
(3) Awards under Stock Option Plan are not valued as value is realized only
to the extent the market value of Common Stock increases subsequent to
the date of grant.
10
Employment Agreements. Upon consummation of the Reorganization, the
Bank intends to enter into a two-year employment agreement with Mr. Frederick A.
Marcell, Jr., President. If the employment of Mr. Marcell is terminated as a
result of a change in control of the Company, he would be entitled to a cash
severance amount equal to two times his base salary and annual bonus (or
$327,000, assuming such change in control had occurred on June 30, 1998). At
least 60 days prior to each annual anniversary date of the employment agreement,
the Boards of Directors of the Bank shall determine whether or not to continue
the term of the agreement. In addition, the three other current executive
officers of the Bank will enter into one-year employment agreements with the
Bank upon consummation of the Reorganization. See "Management - Management of
the Bank - Employment Agreements."
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no Prospectus will be
mailed any later than five days prior to such date or hand delivered any later
than two days prior to such date. Execution of the order form will confirm
receipt or delivery of the Prospectus in accordance with Rule 15c2-8. Order
forms will be distributed only with a Prospectus. The Company and the Bank will
accept for processing only orders submitted on original order forms. Copies of
order forms will not be accepted nor will order forms unaccompanied by a
properly executed certification form be accepted. Payment by check, money order,
cash or debit authorization to an existing account at the Bank must accompany
the order form. No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the close of business on the Eligibility
Record Date (June 30, 1997) or the Supplemental Eligibility Record Date
(__________, 1998), and/or depositors and certain borrowers as of the close of
business on the Voting Record Date (__________, 1998), must properly and fully
list all accounts on the stock order form giving all names as reflected on each
account and the correct account numbers. The records of the Bank will be deemed
to control with respect to all matters related to the existence of subscription
rights and/or one's ability to purchase shares of Common Stock in the
Subscription Offering. See "The Reorganization and Stock Issuance - Procedure
for Purchasing Shares in the Subscription Offering."
In order to purchase shares of Common Stock in the Offerings,
subscribers must submit a properly completed order form as well as a related
certification form. The certification form is required pursuant to regulations
of the OTS. It is the Bank's understanding that the certification form is merely
to provide furhter assurance that investors have received a Prospectus, advises
investors that certain risk factors are discussed in Prospectus and that the
shares of Common Stock are not insured deposits nor are they guaranteed by the
Bank or any government agency. The certification form will be used only in the
determination whether shares of Common Stock should be issued and will not be
used by the Company or the Bank for any purpose subsequent to such issuance.
Execution of the certification form will not constitute a waiver of any rights
that an investor may have under the Securities Act of 1933.
Use of Proceeds
The net proceeds from the sale of the shares of Common Stock in the
Offerings are estimated to be between $16.2 million and $22.2 million ($25.6
million assuming a 15% increase in the Estimated Offering Range), depending on
the number of shares of Common Stock sold and the expenses of the
Reorganization. See "Pro Forma Data." The Company will purchase all of the
capital stock of the Bank to be issued in the Reorganization in exchange for 50%
of the Offerings proceeds (net of expenses and the loan to be made to the ESOP)
and will retain the remaining net proceeds as its initial capitalization. The
Company intends to use a portion of the net proceeds retained by it to make a
loan directly to the ESOP to enable the ESOP to purchase up to 8% of the
11
shares of Common Stock sold in the Stock Issuance. The amount of the loan is
expected to be between $1.4 million and $1.9 million at the minimum and maximum
of the Estimated Offering Range, respectively. See "Management - Management of
the Company - Benefits - Employee Stock Ownership Plan." The remaining net
proceeds retained by the Company initially may be used to invest in U.S.
Government and federal agency securities of various maturities, mortgage-backed
or other securities, deposits in either the Bank or other financial
institutions, or a combination thereof. Ultimately, the portion of net proceeds
retained by the Company may be used to support the Bank's lending activities, to
support the future expansion of operations through establishment of additional
branch offices or other customer facilities, acquisitions of other financial
service organizations, such as other savings institutions or commercial banks
(although no such transactions are specifically being considered at this time),
and for other business and investment purposes, including the payment of regular
cash dividends and possible repurchases of the Company's Common Stock. See
"Dividend Policy." Funds contributed to the Bank from the Company will be used
for general business purposes. The proceeds will be used to support the Bank's
lending and investment activities and thereby enhance the Bank's capabilities to
serve the borrowing and other financial needs of the communities it serves. In
addition, the Bank may use a portion of the net proceeds to repay borrowings in
the ordinary course. See "Use of Proceeds."
Dividends
Following consummation of the Reorganization, the Board of Directors of
the Company intends to consider implementation of a policy of paying quarterly
cash dividends on the Common Stock. However, there has been no determination
made at this point in time as to the initial rate of dividend, if any, to be
paid on the Common Stock. Declarations of dividends by the Company's Board of
Directors will depend upon a number of factors, including the amount of the net
proceeds retained by the Company in the Reorganization, investment opportunities
available to the Company or the Bank, capital requirements, the Company's and
the Bank's financial condition and results of operations, tax considerations,
statutory and regulatory limitations, and general economic conditions. The
payment of dividends by the Company also will depend, in part, on the payment of
dividends by the Bank to the Company, which Bank dividends are subject to OTS
regulations. See "Regulation--the Bank--Capital Distributions." It is currently
unclear what limitations may exist with respect to the Company's ability to pay
dividends since the OTS has not promulgated regulations with respect to this
matter. However, the OTS may, by regulation or otherwise, impose similar
restrictions on the Company's ability to pay dividends as are imposed on the
Bank. There can be no assurances that dividends will in fact be paid on the
Common Stock or that, if paid, such dividends will not be reduced or eliminated
in future periods. Furthermore, the Company has committed that it will not pay
or undertake any action to affect a return of capital for one year following the
Stock Issuance. For a more detailed discussion of the factors that may affect
the payment of dividends, see "Dividend Policy."
Waivers of Dividends by the MHC
It has been the recent practice of the OTS to permit mutual holding
companies to waive the receipt of cash dividends declared by savings association
subsidiaries or subsidiary holding companies on a case-by-case basis and subject
to the satisfaction of certain conditions, although there can be no assurance
that the OTS will permit future dividend waivers, or of the terms of such
permitted waivers. The Board of Directors of the MHC, which initially will
consist of the same individuals as the Board of Directors of the Bank, will
determine whether the MHC will waive receipt of such dividends as such dividends
are declared by the Company. The MHC may elect to receive dividends and to
utilize the dividends received, if any, for general corporate purposes and to
fund the purchase of Common Stock in the open market, as well as the payment of
miscellaneous expenses. Any waiver of dividends
12
by the MHC may result in an adjustment to the ratio pursuant to which shares of
Common Stock are exchanged for shares of a stock holding company should the MHC
convert from the mutual to stock form of organization. Such an adjustment would
have the effect of diluting the ownership interest of stockholders other than
the MHC. The Board of Directors of the MHC presently intends to waive the
receipt of dividends declared by the Company and to seek OTS approval to do so.
See Risk Factors - Waiver of Dividends by the MHC," "MHC Conversion to Stock
Form" and "Dividend Policy."
Conversion of the MHC to Stock Form
Although the MHC may convert to the stock form of organization (a
"Conversion Transaction") in the future and OTS regulations provide for a
Conversion Transaction, there can be no assurance when, if ever, a Conversion
Transaction will occur, or what conditions may be imposed by the OTS on any
Conversion Transaction. Any Conversion Transaction would be subject to federal
securities laws and the regulations of the OTS in effect at the time of the
Conversion Transaction. In the event of a Conversion Transaction, subject to OTS
approval, (i) the stockholders of the Company other than the MHC will be
entitled to exchange their shares of Common Stock for shares of the stock
holding company in a manner that is deemed fair and reasonable to the
stockholders and subject to the stock purchase limitations of the OTS conversion
regulations (which may require, as a condition to the approval of the Conversion
Transaction by the OTS, that certain insiders of the Company who have
accumulated shares in excess of the stock purchase limitations of the Conversion
Transaction to divest such shares, and may also potentially restrict or prohibit
additional purchases of common stock of the stock holding company in the
Conversion Transaction by other stockholders that could be in excess of such
stock purchase limitation), or (ii) the MHC may conduct a Conversion Transaction
that does not exchange shares of Common Stock for stock of the stock holding
company; provided, however, the MHC must purchase all shares not owned by it
simultaneously with the closing of such Conversion Transaction at the fair
market value of such shares, determined as if such shares had such exchange
rights, as determined by an independent appraisal. The precise treatment of a
Conversion Transaction by the OTS cannot be determined at this time and the OTS
may impose, or the regulations of the OTS may require, restrictions or
conditions that may adversely affect minority stockholders. See "MHC Conversion
to Stock Form."
Market for Common Stock
The Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Company has
applied to have the Common Stock listed on the Nasdaq National Market under the
symbol "WGBC." Keefe, Bruyette has indicated its intention to act as a market
maker in the Common Stock following the consummation of the Reorganization,
depending on trading volume and subject to compliance with applicable laws and
regulatory requirements. Furthermore, Webb has agreed to use its best efforts to
assist the Company in obtaining additional market makers for the Common Stock.
No assurance can be given that an active and liquid trading market for the
Common Stock will develop. Further, no assurance can be given that purchasers
will be able to sell their shares at or above the Purchase Price after the
Reorganization. See "Risk Factors -- Absence of Market for the Common Stock" and
"Market for the Common Stock."
13
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors, including, among other factors, control of
the Company by the MHC, waiver of dividends by the MHC, the potential for a low
return on equity following the Reorganization and the uncertainty as to future
growth opportunities, the dilutive effect of the issuance of additional shares
of Common Stock, the charitable foundation to be established in connection with
the Reorganization, the potential effects of changes in interest rates and the
current interest rate environment, risks related to construction and land
development loans, multi-family residential real estate loans, commercial real
estate loans and commercial business loans, competition, the Bank's geographic
concentration of loans, certain anti-takeover provisions, regulatory oversight,
the absence of a market for the Common Stock, a possible increase in the number
of shares issued in the Reorganization, potential increased compensation
expenses after the Reorganization, possible adverse tax consequences of the
distribution of subscription rights to purchase the Common Stock, compliance
with the Year 2000 issues, certain additional anti-takeover considerations and
the potential delay in consummation of the Reorganization and the irrevocability
of orders.
14
SELECTED FINANCIAL AND OTHER DATA
(Dollars in Thousands)
The following selected historical financial data is derived in part
from, should be read in conjunction with, and is qualified in its entirety by,
the historical financial statements of the Bank, including the related notes,
included elsewhere herein.
At June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Selected Financial Condition Data:
Total assets............................. $405,374 $354,679 $312,326 $293,589 $232,551
Cash and cash equivalents................ 18,291 4,204 4,282 6,871 6,488
Investment securities held to maturity... -- 3,999 -- 55,480 61,341
Securities available for sale............ 48,111 45,766 50,163 742 180
Loans available for sale................. 12,152 6,173 5,140 9,370 562
Loans receivable, net.................... 315,705 284,596 243,310 210,212 151,341
Real estate held for investment, net..... -- 180 204 206 206
Deposits................................. 340,793 309,726 267,695 237,645 204,022
Borrowings............................... 21,000 6,500 10,120 22,620 120
Total Equity............................. 35,945 33,122 30,374 28,420 24,615
Year Ended June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Selected Operating Data:
Interest income.......................... $ 28,604 $ 25,423 $ 22,105 $ 19,848 $ 15,630
Interest expense......................... 15,097 13,817 12,370 10,207 6,920
-------- -------- -------- -------- --------
Net interest income...................... 13,507 11,606 9,735 9,641 8,710
Provision for loan losses................ 993 185 210 60 156
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................ 12,514 11,421 9,525 9,581 8,554
Non-interest income...................... 760 786 1,245 1,553 1,500
Non-interest expense..................... 9,462 8,284 6,024 5,598 4,179
-------- -------- -------- -------- --------
Income before income taxes............... 3,812 3,923 4,746 5,536 5,875
Income taxes............................. 1,367 1,548 1,744 2,108 2,157
Change in accounting principle........... -- -- -- -- 333
-------- -------- -------- -------- --------
Net income............................... $ 2,445 $ 2,375 $ 3,002 $ 3,428 $ 4,051
======== ======== ======== ======== ========
Key Operating Ratios:(1)
At or For the Year Ended June 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Performance Ratios:
Return on average assets................... 0.65% 0.71% 1.02% 1.28% 1.97%
Return on average equity................... 6.81 7.54 10.11 12.73 17.67
Average interest-earning assets to average
interest-bearing liabilities............. 108.22 108.06 108.74 108.78 110.26
Interest rate spread(2).................... 3.36 3.21 3.02 3.35 4.01
Net interest margin(2)..................... 3.71 3.56 3.40 3.69 4.36
Asset Quality Ratios:
Nonperforming assets to total assets at end
of period(3)............................. 0.37% 0.54% 0.87% 0.20% 0.28%
Allowance for loan losses to nonperforming
loans at end of period................... 178.98 87.62 71.67 291.89 257.41
Allowance for loan losses to total loans at
end of period............................ 0.83 0.58 0.79 0.81 1.08
Capital and Other Ratios:
Average equity to average assets........... 9.59% 9.39% 10.09% 10.02% 11.17%
Tangible equity to assets at end of
period................................. 8.32 8.70 9.00 8.60 9.02
Total capital to risk-weighted assets...... 14.89 15.87 16.06 18.17 20.13
- ----------
(1) With the exception of end of period ratios and ratios for the years ended
December 31, 1994 and 1995, ratios are based on average daily balances
during the respective periods. Ratios for 1994 and 1995 are based on
average month-end balances.
(2) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(3) Nonperforming assets consist of non-accrual loan and accruing loans 90
days or more past due. The Bank had no real estate acquired through
foreclosure or by deed-in-lieu thereof ("REO") at any of the year ends.
15
SUMMARY OF RECENT DEVELOPMENTS
(Dollars in Thousands)
The selected financial and other data of the Bank set forth below does
not purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed information, including the
financial statements and related notes, appearing elsewhere herein. In the
opinion of management, financial information at September 30, 1998 and for the
three months ended September 30, 1998 and 1997 reflect all adjustments
(consisting only of normal recurring accruals) which are necessary to present
fairly the results for such periods. Results for the three month periods ended
September 30, 1998 and 1997 may not be indicative of operations of the Bank on
an annualized basis.
At At
Selected Financial Condition Data: September 30, 1998 June 30, 1998
------------------ -------------
Total assets............................................... $398,723 $405,374
Cash and cash equivalents.................................. 25,854 18,291
Investment securities held to maturity..................... -- --
Securities available for sale.............................. 36,338 48,111
Loans available for sale................................... 5,661 12,152
Loans receivable, net...................................... 320,529 315,705
Real estate held for investment, net....................... -- --
Deposits................................................... 342,955 340,793
Borrowings................................................. 14,000 21,000
Total equity............................................... 37,125 35,945
Three Months Ended September 30,
--------------------------------
Selected Operating Data: 1998 1997
---- ----
Interest income............................................ $7,605 $6,843
Interest expense........................................... 3,962 3,674
Net interest income........................................ 3,643 3,169
Provision for loan losses.................................. 90 90
Net interest income after provision for loan
losses................................................... 3,553 3,079
Non-interest income........................................ 301 161
Non-interest expense....................................... 2,205 1,887
Income before income taxes................................. 1,649 1,353
Income taxes............................................... 611 486
Net income................................................. 1,038 867
Key Operating Ratios: At or For the Three Months
Ended September 30,
--------------------------
Performance Ratios: 1998 1997
---- ----
Return on average assets..................................... 1.04% 0.97%
Return on average equity..................................... 11.16 10.08
Average interest-earning assets to average
interest-bearing liabilities............................... 108.64 108.08
Interest rate spread(1)...................................... 3.39 3.30
Net interest margin(1)....................................... 3.74 3.64
Asset Quality Ratios:
Nonperforming assets to total asset at end of
period(2).................................................. 0.43% 0.31%
Allowance for loan losses to nonperforming
loans at end of period..................................... 161.80 157.22
Allowance for loan losses to total loans at
end of period.............................................. 0.84 0.58
Capital and Other Ratios:
Average equity to average assets............................. 9.30% 9.59%
Tangible equity to assets at end of period................... 8.74 8.84
Total capital to risk-weighted assets........................ 14.94 15.24
- ----------
(1) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(2) Nonperforming assets consist of non-accrual loan and accruing loans 90
days or more past due. The Bank has no real estate acquired through
foreclosure or by deed-in-lieu thereof ("REO") at any of the period ends.
At September 30, 1998, Willow Grove's total assets amounted to $398.7
million compared to total assets of $405.4 million at June 30, 1998. The $6.7
million, or 1.6%, decrease in total assets was due primarily to decreases in
securities available for sale and loans available for sale. The Bank's deposits
amounted to $343.0 million at September 30, 1998 compared to $340.8 million at
June 30, 1998. Borrowings decreased to $14.0 million at September 30, 1998 from
$21.0 million at June 30, 1998. The Bank's total equity increased by $1.2
million, or 3.3%, to $37.1 million at September 30, 1998 compared to $35.9
million at June 30, 1998. The increase in total equity was primarily due to the
continued profitable operations of the Bank.
Net income amounted to $1.0 million for the three months ended
September 30, 1998 compared to $867,000 for the three months ended September 30,
1997. The $171,000, or 19.7%, increase in net income during the first quarter of
fiscal 1999 was due primarily to a $762,000 increase in interest income, which
was partially offset by a $228,000 increase in interest expense and a $323,000
increase in non-interest expense.
Net interest income increased by $474,000, or 15.0%, for the three
months ended September 30, 1998 compared to the same period in 1997. The
increase in net interest income was due to a $762,000 increase in interest
income which was partially offset by a $288,000 increase in interest expense.
The Bank's interest rate spread increased to 3.39% for the first quarter of
fiscal 1999 from 3.30% for the comparable prior year period. Willow Grove's
ratio of average interest-earning assets to average interest-bearing liabilities
and its net interest margin both increased during the three months ended
September 30, 1998 compared to the three months ended September 30, 1997. Such
increases reflect, in part, Willow Grove's continuing efforts to increase its
loan originations, particularly with respect to relatively higher yielding home
equity and commercial loans.
The Bank's provision for loan losses was $90,000 for both the three
months ended September 30, 1998 and 1997. While the provision for loan losses
was the same in each quarter, the amounts were determined by management's
individual assessment of the risk elements in the Bank's portfolio at each
respective period ends. At September 30, 1998, the Bank's total non-performing
loans amounted to $1.7 million. The Bank's allowance for loan losses amounted to
$2.8 million at September 30, 1998, representing 0.84% of total loans and 161.8%
of non-performing loans at such date.
Non-interest income increased by $140,000, or 87.0% to $301,000 for the
three months ended September 30, 1998 compared to the same period in 1997. The
primary reason for the increase in non-interest income during the quarter was
increased levels of loan sales, late charges as well as increased transaction
fees from the Bank's automated teller machines ("ATM") and growth in transaction
accounts.
Non-interest expense amounted to $2.2 million for the three months
ended September 30, 1998 compared to $1.9 million for the three months ended
September 30, 1997. The $318,000, or 16.9% increase in non-interest expenses
during the 1998 period primarily reflects the increased number of Bank employees
during the 1998 period.
Willow Grove's income tax expenses amounted to $611,000 and $486,000
for the three months ended September 30, 1998 and 1997, respectively. The
increase in the 1998 period primarily was the result of the increase in taxable
income during the period. The Bank's effective tax rate was 37.1% for the
quarter ended September 30, 1998 compared to 35.9% for the comparable quarter in
1997.
At September 30, 1998, the Bank's tangible and core capital both
amounted to $35.0 million or 8.74% of adjusted total assets of $397.0 million,
and the Bank's risk-based capital amount to $37.0 million or 14.94% of adjusted
risk-weighted assets of $250.3 million.
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be carefully considered by investors in deciding whether
to make an investment in the Common Stock offered hereby.
Control of the Company by the MHC
The Company is required to be a majority-owned subsidiary of the MHC as
long as the MHC remains in existence. Following the Stock Issuance and assuming
the contribution to the Foundation of 4.0% of the shares of Common Stock sold in
the Offerings, the MHC will own 54.7% of the outstanding Common Stock. Holders
of deposit accounts in the Bank will be entitled to vote on all matters
presented to the members of the MHC for resolution by vote, including, without
limitation, election of directors of the MHC. Prior to the Reorganization,
members of the Bank generally granted revocable proxies to the Board of
Directors of the Bank, and members of the MHC may grant proxies to the Board of
Directors of the MHC after the Reorganization. According to regulations of the
OTS, the revocable proxies that members of the Bank have granted to the Board of
Directors of the Bank, which confer on the Board of Directors of the Bank
general authority to cast a member's vote on any and all matters presented to
the members, shall be deemed to cover the member's votes as members of the MHC,
and such authority shall be conferred on the Board of Directors of the MHC. The
use of such proxies will facilitate control over the MHC by the MHC's Board of
Directors and thereby control of the Company by virtue of the MHC's ownership of
a majority of the outstanding shares of Common Stock. The MHC will be able to
elect all of the members of the Board of Directors of the Company and will be
able to control the outcome of most matters presented to the stockholders of the
Company for resolution by vote, excluding certain matters related to stock
compensation plans and certain votes regarding a conversion to stock form by the
MHC. Therefore, purchasers of the Common Stock in the Offerings will be minority
stockholders of the Company ("Minority Stockholders") and, as such, will not be
able to elect directors or effect a change of control in management of the
Company.
No assurances can be given that the MHC or the Company will not take
action which the Minority Stockholders believe to be contrary to their interests
at some future time. For example, the MHC or the Company could revise the Bank's
dividend policy, prevent a Conversion Transaction or defeat a candidate for the
Bank's Board of Directors or other proposals put forth by the Minority
Stockholders. Moreover, the MHC's ownership of a majority of the outstanding
shares of Common Stock, the MHC's mutual form of organization and, to a lesser
extent, provisions in the Company's Charter and Bylaws that eliminate cumulative
voting for the election of directors, authorize the issuance of additional
amounts of capital stock and require staggered terms for members of the Board of
Directors, are likely to perpetuate existing management and directors and
discourage certain transactions that involve an actual or threatened change in
control of the Company. See "Certain Restrictions on Acquisition of the Company
and the Bank."
16
Waiver of Dividends by the MHC
The Board of Directors of the MHC will determine whether the MHC will
waive the receipt of dividends declared by the Company each time the Company
declares a dividend. The Board of Directors of the MHC presently intends to
waive the receipt of dividends declared by the Company. OTS regulations require
the MHC to notify the OTS of any proposed waiver of the right to receive
dividends. It is the OTS' recent practice to review dividend waiver notices on a
case-by-case basis, and, in general, not to object to any such waiver if: (i)
the mutual holding company's board of directors determine that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the subsidiary holding company is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company is considered to be a restriction on the stockholders' equity of
the subsidiary holding company, which restriction, if material, is disclosed in
the public financial statements of the subsidiary holding company as a note to
the financial statements; (iii) the amount of any dividend waived by the mutual
holding company is available for declaration as a dividend solely to the mutual
holding company, and, in accordance with Statement of Financial Accounting
Standards No. 5, where the subsidiary holding company determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the subsidiary holding
company in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the Conversion
Transaction takes into account the amount of the dividends waived by the mutual
holding company. In addition, the OTS has announced that the dividends waived by
mutual holding companies will affect the ratio pursuant to which shares of
common stock of a subsidiary holding company held by minority stockholders would
be exchanged for shares of common stock of the converted holding company in a
Conversion Transaction. The OTS will not permit a pro rata exchange if the
mutual holding company has waived the receipt of cash dividends by the
subsidiary holding company. Accordingly, the precise treatment of any Conversion
Transaction cannot be assured. Any waiver of dividends by the MHC is likely to
result in an adjustment to the ratio pursuant to which shares of Common Stock
are exchanged for shares of the converted MHC in a Conversion Transaction, which
adjustment will have the effect of diluting Minority Stockholders' interests.
See "MHC Conversion to Stock Form."
Potential Low Return on Equity Following the Reorganization; Uncertainty as to
Future Growth Opportunities
At June 30, 1998, the Bank's ratio of equity to assets was 8.9%. The
Company's equity position will be significantly increased as a result of the
Stock Issuance. On a pro forma basis as of June 30, 1998, assuming the sale of
the shares of Common Stock at the maximum of the Estimated Offering Range, the
Company's ratio of equity to assets would be 13.08%. The Company's ability to
leverage this capital will be significantly affected by industry competition for
loans and deposits. The Company currently anticipates that it will take time to
prudently deploy such capital. As a result,
17
the Company's return on equity initially is expected to be below the industry
average after the Reorganization.
In an effort to fully deploy post-Reorganization capital, in addition
to attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise by establishing new branch offices and/or by
acquiring other financial institutions or branches in the greater Philadelphia
metropolitan area. The Bank's total assets and total deposits increased by 29.8%
and 27.3%, respectively, from June 30, 1996 to June 30, 1998. The Company's
ability to grow through selective acquisitions of other financial institutions
or branches of such institutions will be dependent on successfully identifying,
acquiring and integrating such institutions or branches. There can be no
assurance the Company will be able to generate internal growth or to identify
attractive acquisition candidates, acquire such candidates on favorable terms or
successfully integrate any acquired institutions or branches into the Company.
Neither the Company nor the Bank has any specific plans, arrangements or
understandings regarding any such expansions or acquisitions at this time, nor
have criteria been established to identify potential candidates for acquisition.
Potential Increased Compensation Expense After the Reorganization
Current accounting standards for employee stock ownership plans
require an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan, rather than an amount equal to the cost basis of such
shares. If the shares of Common Stock appreciate in value over time, additional
shares committed to be released will result in increased compensation expense
with respect to the ESOP as compared with prior periods. It is impossible to
determine at this time the extent of such impact on future net income. See "Pro
Forma Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact of Accounting Pronouncements." In addition, after
consummation of the Reorganization, the Company intends to implement, subject to
stockholder approval (which approval cannot be obtained earlier than six months
subsequent to the Reorganization), the Recognition Plan. Upon implementation,
the release of shares of Common Stock from the Recognition Plan will result in
additional compensation expense. See "Pro Forma Data" and "Management - Benefits
- - Recognition Plan." Assuming that shares of Common Stock are valued at the
Purchase Price, the value of shares to be issued under the RRP will be between
$685,000 and $927,000 at the minimum and maximum of the Estimated Offering
Range, respectively, while the value of the shares to be purchased by the ESOP
will be between $1.4 million and $1.9 million at the minimum and the maximum of
the Estimated Offering Range, respectively.
Risks Related to Construction and Land Development Loans, Multi-Family
Residential Real Estate Loans, Commercial Real Estate Loans and Commercial
Business Loans
Consistent with its strategy to become more like a full-service
community bank, in recent years Willow Grove has increased its efforts to
originate construction loans, multi-family residential real estate loans and
commercial real estate loans, which amounted to $13.6 million (or 4.0% of the
total loans receivable), $7.5 million (or 2.2% of the total loans receivable)
and $24.5 million (or 7.2% of the Bank's total loans receivable), respectively,
at June 30, 1998. The Bank also has commenced a program designed to attract
commercial business loans, which amounted to $5.4 million, or 1.6% of the Bank's
total loans receivable at June 30, 1998.
Construction and land development lending, multi-family residential
real estate lending and commercial real estate lending generally are considered
to involve a higher degree of risk than single-family residential lending due to
a variety of factors, including generally larger loan balances, the dependency
on successful operation of the project for repayment, loan terms which often do
not require full amortization of the loan over its term and successfully
developing and/or selling the property. In addition, risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of value proves to be inaccurate, the Bank may be confronted, at or
prior to the maturity of the loan, with a project, when completed, having a
value which is insufficient to assure full repayment. See "Business - Lending
Activities." Commercial business loans are generally considered to involve a
higher degree of risk than residential mortgage loans because the collateral may
be in the form of intangible assets and/or inventory subject to market
obsolescence. Commercial business loans may involve large loan balances to
single borrowers or groups of related borrowers, with the repayment of such
loans typically dependent on the successful operations and income stream of the
borrower. Such risks can be significantly affected
18
by economic conditions. In addition, commercial business lending generally
requires substantially greater oversight efforts compared to residential real
estate lending. As of June 30, 1998, the Bank had no non-performing construction
and land development loans, multi-family residential real estate loans or
commercial real estate loans. See "Business - Asset Quality - NonPerforming and
Under-Performing Assets."
Dilutive Effect of Issuance of Additional Shares
If the Recognition Plan is approved by stockholders of the Company, the
Recognition Plan intends to acquire an amount of Common Stock equal to 4% of the
shares of Common Stock sold in the Offerings. If such shares are acquired at a
per share price equal to the Purchase Price, the cost of such shares would be
$927,000, assuming the number of shares of Common Stock sold are equal to the
maximum of the Estimated Offering Range. The value of shares awarded under the
Recognition Plan will be expensed as they are earned by plan participants. Such
shares of Common Stock may be acquired in the open market with funds provided by
the Company, if permissible, or from authorized but unissued shares of Common
Stock. In the event that the Recognition Plan acquires authorized but unissued
shares of Common Stock from the Company, the interests of existing stockholders
will be diluted. Assuming the issuance of 2,317,250 shares of Common Stock and
the contribution of 92,690 shares of Common Stock to the Foundation, the
issuance of authorized but unissued shares of Common Stock to such plan in an
amount equal to 4% of the shares of Common Stock sold in the Offerings would
dilute the voting interests of existing stockholders by approximately 0.4%, and
net income per share and stockholders' equity per share would be decreased by a
corresponding amount. See "Pro Forma Data" and "Management Benefits -
Recognition Plan."
If the Stock Option Plan is approved by stockholders of the Company,
the Company intends to reserve for future issuance pursuant to such plan a
number of shares of Common Stock equal to an aggregate of 10% of the shares of
Common Stock sold (231,725 shares, based on the sale of the maximum 2,317,250
shares). Such shares may be authorized but previously unissued shares, treasury
shares or shares purchased by the Company in the open market or from private
sources. Assuming the sale of 2,317,250 shares and the contribution of 92,690
shares of Common Stock to the Foundation, if only authorized but previously
unissued shares are used under such plan, the issuance of the total number of
shares available under such plan would dilute the voting interests of existing
Minority Stockholders by approximately 1.8%, and net income per share and
stockholders' equity per share would be decreased by a corresponding amount. See
"Pro Forma Data" and "Management - Benefits."
19
Establishment of the Foundation
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Reorganization. The Plan provides
that the Foundation will be incorporated under Delaware law as a nonstock
corporation and will be funded with shares of Common Stock contributed by the
Company. The contribution of Common Stock to the Foundation will be dilutive to
the interests of stockholders and will have an adverse impact on the reported
earnings of the Company in fiscal 1999, the year in which the Foundation will be
or is to be established.
Dilution of Stockholders' Interests. The Company proposes to fund the
Foundation with a contribution of shares of Common Stock equal to 4.0% of the
shares of Common Stock sold in the Offerings. Assuming the sale of the shares of
Common Stock at the maximum of the Estimated Offering Range, upon completion of
the Reorganization and establishment of the Foundation, the Company will have
5,325,190 shares of Common Stock issued and outstanding of which the Foundation
will own 92,690 shares of Common Stock, or 1.7%, and the Minority Stockholders
will own 2,317,250 shares, or 43.5%. As a result, persons purchasing shares of
Common Stock in the Offerings will have their ownership and voting interests in
the Company diluted. See "Pro Forma Data."
Impact on Earnings. The contribution of Common Stock to the Foundation
will have a significant adverse impact on the Company's and the Bank's earnings
in the year in which the contribution is made. The Company will recognize the
full expense in the amount of the contribution of Common Stock to the Foundation
in the quarter in which it occurs, which is expected to be the second quarter of
fiscal 1999. The contribution expense will be partially offset by the tax
benefit related to the expense. The Company and the Bank have been advised by
their independent tax advisors that the contribution to the Foundation will be
tax deductible, subject to an annual limitation based on 10% of the Company's
annual taxable income. Assuming a contribution of $927,000 in Common Stock, the
Company estimates a net tax effected expense of $612,000 (based on a 34.0% tax
rate). If the Foundation had been established at June 30, 1998, the Bank would
have reported net income of $1.8 million for the year ended June 30, 1998 rather
than reporting net income of $2.4 million. Management cannot predict earnings
for fiscal 1999, but expects that the establishment and funding of the
Foundation will have a significant adverse impact on the Company's earnings for
such year. In addition to the anticipated costs related to the Foundation, the
Bank may make additional cash contributions pursuant to its Community Enrichment
Program. See "Summary - The Willow Grove Foundation."
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above-described
purposes would qualify as a Section 501(c)(3) exempt organization under the
Internal Revenue Code of 1986, as amended (the "Code"), and would be classified
as a private foundation. Because the MHC is deemed to be a "disqualified person"
(as defined under the Code), in order to avoid certain excise tax provisions,
which could be significant, the Foundation may not own more than 2.0% of the
issued and outstanding shares of Common Stock. The Bank considered such excise
tax provisions and determined that it would be prudent to ensure that the
initial contribution of Common Stock to the Foundation be within the 2.0%
safe-harbor provided by the Code. The Bank anticipates that the Bank and the
Foundation will monitor the Foundation's ownership interest in Common Stock and
will take actions as may be appropriate in order to ensure continued compliance
with the safe-harbor. The Foundation will submit a request to the Internal
Revenue Service ("IRS") to be recognized as an exempt organization. The Company
and the Bank have received an opinion of their independent tax advisors that the
Foundation would qualify as a Section 501(c)(3) exempt organization under the
Code, except that such opinion does not consider
20
the impact of the condition expected to be required by regulatory authorities
that Common Stock issued to the Foundation be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. See "The Reorganization and Stock Issuance -
Establishment of the Foundation-Regulatory Conditions Imposed on the
Foundation." Consistent with this condition, in the event that the Company or
the Foundation receives an opinion of its legal counsel that compliance with the
voting restriction would (i) cause a violation of Delaware law and the OTS
determines that federal law would not preempt the application of the laws of
Delaware to the Foundation, (ii) have the effect of causing the Foundation to
lose its tax-exempt status, or otherwise have a material and adverse tax
consequence on the Foundation or (iii) subject the Foundation to an excise tax
under Section 4941 of the Code, the OTS shall waive such voting restriction upon
submission of a legal opinion by the Company or the Foundation that is
satisfactory to the OTS. The independent tax advisors' opinion further provides
that there is substantial authority for the position that the Company's
contribution of its own stock to the Foundation would not constitute an act of
self-dealing, and that the Company would be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution,
subject to an annual limitation based on 10% of the Company's annual taxable
income. The Company, however, would be able to carry forward any unused portion
of the deduction for five years following the contribution. Thus, while the
Company would have generated a tax benefit of approximately $315,000 in fiscal
1998 (based upon a contribution of $927,000 of Common Stock and the Bank's
pre-tax income for fiscal 1998), as a result of the limitation on deductible
amounts, the Company expects to carry over the excess contribution in the five
following years. The Company estimates that for federal income tax purposes, a
substantial portion of the deduction should be deductible over the six-year
period. Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company will be entitled to the deduction of
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's tax benefit related to
the Foundation would have to be fully expensed, resulting in further reduction
in earnings in the year in which the IRS makes such a determination.
The Foundation will receive working capital from any dividends that may
be paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets.
Comparison of Valuation and Other Factors Assuming the Foundation is
Not Established as Part of the Reorganization. The establishment of the
Foundation was taken into account by RP Financial in determining the estimated
pro forma market value of the shares of Common Stock. The aggregate price of the
shares of Common Stock being offered in the Offerings is based upon the
independent appraisal conducted by RP Financial of the estimated pro forma
market value of the Common Stock. The pro forma aggregate price of the shares of
Common Stock being
21
offered for sale in the Offerings is currently estimated to be between $17.1
million and $23.2 million, with a midpoint of $20.2 million. The pro forma price
to book ratio and the pro forma price to earnings ratio, at and for the year
ended June 30, 1998, are 95.8% and 18.2x, respectively, at the maximum of the
Estimated Offering Range. In the event that the Reorganization and Stock
Issuance did not include the Foundation, RP Financial has estimated that the
estimated pro forma market value of the shares of Common Stock sold in the
Offerings would be $24.4 million at the maximum based on a pro forma price to
book ratio and the pro forma price to earnings ratio at 97.9% and 18.2x,
respectively. Assuming the Subscription Offering closes at the maximum of the
Estimated Offering Range the contribution to the Foundation would amount to
92,690 shares of Common Stock (with a value of $927,000 based on the Purchase
Price) and the amount of the shares of Common Stock sold would be $1.3 million
less than the amount which would have been sold without the Foundation based on
the estimate provided by RP Financial. Accordingly, certain account holders of
the Bank who subscribe to purchase shares of Common Stock in the Subscription
Offering would receive fewer shares depending on the size of a depositor's stock
order and the amount of his or her qualifying deposits in the Bank and the
overall level of subscriptions. See "Comparison of Valuation and Pro Forma
Information with No Foundation." This estimate by RP Financial was prepared
solely for purposes of providing Eligible Account Holders and subscribers with
information with which to make an informed decision on the Reorganization.
The decrease in the amount of shares of Common Stock being offered as a
result of the contribution of Common Stock to the Foundation will not have a
significant effect on the Company or the Bank's capital position. The Bank's
regulatory capital is in excess of its regulatory capital requirements and will
further exceed such requirements following the Reorganization and Stock
Issuance. The Bank's tangible and core capital ratios at June 30, 1998 would be
10.7% and its risk-based capital ratio would be 18.1%, respectively, and on a
consolidated basis, the Company's pro forma stockholders' equity would be $55.6
million, or approximately 13.1% of pro forma consolidated assets, assuming the
sale of shares of Common Stock at the maximum of the Estimated Offering Range.
Pro forma stockholders' equity per share and pro forma diluted net earnings per
share would be $10.44 and $0.55, respectively. If the Foundation were not being
established in the Reorganization, based on the RP Financial estimate, the
Company's pro forma stockholders' equity would be approximately $56.4 million,
or approximately 13.2% of pro forma consolidated assets at the maximum of the
Estimated Offering Range, and pro forma stockholders' equity per share and pro
forma net earnings per share would be 10.21 and 0.55, respectively. See
"Comparison of Valuation and Pro Forma Information with No Foundation."
Potential Challenges. To date, there has been limited precedent with
respect to the establishment and funding of a charitable foundation as part of a
mutual holding company reorganization and stock issuance. In addition,
establishment and funding of the Foundation will require the OTS to grant the
Company and the Bank waivers from its regulations. As such, the Foundation and
the OTS's non-objection to the Reorganization may be subject to potential
challenges with respect to, among other things, the Company's and the Bank's
ability to establish the Foundation, notwithstanding that the Board of Directors
of the Bank and the Company have carefully considered the various factors
involved in the establishment of the Foundation in reaching their determination
22
to establish the Foundation as part of the Reorganization, and/or with respect
to the OTS' authority to grant the waivers necessary to establish the
Foundation. See "The Reorganization and Stock Issuance - Establishment of the
Foundation-Purpose of the Foundation." If challenges were to be instituted
seeking to require the Bank and the Company to eliminate establishment of the
Foundation in connection with the Reorganization no assurances can be made that
the resolution of such challenges would not result in a delay in the
consummation of the Reorganization or that any objecting persons would not be
ultimately successful in obtaining such removal or other relief against the Bank
and the Company. In addition, if the Bank and the Company are forced to
eliminate the Foundation, it could affect the amount of orders received in the
Offerings and, if the number of shares of Common Stock subscribed for times the
Purchase Price would be either below the minimum or more than 15% above the
maximum of the Estimated Offering Range, then the Company may be required to
resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Reorganization. If the Bank's
members approve the Plan of Reorganization, but not the establishment of the
Foundation, the Bank intends to complete the Reorganization and Stock Issuance
without the establishment of the Foundation. Failure to approve the Foundation
may materially increase the pro forma market value of the shares of Common Stock
being offered for sale in the Offerings since the Estimated Offering Range, as
set forth herein, takes into account the proposed contribution to the
Foundation. If the pro forma market value of the Company without the Foundation
is either greater than $26.6 million or less than $17.1 million or if the OTS
otherwise requires a resolicitation of subscribers, the Bank will establish a
new Estimated Offering Range and commence a resolicitation of subscribers (i.e.,
subscribers will be permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded with interest.) Any change in the Estimated Offering Range must be
approved by the OTS. See "The Reorganization and Stock Issuance -Stock Pricing
and Number of Shares to be Issued."
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
The operations of depository institutions, including Willow Grove Bank,
are substantially dependent on its net interest income, which is the difference
between the interest income earned on its interest-earning assets and the
interest expense paid on its interest-bearing liabilities. Like most savings
institutions, the Bank's earnings are affected by changes in market interest
rates, and other economic factors beyond its control. While the Bank's average
interest rate spread increased from 3.02% for fiscal 1996 to 3.36% for fiscal
1998, no assurance can be given that the Bank's average interest rate spread
will not decrease in future periods. Any such decrease in the Bank's average
interest rate spread could adversely affect the Bank's net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management."
23
If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. The Bank attempts to reduce the vulnerability of its operations to
changes in interest rates by maintaining significant amounts of liquid assets
and assets with relatively short estimated lives. Based upon certain repricing
assumptions, the Bank's interest-earning liabilities repricing or maturing
within one year exceeded its interest-bearing assets with similar
characteristics by $46.1 million or 11.4% of total assets. Accordingly, an
increase in interest rates generally would result in a decrease in the Bank's
average interest rate spread and net interest income. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management."
In addition to affecting interest income and expense, changes in
interest rates also can affect the value of the Bank's interest-earning assets,
which are comprised of fixed and adjustable-rate instruments, and the ability to
realize gains from the sale of such assets. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. At June 30,
1998, the Bank had $48.1 million of securities available for sale ($30.4 million
of which had fixed-rates of interest) and $12.2 million of loans available for
sale ($12.2 million of which had fixed-rates of interest.)
The OTS has implemented an interest rate risk component into its
risk-based capital rules, which is designed to calculate on a quarterly basis
the extent to which the value of an institution's assets and liabilities would
change if interest rates increase or decrease. If the net portfolio value of an
institution would decline by more than 2% of the estimated market value of the
institution's assets in the event of a 200 basis point increase or decrease in
interest rates, then the institution is deemed to be subject to a greater than
"normal" interest rate risk and must deduct from its capital 50% of the amount
by which the decline in net portfolio value exceeds 2% of the estimated market
value of the institution's assets, as of an effective date to be determined. As
of June 30, 1998, if interest rates increased or decreased by 200 basis points,
the Bank's net portfolio value would decrease by 30% and increase by 11%,
respectively, of the estimated market value of the Bank's portfolio equity, as
calculated by the OTS. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management." As a
result of such interest rate risk, the Bank could be required to deduct $2.6
million in calculating its total regulatory capital if certain regulations were
applicable, although even with such deduction the Bank would continue to be
deemed "well-capitalized." See "Regulation - The Bank - Regulatory Capital
Requirements."
Changes in interest rates also can affect the average life of loans and
mortgage-related and other securities. Decreases in interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-related
securities, as borrowers refinanced to reduce borrowing costs. Under these
circumstances, the Bank is subject to reinvestment risk to the extent that it is
not able to reinvest such prepayments at rates which are comparable to the rates
on the maturing loans or securities. The Bank also has utilized FHLB advances as
an additional source of funds. Such
24
advances often have features permitting them to be called by the FHLB which
subjects the Bank to interest rate risk if it is required to replace such
borrowings. See "Business - Lending Activities."
Strong Competition Within the Bank's Market Area
Competition in the banking and financial services industry is intense.
In its market area, the Bank competes with commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies, mutual
funds, insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. The Bank estimates that it competes with approximately 36
other banks and savings institutions in its market area. The largest bank
currently operating in the Bank's market area has over $2.0 billion in deposits
in each of Bucks County and Montgomery County, Pennsylvania and has over 25% and
20% of the deposit market share in such respective counties. By comparison,
Willow Grove's deposits in Bucks County and Montgomery County were $49.7 million
and $260.0 million at June 30, 1997 (the most recent available data)
representing approximately 0.7% and 2.3% of deposit market share at such date.
Many of these competitors have substantially greater resources and lending
limits than the Bank and may offer certain services that the Bank does not or
cannot provide. The profitability of the Bank depends upon its continued ability
to successfully compete in its market area.
Geographic Concentration of Loans
The market areas of the Bank are comprised primarily of Montgomery and
Bucks Counties, Pennsylvania. The real estate loans of the Bank are primarily
secured by properties located in such market area and its non-real estate loans
are primarily made to local residents. Accordingly, the asset quality of the
loan portfolios of the Bank are highly dependent upon the economy and the
unemployment rate in the market area. While the economy of the Philadelphia
suburbs generally has been stable in recent years, there is still potential for
a significant degree of volatility in the local economy. No assurance can be
given that downturns in the economy in the Bank's market area may not adversely
affect the Bank's operations in the future. See "Business of Willow Grove -
Market Area and Competition."
Regulatory Oversight and Legislation
Willow Grove is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority, and by the FDIC as insurer
of deposits up to applicable limits. The Bank is a member of the FHLB System and
is subject to certain limited regulations promulgated by the Federal Reserve
Board. The MHC and the Company also will be subject to regulation and oversight
by the OTS. Such regulation and supervision govern the activities in which an
institution can engage and are intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996
was enacted into law. The DIF Act contemplates the development of a common
charter for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings
25
associations. It is not known what form the common charter may take and what
effect, if any, the adoption of a new charter would have on the financial
condition or results of operations of the Bank. See "Regulation - The Bank."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation.
Absence of Market for the Common Stock
The Company has never issued capital stock. Webb has been retained to
assist in the distribution of the Common Stock on a "best efforts" basis and is
not obligated to purchase any shares of Common Stock in the Offerings. The
Company has applied to have its Common Stock quoted on the Nasdaq National
Market, and there must be, among other things, at least three market makers for
the Common Stock. Keefe, Bruyette has indicated its intention to make a market
on the Common Stock, and the Company anticipates, based on advice received from
representatives of Webb, that it will be able to secure at least two additional
market makers for the Common Stock. See "Market for the Common Stock."
Making a market in securities involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. The development of a public trading market depends upon
the existence of willing buyers and sellers, the presence of which is not within
the control of the Company, the Bank, or any market maker. Because there can be
no assurance that buyers and sellers of the Common Stock can be readily matched,
investors may wish to consider the potential illiquid and long-term nature of an
investment in the Common Stock. There can be no assurance that an active and
liquid trading market for the Common Stock will develop, or once developed, will
continue, nor assurances that purchasers of the Common Stock will be able to
sell their shares at or above the Purchase Price. The absence of a liquid and
active trading market, or the discontinuance thereof, may have an adverse effect
on both the price and the liquidity of the Common Stock.
Possible Increase in Number of shares of Common Stock Issued in the
Reorganization
The number of shares of Common Stock to be sold in the Stock Issuance
may be increased as a result of an increase in the Estimated Offering Range of
up to 15% to reflect changes in market and financial conditions prior to
completion of the Reorganization or to fill the order of the ESOP. In the event
that the Estimated Offering Range is so increased, it is expected that the
Company will issue up to 2,664,838 shares of Common Stock at the Purchase Price
for an aggregate price of up to $26.6 million. An increase in the number of
shares will decrease net income per share and
26
stockholders' equity per share on a pro forma basis and will increase the
Company's consolidated stockholders' equity and net income. Such an increase
will also increase the Purchase Price as a percentage of pro forma stockholders'
equity per share and net income per share.
The ESOP currently intends to purchase 8% of the shares sold in the
Offerings, which purchase may be increased to up to 10% of the shares. In the
event that the number of shares to be sold in the Offerings are increased as a
result of an increase in the Estimated Offering Range, the ESOP shall have a
first priority to purchase all of such shares sold in excess of 2,317,250
shares, up to a maximum of 10% of the total number of shares sold in the
Offerings. See "Pro Forma Data" and "The Reorganization and Stock Issuance -
Stock Pricing and Number of Shares to be Issued."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Company and the Bank have received a letter from RP Financial
advising them of its belief that subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members have no value.
However, this letter is not binding on the IRS. If the subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are deemed to have an ascertainable value, receipt of such rights
would be taxable probably only to those Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members who exercise the subscription rights
(either as capital gain or ordinary income) in an amount equal to such value.
Whether subscription rights are considered to have ascertainable value is an
inherently factual determination. See "The Reorganization and Stock Issuance -
Effects of the Reorganization" and "- Tax Aspects."
Year 2000 Compliance
As the year 2000 approaches, significant concerns have been expressed
with respect to the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the year
2000 and thereafter. Many existing application software products were designed
to accommodate only a two digit year (e.g., 1998 is reflected as "98"). The
Bank's operating, processing and accounting operations are computer reliant and
could be affected by the Year 2000 issues. The Bank is reliant on third-party
vendors for its data processing needs as well as certain other significant
functions and services (e.g., securities safekeeping services, securities
pricing data, etc.). In early 1998, the Bank commenced an extensive plan to
identify and address potential systems and software problems as a result of the
Year 2000. Willow Grove also currently is working with its third-party vendors
in order to assess its Year 2000 readiness. Management believes that such
vendors are taking appropriate steps to address the issues on a timely basis.
While no assurances can be given as to actual systems operations upon the turn
of the century, based upon information currently known to it and upon
consideration of its testing efforts to date, management believes that in the
worst case scenario, the Bank will suffer only a slight interruption of business
as a result of minor application failures of its systems and software as a
result of the Year 2000. Based on certain preliminary estimates, Willow Grove
believes that its expenses related to upgrading its systems and software for
Year 2000 issues will not be material. While Willow Grove currently has no
reason to believe that the cost of addressing such issues will materially affect
the Bank's products, services or ability to compete effectively, no assurance
can be made that Willow Grove or the third party vendors on which it relies will
become Year 2000 compliant in a successful and timely fashion. Nevertheless, the
Company does not believe that the cost of addressing the Year 2000 issues will
be a material event or uncertainty that would cause reported financial
information not to be necessarily indicative of future operating results or
financial conditions, nor does it believe that the costs or the consequences of
incomplete or untimely resolution of its Year 2000 issues represent a known
material event or uncertainty that is reasonably likely to affect its future
financial results, or cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Considerations.
27
Certain Additional Anti-Takeover Considerations
As previously indicated, the MHC will own more than a majority of the
issued and outstanding shares of Common Stock and, accordingly, will be able to
elect all of the members of the Board of Directors of the Company and will be
able to control the outcome of most matters presented to stockholders for their
approval. See " - Control of the Company by the MHC." In addition, certain
provisions in the Company's Charter and Bylaws and Federal law and regulations
as well as the anticipated stock ownership levels of the Bank's management will
provide certain additional anti-takeover provisions.
The Company's Charter and Bylaws contain certain provisions that could
discourage non-negotiated takeover attempts that certain stockholders might deem
to be in their interests or as a result of which stockholders might otherwise
receive a premium for their shares over the then current market price and that
may tend to perpetuate existing management. These provisions include the
classification of the terms of the members of the Board of Directors, the
elimination of cumulative voting by stockholders in the election of directors,
certain provisions relating to meetings of stockholders, and restrictions on the
acquisition of the Company's equity securities. The Charter also authorizes the
issuance of up to 10,000,000 shares of Preferred Stock as well as additional
shares of Common Stock. Such shares could be issued without stockholder approval
on terms or in circumstances that could deter a future takeover attempt. In
addition, Federal law provides for certain restrictions on acquisition of the
Company and Bank. See "Certain Restrictions on Acquisition of the Company and
the Bank."
Directors and executive officers of the Bank expect to purchase
approximately 200,000 shares of Common Stock, which would equal 4.32% of the
total issued and outstanding shares assuming the sale of 2,015,000 shares at the
mid-point of the Estimated Offering Range. See "Proposed Management Purchases."
The directors who act as trustees of the ESOP are also expected to immediately
control the voting of 8% of the shares of Common Stock sold in the Offerings
through the ESOP, at least until an allocation has been made under the ESOP.
Under the terms of the ESOP, after an allocation has been made, the unallocated
shares will be voted by the trustees in the same proportion as the allocated
shares are voted by the ESOP participants.
The Company intends to seek stockholder approval of the Company's
proposed Recognition Plan, which is a non-tax qualified restricted stock plan
for the benefit of directors, officers, and employees of the Company and the
Bank. Assuming the receipt of stockholder approval, which stockholder approval
cannot be obtained earlier than six months following the Reorganization pursuant
to regulations of the OTS, the Company expects to acquire Common Stock on behalf
of the Recognition Plan, in an amount equal to 4% of the Common Stock sold in
the Offerings, or 68,510 shares and 92,690 shares at the minimum and maximum of
the Estimated Offering Range, respectively. These shares will be acquired either
through open market purchases, if permissible, or from authorized but unissued
Common Stock. Under the terms of the Recognition Plan, recipients of awards will
be entitled to instruct the trustee of the Recognition Plan as to how the
underlying shares should be voted, and the trustee will be entitled to vote all
unallocated shares in its discretion. If the shares are purchased in the open
market, directors and executive officers would have effective control over
10.3% or 9.0% of the Common Stock outstanding at such time based upon the
minimum and the maximum of the Estimated Offering Range, respectively, before
giving effect to the potential exercise of any stock options by directors and
officers of the Company and the Bank, and shares held by the ESOP. If approved
by stockholders at a meeting held no earlier than six months following the
Reorganization, the Company intends to reserve for future issuance pursuant to
the Stock Option Plan a number of authorized shares of Common Stock equal to an
aggregate of 10% of the Common Stock sold in the Offerings (201,500 shares,
based on the issuance of 2,015,000 shares at the mid-point of the Estimated
Offering Range). See "Management - Benefits - Stock Option Plan." Management's
potential stock ownership interest could, together with additional stockholder
support, make more difficult takeover attempts that certain stockholders deem to
be in their best interest and may tend to perpetuate existing management.
28
Upon completion of the Reorganization, the Foundation will own 1.7% of
the total shares of the Common Stock outstanding. Such shares will be owned
solely by the Foundation; however, pursuant to a condition expected to be
required by regulatory authorities, it is anticipated that the shares of Common
Stock held by the Foundation will be voted in the same ratio as all other shares
of the Common Stock voted on all proposals considered by the stockholders of the
Company. As such, the Company does not believe the Foundation will have an
anti-takeover effect on the Company. However, in the event that the OTS were to
waive this voting restriction for the reasons described herein as provided in
the condition, the Foundation's Board of Directors would exercise sole voting
power over such shares and would no longer be subject to the restriction. See
"The Reorganization and Stock Issuance - Establishment of the Foundation -
Regulatory Conditions Imposed on the Foundation." In the event the OTS waived
the voting restriction (although it is not currently anticipated that the
Company and the Foundation will seek such a waiver), management of the Company
and the Bank may benefit to the extent that the Board of Directors of the
Foundation determines to vote the shares of Common Stock held by the Foundation
in favor of proposals supported by the Company and the Bank.
Upon consummation of the Reorganization, the Bank intends to enter into
a two-year employment agreement with the Bank's President and one-year
employment agreements with the Bank's three other executive officers. Such
agreements provide for severance payments under certain conditions after a
change-in-control of the Bank. Such severance provisions may have the effect of
increasing the cost of an acquisition of the Bank and, thereby, may discourage
future attempts to acquire the Company or the Bank. See "Management - Management
of the Bank - Employment Agreements."
Irrevocability of Orders; Potential Delay in Completion of Offerings
Orders submitted in the Subscription Offering and any Community
Offering or any Syndicated Community Offering are irrevocable. Funds submitted
in connection with any purchase of Common Stock in the Offerings will be held by
the Company until the completion or termination of the Reorganization and Stock
Issuance, including any extension of the Expiration Date. Because, among other
factors, completion of the Reorganization and Stock Issuance will be subject to
an update of the independent appraisal prepared by RP Financial, there may be
one or more delays in the completion of the Reorganization and Stock Issuance.
Subscribers will have no access to subscription funds and/or shares of Common
Stock until the Reorganization and Stock Issuance is completed or terminated.
WILLOW GROVE BANCORP, INC.
The Company, which is in organization, will be incorporated under
Federal law for the purpose of holding all of the capital stock of the Bank and
in order to facilitate the Reorganization and Stock Issuance. The Company has
applied for the approval of the OTS to become a savings and loan holding company
and as such will be subject to regulation by the OTS. After completion of the
Reorganization and Stock Issuance, the Company will conduct business initially
as a unitary savings and loan holding company. See "Regulation - Regulation of
Savings and Loan Holding Companies." Upon consummation of the Reorganization,
the Company will have no significant assets other than all of the outstanding
shares of common stock of the Bank, the portion of the net proceeds from the
Offerings retained by the Company and the Company's loan to the ESOP, and the
Company will have no significant liabilities. See "Use of Proceeds." Initially,
the management of the Company and the Bank will be substantially identical and
the Company will neither own nor lease any property but will instead use the
premises, equipment and furniture of the Bank. At the present time, the Company
does not intend to employ any persons other than officers who are also officers
of the Bank, and the Company will utilize the support staff of the Bank from
time to time. Additional employees will be hired as appropriate to the extent
the Company expands or changes its business in the future.
Management believes that the proposed corporate structure of the Bank
upon consummation of the Reorganization will provide the Company and the Bank
with additional flexibility to diversify its business activities through
existing or newly-formed subsidiaries, or through acquisitions of other
entities, including potentially other financial institutions and financial
services related companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities or transactions,
the Company will be in a position after the Reorganization, subject to
regulatory limitations and the Company's financial position, to take advantage
of any such acquisition and expansion opportunities that may arise. The initial
activities of the Company are anticipated to be funded by the proceeds to be
retained by the Company and earnings thereon, as well as dividends from the
Bank. See "Dividend Policy."
The Company's principal executive office will be located at the
executive office of the Bank at Welsh and Norristown Roads, Maple Glen,
Pennsylvania 19002, and its telephone number is (215) 646-5405.
29
WILLOW GROVE BANK
Willow Grove is a federally chartered, SAIF-insured mutual savings bank
conducting business from its executive offices and six branch offices. At June
30, 1998, the Bank had total assets of $405.4 million, total deposits of $340.8
million and equity of $35.9 million. For additional information with respect to
the business and operations of the Bank, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary federal regulator. The
Bank is also regulated by the FDIC, the administrator of the SAIF. The Bank is
also subject to certain reserve requirements established by the Federal Reserve
Board and is a member of the FHLB of Pittsburgh, which is one of the 12 regional
banks comprising the FHLB System.
The Bank's principal executive offices are located at Welsh and
Norristown Roads, Maple Glen, Pennsylvania 19002, and its telephone number is
(215) 646-5405.
WILLOW GROVE MUTUAL HOLDING COMPANY
As part of the Reorganization, the Bank will organize the MHC as a
federal mutual holding company with the powers set forth in its proposed charter
and bylaws. As long as they remain depositors of the Bank, persons who had
membership or liquidation rights with respect to the bank as of the date of the
Reorganization will continue to have such rights solely with respect to the MHC
after the Reorganization. Borrowers whose loans were outstanding on May 15, 1995
have membership rights in the Bank and, accordingly, will have membership rights
in the MHC upon completion of the Reorganization so long as their loans remain
outstanding. Members of the MHC (Consisting solely of depositors and certain
borrowers of the Bank) shall have exclusive authority to elect the board of
directors of the MHC for so long as the MHC remains a mutual institution.
The MHC's principal assets will be the shares of Common Stock received
in the Reorganization and up to $100,000 received as its initial capitalization.
Immediately after consummation of the Reorganization, it is expected that the
MHC will not engage in any business activity other than its investment in, and
control of, a majority of the Common Stock of the Company. The MHC will be a
mutual corporation chartered under federal law and regulated by the OTS. The MHC
will be subject to the limitations and restrictions imposed on savings and loan
holding companies by HOLA. See "Regulation - The Mutual Holding Company" The
MHC's executive offices will be located at Welsh and Norristown Roads, Maple
Glen, Pennsylvania 19002, and its main telephone number will be (215) 646-5405.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the shares of Common
Stock cannot be determined until the Reorganization and Stock Issuance is
completed, it is presently anticipated that the net proceeds from the sale of
the shares of Common Stock will be between $16.2 million and $22.2 million
($25.6 million assuming an increase in the Estimated Offering Range by 15%). See
"Pro Forma Data" and "The Reorganization and Stock Issuance - Stock Pricing and
Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts.
The Company will purchase all of the capital stock of the Bank to be
issued in the Reorganization in exchange for 50% of the Reorganization proceeds
(net of Reorganization-related expenses and the loan to be made to the ESOP),
and the Company will retain the remaining net proceeds. The Company intends to
use a portion of the net proceeds to make a loan directly to the ESOP to enable
the ESOP to purchase up to 8% of the shares of Common Stock sold in the
Offerings. Based upon the issuance of 1,712,750 shares of Common Stock and
2,317,250 shares of Common Stock at the minimum and maximum of the Estimated
Offering Range, respectively, the loan
30
to the ESOP would be $1.4 million and $1.9 million, respectively. See
"Management - Benefits - Employee Stock Ownership Plan." The remaining net
proceeds retained by the Company initially may be used to invest in U.S.
Government and federal agency securities of various maturities, mortgage-backed
or other securities, deposits in either the Bank or other financial
institutions, or a combination thereof. The portion of the net proceeds retained
by the Company may ultimately be used to support the Bank's lending activities,
to repay borrowings in the ordinary course to support the future expansion of
operations through the establishment of additional banking offices or other
customer facilities or through acquisitions of other financial institutions or
branch offices (although no such acquisition transactions are specifically being
considered at this time). The net proceeds from the Offerings may also be used
for other business and investment purposes, including the payment of regular or
special cash dividends, possible repurchases of the Common Stock or returns of
capital (the Company and the Bank have committed not to take any action to
further the payment of any return of capital on the Common Stock during the
one-year period subsequent to consummation of the Reorganization). Management of
the Company expects to consider expanding or diversifying, as such opportunities
become available.
Following the six-month anniversary of the completion of the
Reorganization (to the extent permitted by the OTS), and based upon then
existing facts and circumstances, the Company's Board of Directors may determine
to repurchase some shares of Common Stock, subject to any applicable statutory
and regulatory requirements. Such facts and circumstances may include but not be
limited to (i) market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and an improvement in the Company's return on
equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its stockholders. Any stock
repurchases will be subject to the determination of the Company's Board of
Directors that the Bank will be capitalized in excess of all applicable
regulatory requirements after any such repurchases.
The portion of the net proceeds used by the Company to purchase the
capital stock of the Bank will be added to the Bank's general funds to be used
for general corporate purposes, including increased lending activities and
purchases of securities and to fund potential expenditures for improvements in
the Bank's technological resources. While the amount of net proceeds received by
the Bank will further strengthen the Bank's capital position, which already
substantially exceeds all regulatory requirements, it should be noted that the
Bank is not converting primarily to raise capital. After the Reorganization and
Stock Issuance, the Bank's tangible capital ratio will be approximately 10.1%
(based upon the maximum of the Estimated Offering Range). As a result, the Bank
will be a well-capitalized institution. After the Reorganization and Stock
Issuance, the Bank intends to emphasize capital strength and growth in assets
and earnings.
The net proceeds may vary because total expenses of the Reorganization
and Stock Issuance may be more or less than those estimated. The net proceeds
will also vary if the number of shares
31
to be issued in the Reorganization and Stock Issuance is adjusted to reflect a
change in the estimated pro forma market value of the Bank. Payments for shares
made through withdrawals from existing deposit accounts at the Bank will not
result in the receipt of new funds for investment by the Bank but will result in
a reduction of the Bank's interest expense and liabilities as funds are
transferred from interest-bearing certificates or other deposit accounts.
DIVIDEND POLICY
Following consummation of the Reorganization, the Board of Directors of
the Company intends to consider implementation of a policy of paying quarterly
cash dividends on the Common Stock. However, there has been no determination
made at this point in time as to the initial rate of dividend, if any, to be
paid on the Common Stock. The initial or continued payment of dividends thereof
will depend upon a number of factors, including the amount of net proceeds
retained by the Company in the Reorganization and Stock Issuance, investment
opportunities available to the Company or the Bank, capital requirements, the
Company's and the Bank's financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. No assurances can be given that any dividends will be paid or that,
if paid, will not be reduced or eliminated in future periods. If the MHC does
not waive the receipt of any dividends from the Company, the amount of dividends
payable by the Company to public stockholders will be reduced. Special cash
dividends, stock dividends or returns of capital may be paid in addition to, or
in lieu of, regular cash dividends (however, the Company and the Bank have
committed to the OTS that they will take no action to further the payment of any
return of capital during the one-year period following consummation of the
Reorganization and Stock Issuance). The Company anticipates that it will file
consolidated tax returns with the Bank commencing with the first taxable year
following Reorganization. Accordingly, it is anticipated that any cash
distributions made by the Company to its stockholders would be treated as cash
dividends and not as a non-taxable return of capital for federal and state tax
purposes.
Dividends from the Company will depend, in large part, upon receipt of
dividends from the Bank, because the Company initially will have no source of
income other than dividends from the Bank, earnings from the investment of
proceeds from the sale of shares of Common Stock retained by the Company, and
interest payments with respect to the Company's loan to the ESOP. A regulation
of the OTS imposes limitations on "capital distributions" by savings
institutions. See "Regulation - The Bank - Capital Distributions." The payment
of dividends by the Company also will depend, in part, on the payment of
dividends by the Bank to the Company, which Bank dividends are subject to OTS
regulations. See "Regulation - The Bank - Capital Distributions." It is
currently unclear what limitations may exist with respect to the Company's
ability to pay dividends since the OTS has not promulgated regulations with
respect to this matter. However, the OTS may, by regulation or otherwise, impose
similar restrictions on the Company's ability to pay dividends as are imposed on
the Bank.
Any payment of dividends by the Bank to the Company which would be
deemed to be drawn out of the Bank's bad debt reserves would require a payment
of taxes at the then-current tax rate by the Bank on the amount of earnings
deemed to be removed from the reserves for such distribution. The Bank does not
intend to make any distribution to the Company that would create such a federal
tax liability. See "Taxation."
32
WAIVER OF DIVIDENDS BY THE MHC
The Board of Directors of the MHC will determine whether the MHC will
waive the receipt of dividends declared by the Company each time the Company
declares a dividend. The Board of Directors of the MHC presently intends to
waive the receipt of dividends declared by the Company. OTS regulations require
the MHC to notify the OTS of any proposed waiver of the right to receive
dividends. It is the OTS' recent practice to review dividend waiver notices on a
case-by-case basis, and, in general, not to object to any such waiver if: (i)
the mutual holding company's board of directors determine that such waiver is
consistent with such directors' fiduciary duties to the mutual holding company's
members; (ii) for as long as the subsidiary holding company is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company is considered to be a restriction on the stockholders' equity of
the subsidiary holding company, which restriction, if material, is disclosed in
the public financial statements of the subsidiary holding company as a note to
the financial statements; (iii) the amount of any dividend waived by the mutual
holding company is available for declaration as a dividend solely to the mutual
holding company, and, in accordance with Statement of Financial Accounting
Standards No. 5, where the subsidiary holding company determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the subsidiary holding
company in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the Conversion
Transaction takes into account the amount of the dividends waived by the mutual
holding company. In addition, the OTS has announced that the dividends waived by
the mutual holding companies will affect the ratio pursuant to which shares of
common stock of a subsidiary holding company held by Minority Stockholders would
be exchanged for shares of common stock of the converted holding company in a
Conversion Transaction. The OTS will not permit a pro rata exchange if the
mutual holding company has waived the receipt of cash dividends by the
subsidiary holding company. Accordingly, the precise treatment of any Conversion
Transaction cannot be assured. Any waiver of dividends by the MHC is likely to
result in an adjustment to the ratio pursuant to which shares of Common Stock
are exchanged for shares of the converted MHC in a Conversion Transaction, which
adjustment will have the effect of diluting Minority Stockholders' interests.
See "MHC Conversion to Stock Form."
The MHC's Board of Directors may conclude that a dividend waiver by the
MHC, which permits retention of capital by the Company, is in the best interest
of the MHC's members because, among other reasons: (i) the MHC has no need for
the dividend for its business operations, (ii) the cash that would be received
could be invested by the Company more effectively; and (iii) such waiver
preserves the retained earnings of the MHC through its principal asset (the
Company), which would be available for distribution in the unlikely event of a
voluntary liquidation of the Company after satisfaction of claims of depositors
and other creditors. The Board of Directors may consider other factors in
determining whether such waiver is consistent with its fiduciary duties to
members of the MHC. There is no assurance that the MHC will waive the receipt of
the dividends.
33
Immediately after consummation of the Reorganization and the Stock
Issuance, it is expected that the MHC's operations will consist of activities
relating to its investment in, and control of, a majority of the shares of
Common Stock of the Company and maintenance of books and records relating to
members of the MHC. In the future, the MHC may accept dividends paid by the
Company to be used for the payment of operating expenses and other purposes,
including purchasing Common Stock from time to time in the open market or from
the Company. There can be no assurance that the MHC will accept dividends paid
by the Company, or if such dividends are accepted, that the MHC will purchase
shares of Common Stock in the open market. Any purchases of Common Stock other
than from the MHC will increase the percentage of the Company's outstanding
shares of Common Stock held by the MHC and increase the number of shares
eligible to be sold in any subsequent secondary offering or mutual to stock
conversion of the MHC. Any waiver of dividends by the MHC is likely to result in
an adjustment to the ratio pursuant to which shares of Common Stock are
exchanged for shares of the converted MHC in the event of a Conversion
Transaction, which adjustment will have the effect of diluting Minority
Stockholders' percentage ownership interest in the converted MHC's shares. See
"MHC Conversion to Stock Form."
MHC CONVERSION TO STOCK FORM
As long as the MHC remains a mutual holding company, it must own at
least a majority of the outstanding voting stock of the Company. OTS regulations
specifically authorize mutual holding companies to (i) convert to stock form and
(ii) exchange stock issued by the converted holding company for stock issued by
a subsidiary holding company. OTS regulations require that such exchange be
"fair and reasonable" but do not specify the basis for such exchange. Although
the MHC may convert to stock form in the future, the Bank has no current plans
and there can be no assurance as to when, if ever, such a conversion will occur.
Any Conversion Transaction would be subject to federal securities laws and
regulations of the OTS in effect at the time of the Conversion Transaction. In
addition, the OTS may, in the future, authorize alternative forms of structure
or organization for mutual holding companies or their affiliates or
subsidiaries. Although the Bank and the MHC may consider such alternative forms
of structure or organization, there can be no assurances as to when, if ever,
the Bank and the MHC will choose to avail itself of any such alternative form of
structure or organization. A decision by the MHC to convert to stock form would
require the approval of its members prior to the Conversion Transaction. It is
expected that these members will have subscription rights to purchase stock of
the converted MHC. In a Conversion Transaction, the MHC, the Company or the Bank
will have to demonstrate to the OTS that the terms of such exchange are fair and
reasonable and comply with the stock purchase limitations of the OTS conversion
regulations (which may, as a condition to OTS approval of the Conversion
Transaction, in certain limited circumstances, require certain insiders of the
Bank who have accumulated shares in excess of stock purchase limitations in the
Conversion Transaction to divest such shares in connection with such Conversion
Transaction, and also potentially restrict or prohibit additional purchases of
Common Stock in the Conversion Transaction by other stockholders that would be
in excess of such stock purchase limitations). The fairness of the exchange may
be supported by an opinion from an independent third party.
34
The OTS policy with respect to dividends waived by mutual holding
companies requires that, in the case of mutual to stock conversions of recently
formed mutual holding companies, such as the MHC, the aggregate amount of cash
dividends waived by a mutual holding company must be considered when
establishing a fair and reasonable basis for exchanging subsidiary holding
company common stock for converted MHC common stock. The OTS will not permit a
pro rata exchange if the mutual holding company has waived the receipt of cash
dividends by the subsidiary holding company. Accordingly, the precise treatment
of any Conversion Transaction cannot be assured. Any waiver of dividends by the
MHC is likely to result in an adjustment to the ratio pursuant to which shares
of Common Stock are exchange for shares of the converted MHC in a Conversion
Transaction, which adjustment will have the effect of diluting Minority
Stockholders' ownership interests.
In addition to the possible adjustment to the exchange ratio due to
waived dividends, the percentage of the converted MHC's common stock received by
Minority Stockholders in any Conversion Transaction may be affected by any
purchases of Common Stock by the MHC, any subsequent secondary offerings or
other stock issuances by the Company (including shares issued under the terms of
the Stock Option Plan and MRP), any intervening acquisitions by the MHC, the
Company's dividend policy, including special dividends and the amount of
dividends paid by the Company.
As an alternative to the exchange of shares discussed above, if the
stockholders of the Company do not receive shares of the converted MHC or the
stock institution resulting from the Conversion Transaction based upon a fair
and reasonable exchange ratio, or cash from the resulting institution in an
amount equal to the fair market value of their stock given the circumstances of
the Conversion Transaction, the Company or the MHC (and its successors) may
elect to purchase all shares of the Common Stock not owned by its simultaneously
with the consummation of the Conversion Transaction at the fair market value of
the stock on the date of the Conversion Transaction, subject to OTS approval and
compliance with the limitations of the OTS regulations governing capital
distributions and other conditions that the OTS may impose. Such fair market
value of the Company's Common Stock shall be established by an independent
appraisal, and may be greater than or less than the Purchase Price. Moreover, if
the Common Stock is traded and has an established and liquid trading market, of
which there is no assurance, the fair market value of the Common Stock, as
established by the independent appraisal, may be greater than or less than the
trading price of such stock.
Moreover, in the event that the MHC converts to stock form in a
Conversion Transaction, any options or other convertible securities held by an
officer, director or employee of the Company, convertible into shares of Common
Stock shall become options to purchase or convertible into shares of the
converted MHC; provided, however, that if such options or convertible shares
cannot be so reconstituted, the holders of such options or other convertible
securities shall be entitled to receive cash payment for such shares in an
amount equal to the offering price of the number of shares of the converted MHC
into which such securities would otherwise be converted, less the exercise price
of such options of other convertible securities. Any such exchange or redemption
of these securities will
35
be subject to the written approval of the OTS, and there can be no assurance
that such approval would be obtained. In addition, the OTS may place
restrictions on the Company's or the MHC's ability to purchase Common Stock that
are more restrictive than the OTS regulations governing capital distributions.
The fair market value of the common stock of the converted MHC shall be
established by the independent appraisal utilized in the Conversion Transaction
pursuant to the OTS regulations governing conversions However, there is no plan,
agreement or understanding with respect to such a conversion, and there can be
no assurance that such a conversion will occur.
Further, if the MHC were to undertake a Conversion Transaction, and in
connection therewith additional shares of stock of the converted MHC were
proposed to be contributed to the Foundation, any Conversion Transaction and
contribution of additional shares of Common Stock to the Foundation will be
voted on as separate matters and both matters will require the approval of (i) a
majority of the total outstanding vote of the members of the MHC eligible to be
cast and (ii) a majority vote of the total outstanding shares of Common Stock
held by stockholders other than the MHC and the Foundation.
MARKET FOR THE COMMON STOCK
The Company and the Bank have never issued capital stock, and,
consequently, there is no established market for the Common Stock at this time.
The Company has applied to have its Common Stock quoted on the Nasdaq National
Market under the symbol "WGBC." Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at these quoted prices, subject to various securities laws and other
regulatory requirements. Additionally, the development of a liquid public market
depends on the existence of willing buyers and sellers, the presence of which is
not within the control of the Company, the Bank or any market maker.
Accordingly, the number of active buyers and sellers of the Common Stock at any
particular time may be limited. Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares and should not view
the Common Stock as a short-term investment. Accordingly, there can be no
assurance that an active and liquid trading market for the Common Stock will
develop or that, if developed, it will continue, nor is there any assurance that
persons purchasing shares of Common Stock will be able to sell them at or above
the Purchase Price. In order to be quoted on the Nasdaq National Market, among
other criteria, there must be at least three market makers for the Common Stock,
the Company must satisfy certain minimum capitalization requirements, and there
must be at least 400 round lot shareholders. Keefe, Bruyette has indicated its
intention to act as a market maker in the Common Stock following the
consummation of the Reorganization, depending on trading volume and subject to
compliance with applicable laws and regulatory requirements. Furthermore, Webb
has agreed to use its best efforts to assist the Company in obtaining at least
two additional market makers for the Common Stock. There can be no assurance
there will be two additional market makers for the Common Stock. There can be no
assurance that purchasers will be able to sell their shares at or above the
Purchase Price.
36
REGULATORY CAPITAL
At June 30, 1998, Willow Grove exceeded all of the regulatory capital
requirements applicable to it. The table on the following page sets forth the
historical regulatory capital of Willow Grove at June 30, 1998 and the pro forma
regulatory capital of Willow Grove after giving effect to the Reorganization and
Stock Issuance, based upon the sale of the number of shares shown in the table.
The pro forma regulatory capital amounts reflect the receipt by the Bank of 50%
of the net Stock Issuance proceeds, minus expenses and the amounts to be loaned
to the ESOP and contributed to the RRP. The pro forma risk-based capital amounts
assume the investment of the net proceeds received by the Bank in assets which
have a risk-weight of 20% under applicable regulations, as if such net proceeds
had been received and so applied at June 30, 1998.
37
Pro Forma at June 30, 1998 Based on
--------------------------------------------------------------
1,712,750 2,015,000
Shares Sold Shares Sold
Historical at at $10.00 at $10.00
June 30, 1998 Per Share Per Share
------------------------- ---------------------------- ----------------------------
Percent of Percent of Percent of
Amount Assets(1) Amount Assets(1) Amount Assets(1)
----------- ------------ ------------ ------------- ------------ -------------
(Dollars in Thousands)
Tangible capital:
Actual...................... $33,505 8.3% $39,468 9.6% $40.599 9.9%
Requirement................. 6,038 1.5 6,148 1.5 6,168 1.5
------- ---- ------- ---- ------- ----
Excess...................... $27,467 6.8% $33,320 8.1% $34,431 8.4%
======= ==== ======= ==== ======= ====
Core capital(2):
Actual...................... $33,505 8.3% $39,468 9.6% $40,599 9.9%
Requirement................. 12,075 3.0 12,295 3.0 12,336 3.0
------- ----- ------- ---- ------- ----
Excess...................... $21,430 5.3% $27,173 6.6% $28,263 6.9%
======= ===== ======= ==== ======= ====
Risk-based capital(2):
Actual...................... $36,170 14.9% $42,133 17.2% $43,264 17.7%
Requirement................. 19,438 8.0 19,555 8.0 19,577 8.0
------- ---- ------- ---- ------- ----
Excess...................... $16,732 6.9% $22,578 9.2% $23,687 9.7%
======= ==== ======= ==== ======= ====
Pro Forma at June 30, 1998 Based on
----------------------------------------------------------
2,317,250 2,664,838
Shares Sold Shares Sold
at $10.00 at $10.00
Per Share Per Share
--------------------------- ---------------------------
Percent of Percent of
Amount Assets(1) Amount Assets(1)
----------- ------------ ----------- -------------
(Dollars in Thousands)
Tangible capital:
Actual...................... $41,730 10.1% $43,031 10.4%
Requirement................. 6,189 1.5 6,212 1.5
------- ---- ------- ----
Excess...................... $35,541 8.6% $36,819 8.9%
======= ==== ======= ====
Core capital(2):
Actual...................... $41,730 10.1% $43,031 10.4%
Requirement................. 12,377 3.0 12,425 3.0
------- ---- ------- ----
Excess...................... $29,353 7.1% $30,606 7.4%
======= ==== ======= ====
Risk-based capital(2):
Actual...................... $44,395 18.1% $45,696 18.6%
Requirement................. 19,599 8.0 19,624 8.0
------- ---- ------- ----
Excess...................... $24,796 10.1% $26,072 10.6%
======= ==== ======= ====
- ---------------------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate. The Bank's
adjusted total assets and risk-weighted assets were $402.5 million and
$242.9 million, respectively, as June 30, 1998. The Bank's pro forma
adjusted total assets at the minimum, mid-point, maximum and maximum, as
adjusted of the Estimated Offering Range would be $409.8 million, $411.2
million, $412.6 million and $414.2 million, respectively, while its
risk-weighted assets would be $244.4 million, $244.7 million, $245.0
million and $245.3 million, respectively. As of June 30, 1998, the Bank's
equity capital, calculated in accordance with GAAP, was $35.9 million or
9.04% of total assets. See "capitalization" for the Bank's pro forma GAAP
capital at the minimum, mid-point, maximum and maximum, as adjusted of the
Estimated Offering Range.
(2) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, see "Regulation - The Bank - Regulatory
Capital Requirements."
38
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at June 30, 1998, and the pro forma consolidated capitalization of the Company
after giving effect to the Reorganization, based upon the sale of the number of
shares shown below and the other assumptions set forth under "Pro Forma Data."
The Company - Pro Forma
Based Upon Sale at $10.00 Per Share
---------------------------------------------
The Bank- 1,712,750 Shares 2,015,000 Shares
Historical (Minimum of (Midpoint of
Capitalization Range) Range)
-------------------- -------------------- ---------------------
(In Thousands) (Dollars)
Deposits(2)....................................... $340,793 $340,793 $340,793
Borrowings........................................ 21,000 21,000 21,000
--------- -------- --------
Total deposits and borrowings..................... $ 361,793 $361,793 $361,793
========= ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000
shares authorized; none to be issued......... $ -- $ -- $ --
Common Stock, $.01 par value, 25,000,000
shares authorized; shares to be issued as
reflected(3)................................. $ -- $ 39 $ 46
Additional paid-in capital..................... -- 16,199 19,180
Retained earnings(4)........................... 35,865 35,865 35,865
Shares issued to Foundation(5)................. -- 685 806
Net unrealized gain on investment securities
available for sale........................... 80 80 80
Less:
Initial capitalization of the MHC.............. -- (100) (100)
Expense of contribution to Foundation,
net(6)....................................... -- (452) (532)
Common Stock to be acquired by the
ESOP(7)...................................... -- (1,370) (1,612)
Common Stock to be acquired by the
Recognition Plan(8).......................... -- (685) (806)
--------- -------- --------
Total stockholders' equity........................ $ 35,945 $ 50,261 $ 52,927
========= ======== ========
Stockholders' equity to total assets.............. 8.87% 11.98% 12.53%
========= ========= =========
Total shares to be issued and outstanding(9)...... NA 3,936,010 4,630,600
========= ========= =========
The Company - Pro Forma
Based Upon Sale at $10.00 Per Share
-----------------------------------------------
2,317,250 Shares 2,664,838 Shares(1)
(Maximum of (15% above
Range) Maximum of Range)
-------------------- -----------------------
(In Thousands)
Deposits(2)....................................... $340,793 $340,973
Borrowings........................................ 21,000 21,000
-------- --------
Total deposits and borrowings..................... $361,793 $361,973
======== ========
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000,000
shares authorized; none to be issued......... $ -- $ --
Common Stock, $.01 par value, 25,000,000
shares authorized; shares to be issued as
reflected(3)................................. $ 53 $ 61
Additional paid-in capital..................... 22,161 25,589
Retained earnings.............................. 35,865 35,865
Shares issued to Foundation(4)................. 927 1,066
Net unrealized gain on investment securities
available for sale........................... 80 80
Less:
Initial capitalization of the MHC.............. (100) (100)
Expense of contribution to Foundation,
net(5)....................................... (612) (704)
Common Stock to be acquired by the
ESOP(6)...................................... (1,854) (2,132)
Common Stock to be acquired by the
Recognition Plan(7).......................... (927) (1,066)
--------- ---------
Total stockholders' equity........................ $ 55,593 $ 58,659
========= =========
Stockholders' equity to total assets.............. 13.08% 13.70%
========= =========
Total shares to be issued and outstanding(8)...... 5,325,190 6,123,970
========= =========
(Footnotes on following page)
39
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of the shares of Common Stock to be sold in the
Offerings. No effect has been given to the issuance of additional shares of
Common Stock pursuant to the proposed Stock Option Plan. See "Pro Forma
Data" and "Management - Benefits - Stock Option Plan." Reflects issuance of
additional shares of Common Stock to the Foundation.
(4) Pro forma information reflects proposed $100,000 contribution to capital to
the MHC.
(5) Reflects shares to be contributed to the Foundation at an assumed value of
$10.00 per share.
(6) Net of the tax effect of the contribution of Common Stock to the Foundation
based upon an assumed 34.0% tax rate. The realization of the deferred tax
benefit is limited annually to 10% of the Company's annual taxable income,
subject to the ability of the Company to carry forward any unused portion
of the deduction for five years following the year in which the
contribution is made. Due to this limitation, no state income tax benefit
has been assured. Historical equity has been reduced in the pro forma
presentation by $100,000 due to the retention of such amount by the MHC as
its initial capitalization upon consummation of the MHC.
(7) Assumes that 8.0% of the Common Stock sold in the Offerings will be
purchased by the ESOP, which is reflected as a reduction of stockholders'
equity. The ESOP shares will be purchased with funds loaned to the ESOP by
the Company. See "Pro Forma Data" and "Management - Benefits - Employee
Stock Ownership Plan."
(8) The Company intends to adopt the Recognition Plan and to submit such plan
to stockholders at an annual or special meeting of stockholders held at
least six months following the consummation of the Reorganization. If the
plan is approved by stockholders, the Company intends to contribute
sufficient funds to the trust created under the Recognition Plan to enable
the trust to purchase a number of shares of Common Stock equal to 4.0% of
the Common Stock sold in the Offerings. Assumes that stockholder approval
has been obtained and that the shares have been purchased in the open
market at the Purchase Price. However, in the event the Company issues
authorized but unissued shares of Common Stock to the Recognition Plan in
the amount of 4.0% of the Common Stock sold in the Offerings, the voting
interests of existing stockholders would be diluted approximately 3.8%. The
shares are reflected as a reduction of stockholders' equity. See "Pro Forma
Data" and "Management - Benefits - Recognition Plan."
(9) Reflects shares to be sold in the offering, issued to the MHC and
contributed to the Foundation. Does not give any effect to the anticipated
stock option Plan.
40
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Reorganization is completed. However, net proceeds are
currently estimated to be between $16.2 million and $22.2 million (or $25.6
million in the event the Estimated Offering Range is increased by 15%) based
upon the following assumptions: (i) all shares of Common Stock will be sold in
the Subscription Offering; (ii) no fees will be paid to Webb on shares purchased
by (x) the ESOP and any other employee benefit plan of the Company or the Bank,
(y) officers, directors, employees and members of their immediate families or
(z) the Foundation; (iii) Webb will receive a fee equal to 1.25% of the
aggregate Purchase Price for sales in the Subscription Offering (excluding the
sale of shares to the ESOP, employee benefit plans, officers, directors and
their immediate families and the Foundation); (iv) the Company will contribute
to the Foundation an amount of Common Stock equal to 4.0% of the Common Stock
sold in the Offerings from authorized but unissued shares; and (v) total
expenses, including the marketing fees paid to Webb will be between $889,000 and
$959,000 (or $999,000 in the event the Estimated Offering Range is increased by
15%). Actual expenses may vary from those estimated.
Pro forma consolidated net income and stockholders' equity of the
Company have been calculated for the fiscal year ended June 30, 1998 as if the
Common Stock to be issued in the Offerings had been sold at the beginning of the
period and the net proceeds had been invested at 5.37%, which represents the
yield on one-year U.S. Government securities at June 30, 1998 (which, in light
of changes in interest rates in recent periods, are deemed by the Company and
the Bank to more accurately reflect pro forma reinvestment rates than the
arithmetic average method). The effect of withdrawals from deposit accounts for
the purchase of Common Stock has not been reflected. A combined Federal and
state income tax rate of 39.0% has been assumed for the period, resulting in an
after-tax yield of 3.28%, for the year ended June 30, 1998. Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock, as adjusted to
give effect to the shares purchased by the ESOP and the effect of the issuance
of shares to the Foundation. See Note 3 to the tables below. No effect has been
given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. As discussed under "Use of Proceeds," the Company
intends to make a loan to fund the purchase of 8.0% of the Common Stock by the
ESOP and retain 50% of the net proceeds from the Offerings.
No effect has been given in the tables to the issuance of additional
shares of Common Stock pursuant to the proposed Option Plan. See "Management -
Benefits - Stock Option Plan." The table below gives effect to the Recognition
Plan, which is expected to be adopted by the Company following the
Reorganization and presented (together with the Stock Option Plan) to
stockholders for approval at an annual or special meeting of stockholders to be
held at least six months following the consummation of the Reorganization. If
the Recognition Plan is approved by stockholders, the Recognition Plan intends
to acquire an amount of Common Stock equal to 4.0% of the shares of Common Stock
sold in the Offerings, either through open market purchases or from authorized
but unissued shares of Common Stock. The table below assumes that stockholder
approval has been obtained, as to which there can be no assurance, and that the
shares acquired by the Recognition Plan
41
are purchased in the open market at the Purchase Price. No effect has been given
to (i) the Company's results of operations after the Reorganization, (ii) the
market price of the Common Stock after the Reorganization or (iii) a less than
4.0% purchase by the Recognition Plan.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with GAAP.
The following table gives effect to the issuance of authorized but
unissued shares of the Common Stock to the Foundation concurrently with the
completion of the Reorganization. The pro forma stockholders' equity is not
intended to represent the fair market value of the Common Stock and may be
different than amounts that would be available for distribution to stockholders
in the event of liquidation.
42
At or For the Year Ended June 30, 1998
--------------------------------------------------------------
1,712,750 2,015,000 2,317,250 2,664,838
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00 Per
Per Share Per Share Per Share Share (15%
(Minimum of (Midpoint (Maximum of above Maximum
Range) of Range) Range) of Range)(8)
-------------- ------------- ------------- ----------------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds............................................. $ 17,128 $ 20,150 $ 23,173 $ 26,648
Plus: Shares acquired by Foundation (equal to
4.0% of the shares sold in the Offerings)................ 685 806 927 1,066
---------- ---------- ---------- ----------
Pro forma market capitalization.......................... $ 17,813 $ 20,956 $ 24,099 $ 27,714
========== ========== ========== ==========
Gross proceeds............................................. 17,128 20,150 23,173 26,648
Less offering expenses and commissions..................... 889 924 959 999
0 0 0 0
---------- ---------- ---------- ----------
Estimated net proceeds................................... $ 16,239 $ 19,226 $ 22,214 $ 25,649
Less: Shares purchased by the ESOP......................... (1,370) (1,612) (1,854) (2,132)
Shares purchased by the
Recognition Plan................................... (685) (806) (927) (1,066)
---------- ---------- ---------- ----------
Total estimated net proceeds, as adjusted(1)............... 14,184 16,808 $ 19,433 $ 22,451
========== ========== ========== ==========
Net income(2):
Historical............................................... $ 2,445 $ 2,445 $ 2,445 $ 2,445
Pro forma income on net proceeds, as adjusted............ 465 551 637 736
Pro forma ESOP adjustment(3)............................. (84) (98) (113) (130)
Pro forma Recognition Plan
adjustment(4).......................................... (84) (98) (113) (130)
---------- ---------- ---------- ----------
Pro forma net income..................................... $ 2,742 $ 2,800 $ 2,856 $ 2,921
========== ========== ========== ==========
Net income per share(2)(5):
Historical............................................... $ 0.64 $ 0.55 $ 0.47 $ 0.41
Pro forma income on net proceeds, as adjusted............ 0.12 0.12 0.12 0.12
Pro forma ESOP adjustment(3)............................. (0.02) (0.02) (0.02) (0.02)
Pro forma Recognition Plan adjustment(4)................ (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Pro forma net income per share(4)(6)..................... $ 0.72 $ 0.63 $ 0.55 $ 0.49
========== ========== ========== ==========
Number of shares outstanding for pro forma net income per
share calculations(5)............................. 3,812,692 4,485,520 5,158,348 5,932,101
========= ========= ========= =========
Offering price to pro forma net
income per share(5)...................................... 13.89x 15.87x 18.18x 20.41x
===== ===== ===== =====
Stockholders' equity:
Historical............................................... $ 35,945 $ 35,945 $ 35,945 $ 35,945
Estimated net proceeds................................... 16,239 19,226 22,214 25,649
Less: Initial capitalization of MHC...................... (100) (100) (100) (100)
Plus: Shares issued to Foundation........................ 685 806 927 1,066
Less: Contribution to Foundation......................... (685) (806) (927) (1,066)
Plus: Tax benefit of the contribution to Foundation...... 233 274 315 362
Less: Common Stock acquired by the ESOP(3)............... (1,370) (1,612) (1,854) (2,132)
Common Stock to be acquired by
the Recognition Plan(4).......................... (685) (806) (927) (1,066)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(4)(6)(7).................. $ 50,261 $ 52,927 $ 55,593 $ 58,659
========== ========== ========= ==========
At or For the Year Ended June 30, 1998
--------------------------------------------------------------
1,712,750 2,015,000 2,317,250 2,664,838
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00 Per
Per Share Per Share Per Share Share (15%
(Minimum of (Midpoint (Maximum of above Maximum
Range) of Range) Range) of Range)(8)
-------------- ------------- ------------- ----------------
(Dollars in Thousands, Except Per Share Amounts)
Stockholders' equity per share(5):
Historical............................................... $ 9.13 $ 7.76 $ 6.75 $ 5.87
Estimated net proceeds................................... 4.13 4.15 4.17 4.19
Plus: Shares issued to Foundation........................ 0.17 0.17 0.17 0.17
Less: Contribution to Foundation......................... (0.17) (0.17) (0.17) (0.17)
Plus: Tax benefit of contribution to Foundation.......... 0.06 0.06 0.06 0.06
Less: Common Stock acquired by the ESOP(3)............... (0.35) (0.35) (0.35) (0.35)
Common Stock to be acquired by the Recognition
Plan(4)......................................... (0.17) (0.17) (0.17) (0.17)
---------- ---------- ---------- ----------
Pro forma stockholders' equity
per share(4)(6)(7)..................................... $12.77 $11.43 $10.44 $ 9.58
====== ====== ====== ======
Offering price as a percentage of pro
forma stockholders' equity per share(5)................ 78.31% 87.49% 95.79% 104.38%
===== ===== ===== ======
Offering price as a percentage of pro forma tangible
stockholders' equity per share(5)...................... 82.17% 91.57% 100.3% 108.76%
===== ===== ===== ======
Number of shares outstanding for pro forma stockholders'
equity per share calculations(5)......................... 3,936,010 4,630,600 5,325,190 6,123,970
========== ========= ========= =========
43
- ---------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the Offerings minus (i) the proceeds attributable to the purchase by
the ESOP and (ii) the value of the shares to be purchased by the
Recognition Plan, subject to stockholder approval, after the Reorganization
at an assumed purchase price of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be recognized
in fiscal 1999 as a result of the establishment of the Foundation. The
Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $452,000, $532,000,
$612,000 and $704,000 at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Valuation Range, respectively. Assuming the
contribution to the Foundation was expensed during the year ended June 30,
1998, pro forma net earnings per share would be 0.60, 0.51, 0.44 and 0.37
at the minimum, midpoint, maximum and maximum, as adjusted, respectively.
Per share net income data is based on 3,812,692, 4,485,520, 5,158,348, and
5,932,102 shares outstanding which represents shares issued to the MHC,
sold in the Offerings, shares contributed to the Foundation and shares to
be allocated or distributed under the ESOP and Recognition Plan for the
period presented.
(3) It is assumed that 8.0% of the shares of Common Stock sold in the Offerings
will be purchased by the ESOP with funds loaned by the Company. The Company
and the Bank intend to make annual contributions to the ESOP in an amount
at least equal to the principal and interest requirement of the debt. The
pro forma net earnings assumes (i) that the loan to the ESOP is payable
over 10 years, with the ESOP shares having an average fair value of $10.00
per share in accordance with SOP 93-6, entitled "Employers' Accounting for
Employee Stock Ownership Plans," of the AICPA, and (ii) the effective tax
rate was 39.0% for the period. See "Management - Benefits - Employee Stock
Ownership Plan."
(4) It is assumed that the Recognition Plan will purchase, following
stockholder approval of such plan, a number of shares of Common Stock equal
to 4.0% of the shares of Common Stock sold in the Offerings for issuance to
directors, officers and employees. Funds used by the Recognition Plan to
purchase the shares initially will be contributed to the Recognition Plan
by the Company. It is further assumed that the shares were acquired by the
Recognition Plan at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed, net
of combined Federal and State taxes of 39.0%, was an amortized expense
during the year ended June 30, 1998. The issuance of authorized but
unissued shares of Common Stock pursuant to the Recognition Plan in the
amount of 4.0% of the Common Stock sold in the Offerings would dilute the
voting interests of existing stockholders by approximately 3.8% and under
such circumstances pro forma net earnings per share for the year ended June
30, 1998 would be $0.72, $0.63, $0.56 and $0.49, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Offering Range,
respectively, and pro forma stockholders' equity per share at June 30, 1998
would be $12.74, $11.41, $10.43 and $9.59 at the minimum, midpoint,
maximum and 15% above the maximum of such range, respectively. There can be
no assurance that the actual purchase price of shares purchased by or
issued to the Recognition Plan will be equal to the Purchase Price. See
"Management - Benefits - Recognition Plan."
(footnotes continued on following page)
44
(5) The per share calculations are determined by adding the number of shares
assumed to be issued to the MHC and sold in the Offerings as well as
contributed to the Foundation and for purposes of calculating earnings per
share, in accordance with SOP 93-6, subtracting 123,318 shares, 145,080
shares, 166,842 shares, and 191,868 shares, respectively, representing the
ESOP shares which have not been committed for release during the year ended
June 30, 1998. Thus, it is assumed at June 30, 1998 that 3,812,692,
4,485,520, 5,158,348 and 5,932,101 shares of Common Stock are outstanding
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Offering Range, respectively. Assuming the uncommitted ESOP
shares were not subtracted from the number of shares of Common Stock
outstanding at June 30, 1998, the offering price as a multiple of pro forma
net earnings per share would be 14.29x, 16.67x, 18.52x and 20.83 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Offering Range, respectively. For purposes of calculating pro forma
stockholders' equity per share, it is assumed that shares outstanding total
3,936,100, 4,630,600, 5,325,190 and 6,123,970 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range.
(6) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan, which will be adopted by the
Company following the Reorganization and presented for approval by
stockholders at an annual or special meeting of stockholders of the Company
held at least six months following the consummation of the Reorganization.
If the Stock Option Plan is approved by stockholders, an amount equal to
10% of the Common Stock sold in the Offerings, or 171,275, 201,500, 231,725
and 266,483 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Offering Range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the Stock
Option Plan. The issuance of Common Stock pursuant to the exercise of
options under the Stock Option Plan will result in the dilution of existing
stockholders' interests. Assuming stockholder approval of the Stock Option
Plan, that all these options were exercised at the beginning of the period
at an exercise price of $10.00 per share and that the shares to fund the
Recognition Plan are acquired through open market purchases at the Purchase
Price, pro forma net earnings per share for the year ended June 30, 1998
would be $0.80, $0.69, $0.61, and $0.54 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Offering Range, respectively,
and pro forma stockholders' equity per share at June 30, 1998 would be
$12.66, $11.38, $10.42 and $9.59 at the minimum, midpoint, maximum and 15%
above the maximum of such range, respectively. See "Management - Benefits -
Stock Option Plan."
(7) The retained earnings of the Bank will be substantially restricted because
certain distributions from the Bank's retained earnings may be treated as
being from its accumulated bad debt reserve for tax purposes, which would
cause the Bank to have additional taxable income. See "Taxation - Federal
Taxation." No effect has been given to the establishment of the liquidation
account subsequent to the Reorganization or to the treatment of the Bank's
intangible assets in the event of a liquidation of the Banks. Pro forma
stockholders' equity and pro forma stockholders' equity per share do not
give effect to the bad debt reserves established by the Bank for federal
income tax purposes in the event of a liquidation of the Bank. Pro forma
retained earnings have been reduced by $100,000 to reflect the proposed
capitalization by the MHC.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Offering Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
45
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Reorganization, RP Financial has estimated that the pro forma aggregate
market capitalization of the Company would be approximately $21.3 million at the
midpoint, which is approximately 1.1 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in an approximately $1.1 million increase in the amount of
Common Stock offered for sale in the Stock Issuance. At the mid-point, the pro
forma price to book ratio and pro forma price to earnings ratio without the
Foundation would be 89.53% and 16.13x, respectively, compared to 87.49% and
15.87x, respectively, with the Foundation. Further, assuming the midpoint of the
Estimated Offering Range, pro forma stockholders' equity per share and pro forma
earnings per share without the Foundation would be $11.17 and $0.62,
respectively, and $11.43 and $0.63, respectively, with the Foundation. There is
no assurance that in the event the Foundation was not formed that the appraisal
prepared at the time would have concluded that the pro forma market value of the
Company would be the same as that estimated herein. Any appraisals prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions. For comparative
purposes only, set forth below are certain pricing ratios and financial data and
ratios, at the minimum, midpoint, maximum and maximum, as adjusted, of the
Estimated Offering Range, assuming the Reorganization and Stock Issuance was
completed at June 30, 1998.
At the Minimum At the Midpoint
------------------------------- ------------------------------
With With
Foundation No Foundation Foundation No Foundation
--------------- -------------- --------------- -------------
(Dollars in thousands, except per share amounts)
Estimated offering amount................. $ 17,128 $ 18,069 $ 20,150 $ 21,257
Pro forma market capitalization........... 17,813 18,069 20,956 21,257
Total assets.............................. 419,690 420,274 422,356 423,043
Total liabilities......................... 369,429 369,429 369,429 369,429
Pro forma stockholders' equity............ 50,261 50,845 52,927 53,614
Pro forma consolidated net earnings....... 2,742 2,760 2,800 2,819
Pro forma stockholders' equity per share.. 12.77 12.47 11.43 11.17
Pro forma consolidated net earnings per
share.................................. 0.72 0.70 0.63 0.62
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per
share................................ 78.31% 80.19% 87.49% 89.53%
Offering price to pro forma net
earnings per share(1)................ 13.89 14.29 15.87 16.13
Pro forma market capitalization to
assets............................... 9.38% 9.71% 10.96% 11.35%
Pro forma financial ratios:
Return on assets(2).................... 0.65% 0.66% 0.66% 0.67%
Return on stockholders' equity(3)...... 5.46% 5.43% 5.29% 5.26%
Stockholders' equity to assets......... 11.98% 12.10% 12.53% 12.67%
At the Maximum,
At the Maximum As Adjusted
------------------------------- ------------------------------
With With
Foundation No Foundation Foundation No Foundation
--------------- -------------- -------------- -------------
(Dollars in thousands, except per share amounts)
Estimated offering amount................. $ 23,173 $ 24,446 $ 26,648 $ 28,113
Pro forma market capitalization........... 24,099 24,446 27,714 28,113
Total assets.............................. 425,022 425,812 428,088 428,997
Total liabilities......................... 369,429 369,429 369,429 369,429
Pro forma stockholders' equity............ 55,593 56,383 58,659 59,568
Pro forma consolidated net earnings....... 2,856 2,680 2,920 2,948
Pro forma stockholders' equity per share.. 10.44 10.21 9.58 9.38
Pro forma consolidated net earnings per
share.................................. 0.55 0.55 0.49 0.49
Pro forma pricing ratios:
Offering price as a percentage of pro
forma stockholders' equity per
share................................ 95.79% 97.94% 104.38% 106.61%
Offering price to pro forma net
earnings per share(1)................ 18.18 18.18 20.41 20.41
Pro forma market capitalization to
assets............................... 12.53% 12.96% 14.31% 14.80%
Pro forma financial ratios:
Return on assets(2).................... 0.67% 0.68% 0.68% 0.69%
Return on stockholders' equity(3)...... 5.14% 5.11% 4.98% 4.95%
Stockholders' equity to assets......... 13.08% 13.24% 13.70% 13.89%
- -----------------
(1) If the contribution to the Foundation had been expensed during the year
ended June 30, 1998, the offering price to pro forma net earnings per share
would have been 16.65x, 19.78x, 22.98x and 26.76x at the minimum, midpoint,
maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended June 30, 1998, return on assets would have been 0.55%, 0.54%, 0.53%
and 0.52% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the Foundation had been expensed during the year
ended June 30, 1998, return on stockholders' equity would have been 4.56%,
4.29%, 4.04% and 3.78% at the minimum, midpoint, maximum and maximum, as
adjusted, respectively.
46
WILLOW GROVE BANK
STATEMENTS OF OPERATIONS
Set forth below are the statements of operations of the Bank for the
periods indicated. The financial statements of the Bank as of June 30, 1998,
1997 and 1996 were audited by KPMG Peat Marwick LLP, independent public
accountants.
For the Year Ended
June 30,
-------------------------------------------------------------
1998 1997 1996
------------------- ------------------- ---------------
(Dollars In Thousands)
Interest and dividend income:
Loans receivable................................... $25,356 $22,374 $18,456
Securities, primarily taxable...................... 3,248 3,049 3,649
------- ------- -------
Total interest income......................... 28,604 25,423 22,105
------- ------- -------
Interest expense:
Deposits........................................ 14,536 13,224 11,598
Borrowings...................................... 529 555 729
Advance payment from borrowers for
taxes......................................... 32 38 43
------- ------- -------
Total interest expense........................ 15,097 13,817 12,370
------- ------- -------
Net interest income................................ 13,507 11,606 9,735
Provision for loan losses.......................... 993 185 210
------- ------- -------
Net interest income after provision for
loan losses................................... 12,514 11,421 9,525
------- ------- -------
Non-interest income:
Service charges and fees........................ 618 409 364
Gain (loss) on sale of land held for
development and resale...................... (25) 16 314
Gain (loss) on sale of securities available
for sale.................................... (105) (8) 564
Gain (loss) on sale of loans available for
sale........................................ 69 29 (66)
Loan servicing income, net...................... 203 340 69
------- ------- -------
Total non-interest income..................... 760 786 1,245
------- ------- -------
Non-interest expense:
Compensation and employee benefits.............. 5,386 3,440 2,919
Occupancy....................................... 636 470 403
Furniture and equipment......................... 328 264 229
Federal insurance premium....................... 195 1,829 545
Amortization of intangible assets............... 410 410 410
Data processing ................................ 388 319 350
Advertising..................................... 413 297 287
Community enrichment............................ 373 259 --
Other expense................................... 1,333 996 881
------- ------- -------
Total non-interest expense.................... 9,462 8,284 6,024
------- ------- -------
Income before income taxes......................... 3,812 3,923 4,746
Income taxes....................................... 1,367 1,548 1,744
------- ------- -------
Net income......................................... $ 2,445 $ 2,375 $ 3,002
======= ======= =======
See accompanying notes to financial statements.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
financial condition and results of operations of Willow Grove. The discussion
and analysis does not include any comments relating to the Company since the
Company has had no significant operations. The information contained in this
section should be read in conjunction with the Financial Statements and the
accompanying Notes and the other sections contained in this Prospectus.
The Bank's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans and securities, and interest expense
on interest-bearing liabilities which consist of deposits and borrowings. The
Bank's results of operations also are affected by the provision for loan losses,
the level of its other income and expenses, and income tax expense.
Market Risk Analysis - Asset and Liability Management
Qualitative Risk Analysis. The ability to maximize net interest income
is largely dependent upon the achievement of a positive interest rate spread
that can be sustained during fluctuations in prevailing interest rates. Interest
rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or
mature within a given period of time. The difference, or the interest rate
repricing "gap," provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities, and is considered negative
when the amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result in
an increase in net interest income, and during a period of falling interest
rates, a negative gap within shorter maturities would result in an increase in
net interest income while a positive gap within shorter maturities would have
the opposite effect. As of June 30, 1998, the ratio of the Bank's cumulative
one-year gap to total interest-earning assets was a negative 11.6% and its ratio
of interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 77.3%.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Bank's results of operations, the
Bank has adopted asset and liability management policies designed to better
match the maturities and repricing terms of the Bank's interest-earning assets
and interest-bearing liabilities. Willow Grove's actions with respect to
interest rate risk and its asset/liability gap management are taken under the
guidance of the Asset/Liability Management Committee ("ALCO") of Willow Grove,
which is comprised of directors Langan, Kremp and Ramsey as well as the Bank's
President and the three other senior executive officers. The purpose of the ALCO
is to communicate, coordinate and control asset/liability management consistent
with the Bank's business plan and Board approved policies. The ALCO establishes
and monitors the volume and mix of assets and funding sources taking into
account relative costs and spreads, interest rate sensitivity and liquidity
needs. The objectives are to manage assets and funding sources to produce
48
results that are consistent with liquidity, capital adequacy, growth, risk and
profitability goals. The ALCO generally meets on at least a quarterly basis to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital positions, anticipated changes
in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections pursuant to gap analysis and income
simulations. At each meeting, the ALCO recommends appropriate strategy changes
based on such review.
In order to manage its assets and liabilities and improve the Bank's
interest rate risk exposure in recent years Willow Grove has emphasized the
origination of commercial and multi-family real estate loans, construction
loans, commercial business loans and home equity loans, all of which generally
have shorter terms to maturity than single-family residential mortgage loans and
are more likely to have interest rates which either are floating or adjustable.
At the same time, the Bank has been seeking to lengthen the term of its deposits
by emphasizing longer term certificates of deposit, to increase the amount of
its core deposits and to reduce its costs of funds by increasing non-interest
bearing checking and business accounts. In recent years, the Bank has used FHLB
advances as an additional source of funds and, pursuant to guidelines of the
Bank's Board of Directors, has reinvested such funds in securities with
estimated lives approximating the lives of the advances but with effective
yields higher than the rate paid for the advances.
Quantitative Risk Analysis. The ALCO regularly reviews interest rate
risk by, among other things, examining the impact of alternative interest rate
environments on net interest income and market value of portfolio equity
("MVPE"), which is defined as the net present value of an institution's existing
assets, liabilities and off-balance sheet instruments, and evaluating such
impacts against the maximum potential changes in net interest income and MVPE
that is authorized by the Board of Directors of the Bank.
Presented below, as of June 30, 1998, is an analysis of Willow Grove's
interest rate risk as measured by changes in net portfolio value ("NPV") for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points in accordance with OTS
regulations. As illustrated in the table, NPV is more sensitive to and may be
more negatively impacted by, rising rates than declining rates. This occurs
principally because as rates rise, the market value of fixed-rate loans declines
due to both the rate increase and slowing prepayments. When rates decline, the
Bank does not experience a significant rise in market value for these loans
because borrowers prepay at relatively high rates. The value of the Bank's
deposits and borrowings change in approximately the same proportion in rising or
falling rate scenarios.
49
Estimated Change in
-----------------------------------------------------------------------
Change (in Basis Points) in Net Interest Income
Interest Rates(1) (next four quarters) MVPE
------------------------------- ------------------------------- ------------------------------
(Dollars in Thousands)
+400 (32)% $(4,414) (65)% $(29,254)
+300 (24) (3,355) (48) (21,520)
+200 (15) (2,055) (30) (13,523)
+100 (6) (858) (13) (5,917)
0
-100 8 1,089 8 3,607
-200 8 1,182 11 4,955
-300 16 2,271 16 7,060
-400 16 2,271 23 10,449
- -------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
The assumptions used by management to evaluate the vulnerability of the
Bank's operations to changes in interest rates in the table above are based on
assumptions utilized in the gap table below. Although management finds these
assumptions reasonable, the interest rate sensitivity of the Bank's assets and
liabilities and the estimated effects of changes in interest rates on the Bank's
net interest income and MVPE indicated in the above table could vary
substantially if different assumptions were used or actual experience differs
from such assumptions. Based upon the above-described changes in the Bank's
MVPE, the Bank could be required to deduct $2.6 million from the calculation of
its total regulatory capital if certain OTS regulations were applicable,
although the Bank would continue to be deemed a "well-capitalized" institution.
See "Regulation - Regulation of Federal Savings Banks - Regulatory Capital
Requirements."
50
The following table summarizes the anticipated maturities or repricing
of the Bank's interest-earning assets and interest-bearing liabilities as of
June 30, 1998, based on the information and assumptions set forth in the notes
below.
More Than
Three to More Than Three Years
Within Three Twelve One Year to to Five Over Five
Months Months Three Years Years Years Total
------------- ------------ ------------ ------------ ------------ -----------
(Dollars in Thousands)
Interest-earning assets:
Cash and interest-earning deposits...... $18,291 $ -- $ -- $ -- $ -- $ 18,291
Securities(1)(2)........................ 20,812 1,800 4,150 9,800 11,549 48,111
Loans(3)(4)............................. 46,642 69,147 91,317 73,117 49,902 330,125
------- -------- -------- ------- ------- --------
Total interest-earning assets......... $85,745 $ 70,947 $ 95,467 $82,917 $61,451 $396,527
======= ======== ======== ======= ======= ========
Interest-bearing liabilities:
Escrow accounts......................... 2,913 1,568 -- -- -- 4,481
Money market accounts(5)................ 15,365 3,842 960 240 80 20,487
Savings accounts(5)..................... 6,034 5,129 4,359 3,705 20,998 40,225
NOW accounts(5)......................... 15,866 10,630 7,122 4,772 9,689 48,079
Certificates of deposit(5).............. 32,972 97,350 84,191 14,148 3,341 232,002
Borrowings(6)........................... 7,000 4,000 -- 6,000 4,000 21,000
------- -------- -------- ------- ------- --------
Total interest-bearing liabilities.... $80,150 $122,519 $ 96,632 $28,865 $38,108 $366,274
======= ======== ======== ======= ======= ========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities.. $5,595 $(51,572) $ (1,165) $54,052 $23,343 $ 30,253
======= ======== ======== ======= ======= ========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities....................... $5,595 $(45,977) $(47,142) $ 6,910 $30,253
======= ======== ======== ======= =======
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets.............................. 1.38% (11.34)% (11.63)% 1.70% 7.46%
==== ====== ====== ==== ====
Ratio of interest-earning assets to interest
bearing liabilities........................ 106.82% 57.91% 98.79% 287.26% 161.25%
====== ===== ===== ====== ======
- --------------
(1) Includes $20.0 million of callable agency securities for which the expected
repayment schedule is based on management's estimates given the current
interest rate environment.
(2) Repayments are based on management's estimates given the current interest
rate environment.
(3) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted for management's estimates of prepayments.
(4) Includes available for sale loans. Balances are gross of the allowance for
loan losses and deferred loan fees, and have been reduced for
non-performing loans, which amounted to $1.5 million at June 30, 1998.
(5) Although the Bank's NOW accounts, passbook savings accounts and money
market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer effective maturities. The decay rates used on these
accounts are based on management estimates and should not be regarded as
indicative of the actual withdrawals that may be experienced by the Bank.
(6) Borrowings consist of FHLB advances and are stated at contractual maturity.
A substantial amount of such advances could be called for repayment within
one year.
51
Certain assumptions are contained in the above tables which affect the
presentation therein. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates of other types of assets and liabilities lag behind changes
in market interest rates. Certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table.
Changes in Financial Condition
General. Total assets of Willow Grove increased by $50.7 million, or
14.3%, to $405.4 million at June 30, 1998 compared to $354.7 million at June 30,
1997. Such increase was due primarily to a $31.1 million increase in net loans
receivable.
Cash and cash equivalents. Cash and cash equivalents, which consist of
cash and deposits at other institutions, amounted to $18.3 million and $4.2
million at June 30, 1998 and 1997, respectively. The increase during fiscal 1998
primarily reflects significant loan repayments during the period as well as
deposit inflows during the period.
Assets Available for Sale. At June 30, 1998, Willow Grove's assets
available for sale consisted of $48.1 million in securities and $12.2 million in
loans compared to $45.8 million and $6.2 million, respectively, at June 30,
1997. During fiscal 1996, the Bank reclassified substantially all of its
securities as available for sale pursuant to Statement of Financial Accounting
Standards No. 115 ("SFAS 115"). Such classification provides the Bank with
additional flexibility to dispose of securities prior to maturity if, for
example, it is determined that they have unacceptable levels of interest rate
risk, that their sale is desirable for liquidity purposes or for other asset and
liability management reasons. Securities classified as available for sale are
accounted for at fair value, with unrealized gains or losses, net of taxes,
reflected as an adjustment to equity. As a result of changes in market rates of
interest, at June 30, 1998, the Bank had a net unrealized gain on securities
available for sale of $80,000 compared to a net loss of $298,000 at June 30,
1997. Mortgage loans which are originated by the Bank for sale into the
secondary market are classified as available for sale and are carried at the
lower of cost or market value with any unrealized losses reflected in the
statement of operations.
Loans. Willow Grove's net loans receivable amounted to $315.7 million
at June 30, 1998 compared to $284.6 million at June 30, 1997. The $31.1 million,
or 10.9%, increase in the Bank's net loan portfolio during fiscal 1998 was due
primarily to a $9.0 million increase in commercial real estate mortgage loans
and a $15.8 million increase in home equity loans. The increase in the loan
portfolio was due to increased loan demand as well as the Bank's efforts to
expand its lending activities, other than single-family residential first
mortgage loans.
Intangible Assets. Willow Grove's intangible assets amounted to $2.4
million and $2.8 million at June 30, 1998 and 1997, respectively. Such assets
are comprised of goodwill and a core deposit intangible resulting from the
Bank's purchase of three branch offices from another institution
52
in March 1994. The goodwill is being amortized on a straight-line basis over 15
years while the core deposit intangible is being amortized on an accelerated
basis over 10 years.
Liabilities. Willow Grove's total liabilities increased by $47.8
million, or 14.9%, to $369.4 million at June 30, 1998 compared to $321.6 million
at June 30, 1997. The primary reason for such increase was a $31.1 million
increase in deposits together with a $14.5 million increase in borrowings. The
Bank attributes the growth in deposits primarily to its efforts to solicit
no-cost checking accounts and business accounts. The increase in borrowings
reflects the Bank's determination to utilize borrowings, on a limited basis, as
an additional source of funds. The Bank has commenced a leverage program
whereby, subject to limits established by the Bank's Board of Directors, it
obtains FHLB advances and, at the same time, purchases securities with estimated
average lives corresponding to the term of the advances while paying a higher
yield than the cost of borrowings. Pursuant to such leverage program, the
Board's policy permits the President or Chief Financial Officer to obtain
borrowings of up to $20 million at any time in order to make investments. At
June 30, 1998, the Bank had $16.0 million in borrowings outstanding under this
leverage program and a commensurate amount of securities. See "Business Sources
of Funds - Borrowings."
Equity. Total equity of Willow Grove amounted to $35.9 million, or 8.9%
of total assets, at June 30, 1998 compared to $33.1 million, or 9.3% of total
assets, at June 30, 1997. The increase in Willow Grove's total equity from June
30, 1997 to June 30, 1998 primarily reflects net income of $2.4 million during
the year.
53
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods. The table also reflects the yields on the Bank's
interest-earning assets and costs of the Bank's interest-bearing liabilities at
June 30, 1998. Given that the Bank had only nominal amounts of tax-exempt
investments ($100,000 at June 30, 1998), the data below is shown without tax
effects.
Year Ended June 30,
---------------------------------------
1998
---------------------------------------
Average
Yield/Cost at Average Yield/
June 30, 1998 Balance Interest Cost
------------- ------------- ---------- ---------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1):
Mortgage loans.............................. 7.89% $303,458 $24,824 8.18%
Non-mortgage consumer loans................. 9.08 4,038 254 6.29
Commercial business loans................... 9.32 3,423 278 8.12
-------- -------
Total loans............................... 7.93 310,919 25,356 8.16
Securities................................... 6.16 46,336 2,923 6.31
Other interest-earning assets(2)............. 6.11 6,961 325 4.67
-------- -------
Total interest-earning assets............. 7.66 364,216 28,604 7.85
-------
Noninterest-earning assets..................... 10,364
--------
Total assets.............................. $374,580
========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts............. 1.43% $ 60,144 $ 916 1.52%
Savings accounts.......................... 2.10 36,984 787 2.13
Certificates of deposit................... 5.62 226,340 12,833 5.67
-------- -------
Total deposits.......................... 4.36 323,468 14,536 4.49
Borrowings................................... 5.62 9,794 529 5.40
Advance payments by borrowers
for taxes and insurance............... 2.00 3,274 32 0.98
-------- -------
Total interest-bearing liabilities........... 4.40 336,536 15,097 4.49
-------
Noninterest bearing liabilities(3)............. 2,133
--------
Total liabilities....................... 338,669
Retained earnings.............................. 35,911
--------
Total liabilities and equity............ $374,580
========
Net interest-earning assets.................... $ 27,680
========
Net interest income/interest rate spread....... $13,507 3.36%
======= ======
Net interest margin............................ 3.71%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities...... 108.22%
======
Year Ended June 30,
-----------------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- --------- --------- ------------ ---------- ---------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1):
Mortgage loans.............................. $273,423 $22,208 8.12% $225,084 $18,256 8.11%
Non-mortgage consumer loans................. 2,635 164 6.22 1,688 118 6.99
Commercial business loans................... 1,743 2 0.11 1,459 82 5.62
-------- ------- -------- -------
Total loans............................... 277,801 22,374 8.05 228,231 18,456 8.09
Securities................................... 44,811 2,877 6.42 54,596 3,478 6.37
Other interest-earning assets(2)............. 3,641 172 4.72 3,428 171 4.99
-------- ------- -------- -------
Total interest-earning assets............. 326,253 25,423 7.79 286,255 22,105 7.72
------- -------
Noninterest-earning assets..................... 9,121 8,317
-------- --------
Total assets.............................. $335,374 $294,572
======== ========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts............. $ 47,784 $ 803 1.68 $ 37,882 $ 721 1.90
Savings accounts.......................... 34,690 768 2.21 32,810 745 2.27
Certificates of deposit................... 205,792 11,653 5.66 176,777 10,132 5.73
-------- ------- -------- -------
Total deposits.......................... 288,266 13,224 4.59 247,469 11,598 4.69
Borrowings................................... 10,567 555 5.25 12,956 729 5.63
Advance payments by borrowers
for taxes and insurance............... 3,091 38 1.23 2,812 43 1.53
-------- ------- -------- -------
Total interest-bearing liabilities........... 301,924 13,817 4.58 263,237 12,370 4.70
------- -------
Noninterest bearing liabilities(3)............. 1,948 1,627
-------- --------
Total liabilities....................... 303,872 264,864
Retained earnings.............................. 31,502 29,708
-------- --------
Total liabilities and equity............ $335,374 $294,572
======== ========
Net interest-earning assets.................... $ 24,329 $ 23,018
======== ========
Net interest income/interest rate spread....... $11,606 3.21% $ 9,735 3.02%
======= ====== ======= ======
Net interest margin............................ 3.56 3.40%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities...... 108.06% 108.74%
====== ======
- ----------
(1) The average balance of loans receivable includes loans available for sale
and nonperforming loans, interest on which is recognized on a cash basis.
(2) Includes money market accounts and interest-earning bank deposits.
(3) Consists primarily of demand deposit accounts.
54
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the Bank. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii)
changes in rate/volume (change in rate multiplied by change in volume).
Year Ended June 30,
----------------------------------------------------
1998 compared to 1997
----------------------------------------------------
Increase (decrease) due to
----------------------------------------------------
Total Net
Rate Increase
Rate Volume /Volume (Decrease)
------ -------- ------- ----------
(In Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans.......................... $164 $2,439 $ 13 $2,616
Non-mortgage consumer loans............. 2 87 1 90
Commercial business loans............... 140 2 134 276
---- ------ ---- ------
Total loans receivable................ 306 2,528 148 2,982
Securities................................. (49) 98 (3) 46
Other interest - earning assets............ (2) 157 (2) 153
---- ------ ---- ------
Total net change in income on
interest-earning assets............... 255 2,783 143 3,181
--- ------ ---- ------
Interest-bearing liabilities:
Deposits:
NOW and money market deposits........... (76) 208 (19) 113
Savings accounts........................ (28) 51 (4) 19
Certificates of deposit................. 21 1,163 (4) 1,180
---- ------ ---- ------
Total deposits....................... (83) 1,422 (27) 1,312
Borrowings.................................. 16 (41) (1) (26)
Advance payments by borrowers for taxes
and insurance............................. (8) 2 - (6)
---- ------ ---- ------
Total net change in expense on
interest-bearing liabilities............. (75) 1,383 (28) 1,280
---- ------ ---- ------
Net change in net interest income........... $330 $1,400 $171 $1,901
==== ====== ==== ======
Year Ended June 30,
---------------------------------------------------
1997 compared to 1996
---------------------------------------------------
Increase (decrease) due to
---------------------------------------------------
Total Net
Rate/ Increase
Rate Volume Volume (Decrease)
----- -------- ------ -----------
(In Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans.......................... $ 23 $3,920 $ 9 $3,952
Non-mortgage consumer loans............. (13) 66 (7) 46
Commercial business loans............... (80) 16 (16) (80)
---- ------ ---- ------
Total loans receivable................ (70) 4,002 (14) 3,918
Securities................................. 27 (623) (5) (601)
Other interest - earning assets............ (9) 11 (1) 1
---- ------ ---- ------
Total net change in income on
interest-earning assets............... (52) 3,390 (20) 3,318
---- ------ ---- ------
Interest-bearing liabilities:
Deposits:
NOW and money market deposits........... (83) 188 (23) 82
Savings accounts........................ (20) 43 -- 23
Certificates of deposit................. (124) 1,663 (18) 1,521
---- ------ ---- ------
Total deposits....................... (227) 1,894 (41) 1,626
Borrowings.................................. (49) (135) 10 (174)
Advance payments by borrowers for taxes
and insurance............................. (8) 4 (1) (5)
---- ------ ---- ------
Total net change in expense on
interest-bearing liabilities............. (284) 1,763 (32) 1,447
---- ------ ---- ------
Net change in net interest income........... $232 $1,627 $ 12 $1,871
==== ====== ==== ======
55
Results of Operation
General. Willow Grove reported net income of $2.4 million for the year
ended June 30, 1998 compared to $2.4 million and $3.0 million for the years
ended June 30, 1997 and 1996, respectively. While the Bank's net interest income
increased in both in fiscal 1998 and 1997, the results of operations for those
years were adversely affected by decreases in other income and increases in
other expenses including, in fiscal 1997, a one-time special SAIF assessment of
$1.5 million.
Net Interest Income. Net interest income is determined by the Bank's
interest rate spread (i.e., the difference between the yields earned on the
Bank's interest-earning assets and the rate paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. While many institutions have experienced
compression in their interest rate spreads in recent years, Willow Grove's
spread has improved in each of the last three fiscal years. In large part, the
Bank's management attributes such increases in spread to the Bank's efforts to
increase its originations of higher yielding home equity loans, commercial and
multi-family real estate loans, construction loans and commercial business loans
as well as its strategy to decrease its costs of funds by attracting increased
amounts of lower costing checking and business accounts. Willow Grove's average
interest rate spread was 3.36%, 3.21% and 3.02% during the fiscal years ended
June 30, 1998, 1997 and 1996, respectively. The Bank's net interest margin
(i.e., net interest income as a percentage of average interest-earning assets)
was 3.71%, 3.56% and 3.40% during the fiscal years ended June 30, 1998, 1997 and
1996, respectively. The Bank's interest-rate spread was 3.26% at June 30, 1998
compared to its average interest rate spread of 3.36% for the fiscal year. Given
the current interest rate environment, the Bank's interest-rate spread may be
subject to further compression in future periods.
Willow Grove's net interest income amounted to $13.5 million for the
fiscal year ended June 30, 1998 compared to $11.6 million and $9.7 million for
the fiscal years ended June 30, 1997 and 1996, respectively. The $1.9 million,
or 16.4%, increase in net interest income in fiscal 1998 compared to fiscal 1997
was due to an increase in interest income due primarily to a larger average
balance of interest-earning assets, particularly real estate loans, as well as
an increase in interest rate spread. The $1.9 million, or 19.6%, increase in net
interest income in fiscal 1997 compared to fiscal 1996 was due primarily to an
increase during the year in the average balance of the Bank's loan portfolio.
Interest Income. Willow Grove reported total interest income of $28.6
million for the fiscal year ended June 30, 1998 compared to $25.4 million and
$22.1 million for fiscal 1997 and 1996, respectively. The $3.2 million, or
12.6%, increase in interest income in fiscal 1998 compared to fiscal 1997 was
due primarily to a $3.0 million increase in interest income from loans. The
increase in interest income from loans in fiscal 1998 is attributable primarily
to a $30.0 million, or 11.0%, increase in the average balance of the Bank's real
estate loans as well as a six basis point (with 100 basis points being equal to
1.0%) increase in the average yield earned on real estate loans. Interest income
from securities increased by $199,000 in fiscal 1998 compared to fiscal 1997.
The average balance of the Bank's securities portfolio increased by an aggregate
of $1.5 million in fiscal 1998 compared to fiscal 1997, which offset an 11 basis
point decrease in the average yield on securities.
56
Total interest income increased by $3.3 million, or 14.9%, in the
fiscal year ended June 30, 1997 compared to fiscal 1996. Such increase was due
to a $3.9 million increase in interest income on loans which more than offset a
$600,000 decrease in interest income from securities. The average balance of
loans increased by $49.6 million in fiscal 1997 compared to fiscal 1996. The
average balance of securities decreased $9.8 million in fiscal 1997.
Interest Expense. Interest expense is comprised primarily of interest
paid on deposit accounts maintained at the Bank and, to a much lesser extent, on
borrowings and escrow accounts. Total interest expense amounted to $15.1 million
for the fiscal year ended June 30, 1998 compared to $13.8 million and $12.4
million, respectively, for fiscal 1997 and 1996. The primary reason for the $1.3
million, or 9.4%, increase in interest expense in fiscal 1998 was increased cost
as a result of the increased volume associated with the Bank's certificates of
deposit, which constitute the largest component of the Bank's deposits. The
average balance of the Bank's certificates of deposit increased by 10.0% to
$226.3 million for the fiscal year ended June 30, 1998 compared to fiscal 1997.
The average cost of certificates of deposit was relatively constant and amounted
to 5.67% in fiscal 1998 and 5.66% in fiscal 1997. The average balance of the
Bank's NOW and money market accounts increased by 25.7% in fiscal 1998 to $60.1
million while the average cost of such deposits declined by 16 basis points
during the fiscal year. Interest expense on savings accounts and borrowings
changed nominally in fiscal 1998 compared to fiscal 1997.
Total interest expense increased by $1.4 million, or 11.3%, in fiscal
1997 compared to fiscal 1996. Interest expense on certificates of deposit
increased by $1.6 million, or 15.8%, to $11.7 million in fiscal 1997 compared to
fiscal 1996 due to a 16.4% increase in the average balance of certificates
during the period. Such increase was partially offset by a $174,000 reduction in
expense on borrowings due to a $2.4 million, or 18.5%, reduction in the average
balance of borrowings. Interest expense on NOW and money market accounts and
savings accounts increased nominally in fiscal 1997 compared to fiscal 1996.
The Bank's certificates of deposit are its highest costing deposit
accounts. While the average balance of the Bank's certificate accounts increased
in both fiscal 1998 and 1997, it declined as a percentage of total deposits to
68.1% at June 30, 1998 from 70.0% at June 30, 1997 and 71.4% at June 30, 1996.
The Bank's NOW and money market accounts, which is its lowest costing form of
deposit, increased both in average balance in fiscal 1998 and 1997 and as a
percentage of total deposits to 20.1% at June 30, 1998, compared to 18.3% and
16.0%, respectively, at June 30, 1997 and 1996.
Provision for Loan Losses. Willow Grove establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed appropriate to absorb future charge-offs
of loans deemed uncollectible. In determining the appropriate level of the
allowance of loan losses, management considers past experience, evaluations of
real estate collateral, current and anticipated economic conditions, volume and
type of lending and the levels of nonperforming and other classified loans. The
amount of the allowance is based on estimates and the ultimate losses may vary
from such estimates. Management of the Bank assesses the allowance for loan
losses on at least a quarterly basis and will make provisions for loan losses as
deemed appropriate by management in order to maintain the adequacy
57
of the allowance. Willow Grove's provision for loan losses was $993,000 for the
fiscal year ended June 30, 1998 compared to $185,000 and $210,000 for the years
ended June 30, 1997 and 1996, respectively. The primary reason for the
significant increase in Willow Grove's provision for loan losses in fiscal 1998
was the increase in the Bank's total loan portfolio including single-family
residential mortgage which do not conform to FNMA and FHLMC underwriting
guidelines, the continuing shift in recent years of such loan portfolio towards
home equity second mortgage loans, construction loans, commercial real estate
and commercial business loans, and a change in the Bank's allowance for loan
loss methodology to give greater consideration of loan loss allowance ratio
levels maintained by peer group institutions. Management periodically evaluates
whether the methodology used to estimate the allowance for loan losses provides
for a reasonable basis on which to determine the amount of the provision for
loan losses. While management has historically relied on its own loan experience
as one of the factors to be considered in determining the allowance for loan
losses, management determined during 1998 that consideration of loss reserve
ratios established by peer group institutions should be given greater emphasis
than the Bank had in the past because, in part, management believed
industry-wide experience may better represent the inherent loss in its portfolio
due to the changing mix of loan types therein. In making this determination, the
Bank considered in particular the increase in its outstanding commercial
business and commercial real estate loans, which generally are deemed to be more
risky than the single-family residential mortgage loans historically originated
by the Bank. Given this changing mix of the Bank's portfolio, the increasing
originations of loans which may be deemed to involve more risk elements than
conforming, single-family residential mortgage loans and the anticipated future
growth of such loans as a percentage of the Bank's total loan portfolio, the
Bank anticipates that its allowance for loan losses as a percentage to total
loans will continue to increase in future periods.
Although management of Willow Grove believes that the Bank's allowance
for loan losses was adequate at June 30, 1998, based on facts and circumstances
available to it, there can be no assurances that additions to such allowance
will not be necessary in future periods, which would adversely affect the Bank's
results of operations. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's provision for
loan losses and the carrying value of its other nonperforming assets based on
their judgments about information available to them at the time of their
examination. No assurance can be given whether any of such agencies might
require the Bank to make additional provisions for loan losses in the future.
Non-interest Income. Willow Grove reported non-interest income of
$760,000 for the fiscal year ended June 30, 1998 compared to $786,000 and $1.2
million for the fiscal years ended June 30, 1997 and 1996, respectively.
Non-interest income is comprised primarily of service charges and fees, gains
and losses on sales of assets held or available for sale and loan servicing
income. The primary reason for differences in non-interest income during the
past three fiscal years was the gains in fiscal 1996 on sales of real estate
held for investment and securities available for sale of $314,000 and $564,000,
respectively. The Bank reported a loss on real estate held for investment of
$25,000 in fiscal 1998 compared to a gain of $16,000 in fiscal 1997. The gain on
real estate held for investment in fiscal 1996 and, to a much lesser extent,
fiscal 1997 reflects the completion and sale of the final units in a 240 unit
residential subdivision which the Bank acquired through foreclosure prior to
completion of development in 1990. The Bank subsequently managed the completion
of this project and it has no further investment in the development at this
time. The loss on real estate held for investment in fiscal 1998 was due to the
Bank's determination to sell a parcel of land previously acquired as a potential
site for a new branch. The Bank reported losses on sales of securities available
for sale of $105,000 and $8,000 in fiscal 1998 and 1997, respectively, compared
to a gain of $564,000 in fiscal 1996. The Bank took advantage of certain gain
opportunities and recognized sales proceeds of $600,000 from securities in
fiscal 1996. During fiscal 1998 and, to a lesser extent, fiscal 1997, the Bank
determined to sell limited amounts of securities at a loss provided that the
Bank believed it could reinvest the proceeds from such sales in higher yielding
assets so that the loss could be recouped within 12 months of the sale through
increased interest income. Service charges and fee income amounted to $618,000,
$409,000 and $364,000 in the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. The increase in service charges and fees in fiscal 1998 primarily
reflects an
58
increased number of deposit accounts maintained by the Bank. Loan servicing
income amounted to $203,000 $340,000 and $69,000 in fiscal 1998, 1997 and 1996,
respectively.
Non-interest Expense. The primary components of non-interest expense
are compensation and employee benefits expense, occupancy and equipment costs,
federal insurance premiums and a variety of other operating expenses. Willow
Grove's total non-interest expense amounted to $9.5 million, $8.3 million and
$6.0 million in the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. The primary reasons for the significant increase in non-interest
expenses during the past three fiscal years have been increases in compensation
and benefit expenses and occupancy and equipment costs and, in fiscal 1997, a
one-time special SAIF assessment. In addition, non-interest expense has
increased as a result of the Bank's implementation of its Community Enrichment
Program in fiscal 1997.
Compensation and employee benefit expense totaled $5.4 million, $3.4
million and $2.9 million, respectively, in the fiscal years ended June 30, 1998,
1997 and 1996. Such increases primarily reflect the increase in the Bank's work
force, which numbered 106 full time equivalent employees at June 30, 1998
compared to 75 at June 30, 1996, needed by the Bank as a result of its
diversification and expansion efforts. During fiscal 1998, compensation and
benefit expense also increased as the result of the Bank's accrual of $566,000
(pre-tax) and $234,000 (pre-tax), respectively, with respect to the
implementation of a directors' retirement plan and a supplemental executive
retirement plan. See "Management--Management of the Bank--Directors'
Compensation" and "--Benefits--Supplemental Executive Retirement Plan."
Increased compensation and benefit expense also is the result of normal
recurring salary increases as well as certain changes to the Bank's compensation
policies designed to keep the Bank competitive with the market and to provide
additional incentives to Bank employees to cross-sell Bank products (the bank
has instituted a policy where by certain employees are paid specified bonus
amounts if their customer utilize additional products and services of the Bank,
such bonuses aggregrated approximately $14,000 in fiscal 1998). Occupancy,
furniture and equipment costs aggregated $964,000, $734,000 and $632,000,
respectively, in fiscal 1998, 1997 and 1996. Such increases primarily reflect
the opening of two new branch offices in fiscal 1998 and 1997, the installation
of three new ATMs, the renovation and refurbishing costs for the Bank's offices
(all of the Bank's offices have been renovated or refurbished during the past
four years) and continued improvements in technology and equipment. The Bank's
federal insurance premium amounted to $195,000 in fiscal 1998 compared to $1.8
million (including a one-time special SAIF assessment) and $545,000,
respectively, in fiscal 1997 and 1996. The decrease in federal insurance expense
in fiscal 1998 reflects the FDIC's determination to reduce, commencing in 1997,
the federal insurance premiums paid by SAIF members on their deposits from 23
basis points to 6.4 basis points. Amortization expense during the three fiscal
years was constant at $410,000, and data processing expense changed nominally
during the periods. Advertising expense increased to $413,000 in fiscal 1998
compared to $297,000 and $287,000, respectively, in fiscal 1997 and 1996. Such
increase in advertising expense in fiscal 1998 reflects the Bank's efforts to
continue to increase its deposits and loans. Community enrichment expense, which
reflects the Bank's expense with respect to contributions pursuant to its
Community Enrichment Program, commenced in fiscal 1997, was $373,000 and
$259,000, respectively, in fiscal 1998 and 1997. As previously discussed, upon
consummation of the Reorganization, expenses with respect to establishment and
funding of the Foundation as well as additional potential cash contributions
pursuant to the Community Enrichment Program, may have a significant adverse
effect upon the Bank's future results of operations. See "Risk Factors -
Establishment of the Foundation - Impact on Earnings." Other expenses, which
include a sundry of other operating expenses, increased to $1.3 million in
fiscal 1998 compared to $996,000 and $881,000, respectively, in fiscal 1997 and
1996. Such increase in other expenses again primarily reflect the Bank's growth
and diversification efforts in recent years.
59
Income Taxes. The Bank's income tax expense was $1.4 million for the
fiscal year ended June 30, 1998 compared to $1.5 million and $1.7 million,
respectively, in fiscal 1997 and 1996. Willow Grove's effective tax rates were
35.9%, 39.4% and 36.7%, respectively, for the fiscal years ended June 30, 1998,
1997 and 1996.
Liquidity and Commitments
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, amortization, prepayments and maturities of
outstanding loans and mortgage-related securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-related
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Bank invests excess funds in short-term
interest-earning assets which provide liquidity to meet lending requirements.
Historically, the Bank has been able to generate sufficient cash through its
deposits and has utilized borrowings on only a limited basis. The Bank expects
to continue utilizing borrowings in the future to leverage its capital base and
provide additional funds for its lending and investment activities.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as U.S. Treasury securities. On a longer term basis, the Bank maintains a
strategy of investing in various lending products as described in greater detail
under "Business of Willow Grove Bank - Lending Activities." The Bank uses its
sources of funds primarily to meet its ongoing commitments, to pay maturing
certificates of deposit and savings withdrawals, fund loan commitments and
maintain a portfolio of mortgage-backed and investment securities. At June 30,
1998, the total approved loan origination commitments outstanding amounted to
$14.9 million. Certificates of deposit scheduled to mature in one year or less
at June 30, 1998, totaled $130.3 million. Investment securities scheduled to
mature or permitted to be called for redemption in one year or less at June 30,
1998 totaled $20.0 million. Based on historical experience, management believes
that a significant portion of maturing deposits will remain with the Bank. The
Bank anticipates that it will continue to have sufficient funds, together with
borrowings, to meet its current commitments.
Impact of Inflation and Changing Prices
The financial statements 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 changes in relative purchasing
power over time due to inflation. Unlike most industrial companies, virtually
all of the Bank's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
60
Year 2000 Considerations
In order to be ready for the year 2000 (the "Year 2000 Issue"), the
Bank has developed a Year 2000 Action and Assessment Plan (the "Action Plan")
which was presented to the Board of Directors during February 1998. The Action
Plan was developed using the guidelines outlined in the Federal Financial
Institutions Examination's Council's "The Effect of 2000 on Computer Systems".
The Bank's Board of Directors assigned responsibility for the Action Plan to the
Bank's Year 2000 Committee which reports to the Board of Directors on a
quarterly basis. The Action Plan recognizes that the Bank's operating,
processing and accounting operations are computer reliant and could be affected
by the Year 2000 Issue. The Bank's Action Plan addressed the potential impact of
the Year 2000 Issue on both its information technology ("IT") systems and non-IT
systems (such as security systems, elevators, electrical, heating and
air-conditioning, telephone, check-signing equipment, etc.) Pursuant to its
Action Plan, the Bank has reviewed its IT systems and non-IT systems for the
Year 2000 Issue and has tested all of its IT and non-IT systems and equipment
for Year 2000 readiness and believes that it has identified all equipment which
needs to be upgraded or replaced. Commencing in early 1998, the Bank began a
program of upgrading or replacing all such equipment in order to ensure that the
Bank's equipment is Year 2000 compliant on or before September 30, 1999. The
Bank is primarily reliant on third party vendors for its computer output and
processing, as well as other significant non-IT functions and services (i.e.,
securities safekeeping services, securities pricing information, etc.). The Year
2000 Committee is currently working with these third party vendors to assess
their year 2000 readiness. Such vendors generally are reluctant to guarantee or
provide firm assurance that their products will be Year 2000 compliant in a
timely fashion. In addition, the Bank believes that it would be difficult to
prevail on legal claims against such vendors with respect to Year 2000 issues.
Instead, the Bank's approach has been that it is primarily responsible for
identifying and correcting Year 2000 compliance issues. A major factor in the
Bank's operations is the data processing software which is used on a Bank-wide
basis. Such software is maintained by a third party vendor. The Bank has been
working closely with such vendor, whose clients include many depository
institutions, in an effort to ensure the Bank's Year 2000 preparedness. In this
respect, the Bank has, on two occasions during non-banking hours, tested
essentially all of its operation systems, both IT and non-IT systems for Year
2000 readiness. Such tests revealed only minor problems, which are being
corrected, with the Bank's systems with respect to Year 2000. Based upon the
initial assessment, management presently believes that with planned
modifications to existing software and hardware and planned conversions to new
software and hardware, the Bank's third party vendors are taking the appropriate
steps to ensure critical systems will function properly. The Bank's Action Plan
contemplates that all of its software vendors will be Year 2000 compliant by
December 31, 1998. If any of its vendors cannot assure the Bank of their Year
2000 readiness by such date, the Bank intends to evaluate and use alternative
vendors and products where possible. As of the date hereof, the Bank has
completed the awareness (i.e. education), assessment (i.e. assessing the
potential Year 2000 problems in its IT and non-IT systems and software) and
renovation (i.e. developing plans to remedy Year 2000 issues) phases of its Year
2000 Action Plan. The Bank currently is completing the validation phase of its
Action Plan (i.e. validating that the steps of the Action Plan actually resolve
the Year 2000 Issue with respect to the Bank's IT and non-IT systems and
software). The Bank also is in the relatively early stages of the implementation
phase (i.e. replacing certain equipment identified as not being Year 2000
compliant). The Bank is approximately 80% complete or the validation phase and
25% complete or the implementation phase. To date, the Bank's assessment is that
its ATM system and its remote flood plain certification software and its payroll
software system are not Year 2000 compliant. The Bank does not believe that any
of such non-compliant systems will have a critical effect on the Bank's
operations if they are not Year 2000 compliant by the turn of the century. While
no assurance can be given as to actual systems operations upon the turn of the
century, based on information currently known to it and upon consideration of
its testing efforts to date, management believes that in the worse case
scenario, the Bank will suffer only a slight interruption of business as a
result of minor application failures of its IT and non-IT systems and software
as the result of the Year 2000. However, if the appropriate modifications and
conversions are not made, or are not completed on a timely basis, the Year 2000
Issue could have a material impact on the operations of the Bank.
The Year 2000 Issue also affects certain of the Bank's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. The Bank has engaged in a program of contacting its
commercial customers regarding the customers awareness of the Year 2000 Issue.
The Bank has sent mailings out to its commercial customers addressing the Year
2000 Issue and now includes a standard representation from its commercial
borrowers that their software will be Year 2000 compliant by the turn of the
century. The Bank has not yet received sufficient replies to its communications
to business customers to make any assessment as to their Year 2000 readiness and
cannot provide any assurance that such customers will reply to the Bank's
communications in a timely fashion permitting the Bank to make a reasonable
assessment of their level of preparedness for the Year 2000 Issue. Based on the
very limited replies received to date, it appears to the Bank that its more
sophisticated customers are aware of the Year 2000 Issue and are taking steps to
address it while its smaller customers appear to have fewer issues with the Year
2000.
The Bank has completed its own company-wide Year 2000 contingency plan.
Individual contingency plans concerning specific software and hardware issues
have been formulated for the specific departments of the Bank. Such plans
include the identification of Bank operations that can be done on a manual basis
or with stand alone personal computers and printers. The Bank has identified
phone lines within the Bank which should not be affected by any Year 2000
problems and it also has identified alternative electric power sources.
The costs of modifications to the existing software is being primarily
absorbed by the third party vendors, however the Bank recognized that the need
exists to purchase new hardware and software. Based upon current estimates, the
Bank has identified $300,000 in total costs, including hardware, software, and
other issues, for completing the Year 2000 project. Of that amount,
approximately $56,000 was expensed during the fiscal year ended June 30, 1998,
with $199,000 budgeted for the fiscal year ended June 30, 1999.
Impact of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. According to the statement, all items of comprehensive
income are to be reported in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. Along
with net income, examples of
61
comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on available-for-sale securities, changes in
the market value of a futures contract that qualifies as a hedge of an asset
reported at fair value, and minimum pension liability adjustments. Currently,
the comprehensive income of the Bank would consist primarily of net income and
unrealized holding gains and losses on available-for-sale securities. This
statement becomes effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement, which supersedes SFAS
No. 14, requires public companies to report financial and descriptive
information about their reportable operating segments on both an annual and
interim basis. SFAS No. 131 mandates disclosure of a measure of segment
profit/loss, certain revenue and expense items and segment assets. In addition,
the statement requires reporting information on the entity's products and
services, countries in which the entity earns revenues and holds assets, and
major customers. This statement requires changes in disclosures only and would
not affect the financial condition operating results or equity of the Bank. This
statement becomes effective for fiscal years beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Post Retirement Benefits". This statement revises
employer's disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful. This statement requires changes in disclosures only and would not affect
the financial condition, operating results, or equity of the Bank. This
statement becomes effective for fiscal years beginning after December 31, 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of certain exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
an exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of a foreign currency exposure. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier adoption is
permitted. The Bank has not yet determined the impact, if any, of this
Statement, including its provisions for the potential reclassifications of
investment securities, on operations, financial condition, and equity. However,
the Bank currently has no derivatives covered by this statement and currently
conducts no hedging activities.
62
BUSINESS
Willow Grove is a federally chartered mutual savings bank that was
originally organized in 1909. The Bank conducts its business from its
headquarters in Maple Glen, Pennsylvania and six branch offices in Warminster
(where two of its branch offices are located), Willow Grove, Dresher, Huntingdon
Valley and Hatboro, Pennsylvania. The Bank is primarily engaged in attracting
deposits from the general public and using those funds to invest in loans and
securities. In recent years, Willow Grove has concentrated its business plans on
three primary goals, changing its operations to be more like a full-service
community bank, continuing its steady growth and maintaining a high level of
asset quality.
Historically, the Bank's primary lending emphasis has been on
single-family (one- to four-units) residential loans secured by first mortgages
on properties in the Bank's market area. While single-family residential
mortgage loans continue to be the predominant type of loan in the Bank's
portfolio (amounting to $243.1 million or 71.4% of the Bank's total loan
portfolio at June 30, 1998), in recent years the Bank has, to a large extent,
concentrated its efforts on originations of home equity loans, commercial real
estate and multi-family residential mortgage loans, construction loans and
commercial business loans. The Bank favors increases in such loans because they
generally have higher yields and shorter terms to maturity and/or repricing than
single-family residential mortgage loans. Over time, the Bank expects that its
single-family residential mortgage loans, which decreased from 84.8% of the
total portfolio at June 30, 1995 to 71.4% at June 30, 1998, will continue to
decrease as a percentage of the portfolio but will remain the largest single
category within the portfolio. While the Bank is diversifying its loan mix, at
the same time it is very conscious that commercial real estate, construction,
consumer and commercial business loans generally are deemed to be higher risk
loans than single-family residential mortgage loans. In this respect, the Bank
believes that it has implemented conservative policies and procedures for loan
originations. While the Bank has maintained excellent credit quality during the
past five years, with very low delinquency and charge-off rates, given its
recent lending emphasis the Bank increased its provision for loan losses during
fiscal 1998 in an effort to maintain its allowance for loan losses at a level
deemed appropriate by management. As to liabilities, the Bank has reduced its
cost of funds by emphasizing checking and business accounts and has attempted to
lengthen the terms of its deposit base.
During the past five years Willow Grove also has engaged in a strategy
to achieve steady growth. The Bank's total assets, net loans and total deposits
at June 30, 1998 had increased by 74.3%, 108.6% and 67.0%, respectively, over
the levels at June 30, 1994. During such period, the Bank has acquired three new
branch offices from another institution (one of which subsequently was
consolidated with an existing Bank branch) and opened two additional branch
offices. Willow Grove expects to continue to consider opening additional new
offices, through acquisitions or otherwise, in order to supplement the branch
office network in its existing market area and/or to expand its network into
contiguous markets. Currently, the Bank has two sites under active consideration
for new branch offices which may be opened within the next year. As part of the
Bank's expansion efforts, the number of its full-time equivalent employees has
increased from 67 at June 30, 1994 to 106 at June 30, 1998. The Bank also has
increased its advertising efforts and, as part of its efforts to show its
commitment to the communities in its market area, has increased the level of its
charitable
63
contributions and made them more systematic through the implementation, in April
1996, of a Community Enrichment Program.
Upon consummation of the Reorganization and Stock Issuance, the Bank
expects to continue its asset growth, the expansion of its franchise and the
diversification of its products. The Bank also will continue to consider new
services and, in the fall of 1998, the Bank will begin offering, on a brokerage
basis, securities and annuities brokerage through Willow Financial Services.
Willow Grove has no specific plans, arrangements or understanding with respect
to any acquisitions at this time.
Market Area and Competition
Willow Grove's main office is approximately 20 miles north of downtown
Philadelphia and its primary market area is Montgomery and Bucks Counties,
Pennsylvania and, to a lesser extent, Chester and Delaware Counties, the City of
Philadelphia and southern New Jersey.
The Bank faces significant competition both in making loans and in
attracting deposits. The Bank's competition for loans comes principally from
commercial banks, other savings banks, savings associations and mortgage-banking
companies. The Bank estimates that it competes with approximately 36 other banks
and savings institutions in its market area. The longest bank currently
operating the Bank's market area has over $2.0 Billions in deposite in each of
Bucks County and Montgomery County, Pennsylvania and has over 25% and 20% of the
deposit market share in such repsective counties. by comparison, Willow Grove
deposits in Bucks County and Montgomery County were $49.7 million and 260.0
million at June 30, 1997, (the most recent available data), representing
approximately 0.7% and 2.3% of deposit market share at such date. The Bank's
most direct competition for deposits has historically come from savings
associations, other savings banks, commercial banks and credit unions. The Bank
faces additional competition for deposits from short-term money market funds and
other corporate and government securities funds and from other non-depository
financial institutions such as securities brokerage firms and insurance
companies. Competition for banking services may increase as a result of, among
other things, the elimination of restrictions on interstate operations of
financial institutions.
Lending Activities
General. At June 30, 1998, Willow Grove's net portfolio loans amounted
to $315.7 million or 77.9% of the Bank's total assets at such date, and its
total loans receivable, including loans available for sale, amounted to $340.5
million or 84.0% of total assets. Historically, the Bank's primary emphasis has
been the origination of loans secured by first liens on single-family
residences. As previously indicated, the Bank has increased its emphasis on the
origination of home equity loans, commercial and multi-family real estate loans,
construction loans and commercial business loans. The Bank's mortgage loans
secured by commercial real estate amounted to $24.5 million or 7.2% of the total
loan portfolio at June 30, 1998, while its construction loans totaled $13.6
million or 4.0% of the portfolio and its multi-family residential mortgage loans
amounted to $7.5 million or 2.2% of the total loan portfolio at June 30, 1998.
In addition to traditional single-family first mortgage loans, the Bank
also offers home equity loans and lines of credit, which generally have shorter
terms to maturity and higher yields than single-family first mortgage loans.
Willow Grove's home equity loans and lines of credit totaled $41.4 million, or
12.1% of the total loan portfolio at June 30, 1998. Willow Grove also offers,
through a program commenced in May 1997, commercial business loans, which
amounted to $5.4 million or 1.6% of the total portfolio at June 30, 1998, and
non-mortgage consumer loans, which totaled $4.9 million or 1.5% of the total
portfolio at June 30, 1998.
64
The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, the monetary
policy of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
65
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loans at the dates indicated.
At June 30,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ----------------------- ------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------------------------------------------------------------------------------------------
(Dollars in Thousands)
Mortgage loans:
Single-family residential(1)..... $243,131 71.4% $236,832 78.1% $208,877 79.6%
Multi-family residential......... 7,500 2.2 7,686 2.5 4,565 1.7
Commercial real estate........... 24,478 7.2 15,455 5.1 14,904 5.7
Construction..................... 13,627 4.0 13,120 4.3 13,746 5.2
Home equity...................... 41,366 12.1 25,553 8.4 16,184 6.2
-------- ----- -------- ------ -------- -----
Total mortgage loans........... 330,102 96.9 298,646 98.4 258,276 98.4
Non-mortgage consumer loans......... 4,930 1.5 2,924 1.0 2,173 0.9
Commercial business loans........... 5,437 1.6 1,698 0.6 1,841 0.7
-------- ----- -------- ------ -------- -----
Total loans receivable......... 340,469 100.0% 303,268 100.0% 262,290 100.0%
===== ====== =====
Less:
Undisbursed portion of loan
proceeds....................... (8,855) (9,344) (10,341)
Allowance for loan losses......... (2,665) (1,678) (1,938)
Deferred loan fees................ (1,092) (1,477) (1,536)
------- -------- --------
Loans receivable, net............... $327,857 $290,769 $248,475
======== ======== ========
At June 30,
-------------------------------------------------------------
1995 1994
------------------------------ ------------------------
Percent of Percent of
Amount Total Amount Total
-------------------------------------------------------------
(Dollars in Thounsands)
Mortgage loans: $192,168 84.8% $130,310 81.7%
Single-family residential(1)..... 4,203 1.9 4,049 2.6
Multi-family residential......... 9,411 4.2 12,992 8.2
Commercial real estate........... 8,470 3.7 5,328 3.3
Construction..................... 10,494 4.6 5,693 3.5
Home equity...................... -------- ----- ------- -----
224,746 99.2 158,372 99.3
Total mortgage loans........... 1,281 0.5 788 0.5
Non-mortgage consumer loans......... 672 0.3 275 0.2
Commercial business loans........... -------- ----- -------- -----
226,699 100.0% 159,435 100.0%
Total loans receivable......... ===== =====
Less:
Undisbursed portion of loan (3,541) (4,073)
proceeds....................... (1,728) (1,668)
Allowance for loan losses......... (1,848) (1,790)
Deferred loan fees................ -------- --------
$219,582 $151,904
Loans receivable, net............... ======== ========
- -----------------------------
(1) Includes loans available for sale of $12.2 million, $6.2 million, $5.1
million, $9.4 million and $600,000, respectively, at June 30, 1998, 1997,
1996, 1995 and 1994.
66
Contractual Principal Repayments and Interest Rates. The following
table sets forth scheduled contractual amortization of the Bank's loans at June
30, 1998, as well as the dollar amount of such loans which are scheduled to
mature after one year which have fixed or adjustable interest rates. 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, 1998
----------------------------------------------------------------------------------------------------
Non-
Single-Family Multi- Commercial Mortgage Commercial Total
Residential(1) Family Real Estate Construction Consumer Business Loans
----------------------------------------------------------------------------------------------------
(In Thousands)
Amounts due in:
One year or less............ $ 299 $1,245 $ 431 $ 8,808 $ 98 $2,589 $ 13,470
After one year:
More than one year to
three years......... 2,595 694 704 4,009 963 170 9,135
More than three years to
five years........... 14,460 859 3,584 - 1,335 935 21,173
More than 5 years to 10
years................ 25,716 78 12,150 410 630 1,669 40,653
More than 10 years to 20
years................ 72,850 1,002 5,384 - 1,863 74 81,173
More than 20 years....... 168,577 3,622 2,225 400 41 -- 174,865
-------- ------ ------- ------- ------ ------ --------
Total Amount Due....... $284,497 $7,500 $24,478 $13,627 $4,930 $5,437 $340,469
======== ====== ======= ======= ====== ====== ========
- -------------------
(1) Includes $12.2 million of loans available for sale and $41.4 million of
home equity loans.
On the $327 million of loan principal repayments contractually due
after June 30, 1999, $260.5 million have fixed rates of interest and $66.5
million have adjustable rates of interest.
67
Activity in Loans. The following table shows the activity in the Bank's
loans during the periods indicated.
Year Ended June 30,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ------------
(In Thousands)
Total loans held at beginning of period(1)........... $303,268 $262,290 $226,699
======== ======= =======
Originations of loans for portfolio:
Mortgage loans:
Single-family residential....................... $ 33,653 $ 31,007 $ 35,246
Multi-family residential........................ -- 1,000 1,510
Commercial real estate.......................... 11,591 6,298 3,107
Construction.................................... 13,020 4,708 6,604
Home equity..................................... 23,400 16,487 10,328
Non-mortgage consumer loans....................... 3,800 1,717 412
Commercial business loans......................... 6,668 297 2,216
-------- -------- --------
Transfer of loans from available for sale
("AFS") to portfolio.............................. -- 2,089 3,028
-------- -------- --------
Total originations of and transfers to
loans for portfolio........................ 92,132 63,603 62,451
-------- -------- --------
Origination of loans AFS............................. 30,341 16,922 19,955
Transfer of loans AFS to portfolio................... -- (2,089) (3,028)
-------- -------- --------
Total origination of loans.................... 122,473 78,436 79,378
-------- -------- --------
Purchases of loans for portfolio:
Single-family residential......................... 19,836 16,677 7,887
Commercial real estate............................ 600 -- --
Construction...................................... -- 956 2,824
Home equity....................................... 3,988 -- --
Purchases of AFS loans: 6,055 12,205 17,256
-------- -------- --------
Total purchases of loans.......................... 30,479 29,838 27,967
-------- -------- --------
Repayments........................................... 85,328 40,841 33,279
Charge-offs of loans for portfolio................... 6 445 --
Sales of AFS loans................................... 30,417 26,010 38,475
-------- -------- --------
Net activity in loans for portfolio.................. 37,201 40,978 35,591
-------- -------- --------
Total loans at end of period(1)...................... $340,469 $303,268 $262,290
======== ======== ========
- ------------------
(1) Includes loans available for sale.
The lending activities of Willow Grove are subject to underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Given the significant amount of standardization that
has occurred in underwriting and documentation with respect to single-family
residential mortgage loans, the Bank determined in mid-1996 that it was more
cost-effective for it to "out-source" its single-family loan origination
function. As a result of such
68
determination, the Bank no longer maintains single-family mortgage loan
originators on its staff. The Bank relies on a network of approximately 25
correspondent mortgage brokers and mortgage bankers to identify, underwrite and
process new single-family residential mortgage loans on the Bank's behalf. The
Bank regularly provides its network of correspondents with the terms and pricing
of the loans it is willing to consider. Pursuant to various programs of such
correspondents, the Bank's correspondent may either (i) advance funds for
closing provided the Bank commits to purchase, in which case the loan is
classified as "purchased" in the above table, or (ii) may request the Bank to
provide the funds necessary for closing, in which case the loan is classified as
"originated" by the Bank in the above table. In either case, the Bank may retain
such loans in its portfolio or sell them (either on a servicing retained or
servicing released basis). Such correspondents forward loan applications to the
Bank for its review and, depending on the Bank's assessment of its current needs
for new loan product, the Bank determines whether it will either buy such loans
or commit to advance the funds at closing for the Bank's portfolio or for
eventual sale into the secondary market. The Bank makes a determination at the
time of origination whether loans will be available for sale or will be for
retention in the Bank's portfolio. Such loans generally are required to be
underwritten in accordance with standard FNMA or FHLMC guidelines (which
facilitate resale into the secondary market). The Bank makes a determination at
the time of origination whether loans will be available for sale or will be for
retention in the Bank's portfolio. Such loans generally are required to be
underwritten in accordance with standard FNMA or FHLMC guidelines (which
facilitate resale into the secondary market). The Bank also originates
residential mortgage loans which do not conform to FNMA or FHLMC guidelines
("non-conforming" loans). Most of the Bank's non-conforming loans do not conform
because they either exceed the current mortgage loan limits ($227,150) (commonly
referred to as "jumbo" loans) or they have a bi-weekly repayment schedule. Such
non-conforming loans, which generally amount to approximately one-quarter of the
Bank's residential mortgage loans, are underwritten pursuant to the Bank's
alternative underwriting standards, which, in many respects, are similar to FNMA
and FHLMC guidelines.
The Bank's underwriting function for home equity, commercial and
multi-family residential real estate, commercial business and construction loans
is centralized at the Bank's main office. Willow Grove requires that a property
appraisal be prepared by an independent appraisal firm in connection with all
new mortgage loans. Willow Grove requires that title insurance and hazard
insurance be maintained on all security properties (except for home equity
loans) and that flood insurance be maintained if the property is within a
designated flood plain.
The Board of Directors of the Bank has authorized certain officers to
approve loans on an individual basis up to certain designated amounts not
exceeding, in the case of the President, $500,000. Loans exceeding the
individual limits must be approved by the Officers' Loan Committee (which is
comprised of the Bank's President, the three other executive officers and a
vice-president of lending), the Directors' Loan Committee (comprised of three
directors, the President and the Senior Lending Officer) or the full Board of
Directors. The Directors' Loan Committee and full Board of Directors of the Bank
also are provided with summaries of new loan activity on a routine basis.
A federal savings bank generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. Willow Grove's aggregate loans to one borrower
and related entities has been below the regulatory limits. As of June 30, 1998,
Willow Grove's three largest relationships with one borrower and related
entities amounted to $4.4 million, $2.8 million and $2.5 million, and all of the
Bank's loans included in such relationships were performing in accordance with
their terms. The net proceeds received by the Bank from the Offerings will
increase the Bank's capital and thus its loans to one borrower limits. On
occasion, as a result of the loan-to-one borrower limits, the Bank will sell
participation interests in loans which it originates. Conversely, the Bank on
69
occasion may consider buying a participation interest in a loan from another
institution, provided, that the loan meets the Bank's underwriting standards.
Single-Family Residential Mortgage Loans. The Bank utilizes its network
of correspondents to originate and buy single-family (one- to four-units),
conventional residential mortgage loans. Conventional loans are loans that are
neither insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Department of Veterans Affairs ("VA"). The vast majority of
the Bank's single-family mortgage loans are secured by properties located in
Montgomery and Bucks Counties, Pennsylvania. As of June 30, 1998, the Bank's
single-family residential mortgage loans amounted to $243.1 million or 71.4% of
the total loan portfolio. During the fiscal year ended June 30, 1998, the Bank
originated and purchased $33.7 million and $19.8 million, respectively, of
single-family residential mortgage loans for its portfolio. Given the reduced
emphasis on the origination of single-family residential mortgage loans, such
loans have declined, as a percentage of the total portfolio, during each of the
past four fiscal years. The Bank expects such trend to continue, although
single-family residential mortgage loans are likely to remain the largest single
category of loans within the Bank's portfolio for the foreseeable future.
The Bank's single-family residential mortgage loans originated or
purchased for sale generally are underwritten with terms and documentation
conforming to FNMA and FHLMC guidelines. The Bank's loans originated or
purchased for portfolio may conform to such agency guidelines, may exceed
conforming loan amounts for such agencies or may otherwise not comply to such
agencies' underwriting standards for a variety of reasons including credit risk.
Willow Grove's residential mortgage loans have either fixed rates of interest or
interest rates which adjust periodically during the term of the loan. Fixed-rate
loans generally have maturities of 10, 15, 20 or 30 years and are fully
amortizing with monthly loan payments sufficient to repay the total amount of
the loan with interest by the end of the loan term. As of June 30, 1998, the
Bank's fixed-rate single-family residential mortgage loans amounted to $198.9
million or 81.8% of single-family residential mortgage loans.
The Bank also offers a variety of adjustable-rate single-family
residential mortgage ("ARM") loans. Such loans have interest rates which are
pre-determined for an initial period ranging from one to ten years, and then are
adjusted on an annual or other basis in accordance with a designated index such
as one-year U.S. Treasury obligations adjusted to a constant maturity ("CMT"),
plus a stipulated margin. The Bank's adjustable-rate single-family residential
real estate loans generally have a cap of 1% or 2% on any increase or decrease
in the interest rate at any adjustment date, and include a specified cap on the
maximum interest rate over the life of the loan, which cap generally is 4% to 6%
above the initial rate. From time to time, based on prevailing market
conditions, the Bank may offer ARM loans with initial rates which are below the
fully indexed rate. Such loans generally are underwritten based on the fully
indexed rate. The Bank's adjustable-rate loans require that any payment
adjustment resulting from a change in the interest rate of an adjustable-rate
loan be sufficient to result in full amortization of the loan by the end of the
loan term and, thus, do not permit any of the increased payment to be added to
the principal amount of the loan, or so-called negative amortization. At June
30, 1998, $44.2 million or 18.2% of the Bank's single-family residential
mortgage loans were adjustable-rate loans.
70
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material adverse
effect on the Bank to date, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
The volume and types of ARMs originated by Willow Grove are affected by
such market factors as the level of interest rates, competition, consumer
preferences and availability of funds. Accordingly, although the Bank
anticipates that it will continue to offer single-family ARMs, there can be no
assurance that in the future the Bank will be able to originate a sufficient
volume of single-family ARMs to increase or maintain the proportion that these
loans bear to total loans.
The Bank's single-family residential mortgage loans generally do not
exceed $400,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans generally is 95% of the
appraised value of the security property, provided, however, that private
mortgage insurance is obtained on the portion of the principal amount that
exceeds 80% of the appraised value.
Home Equity Loans. Willow Grove offers home equity loans, including
home equity lines of credit. Due to the relatively higher yields and shorter
terms of maturity (the maximum term to maturity is 15 years), the Bank has
emphasized the origination of home equity loans in recent years. At June 30,
1998, the Bank's home equity loans amounted to $41.4 million compared to $25.6
million and $16.2 million at June 30, 1997 and 1996, respectively. Home equity
loans, like single-family residential mortgage loans, are secured by the
underlying equity in the borrower's residence. However, the Bank generally
obtains a second mortgage position to secure its home equity loans. The Bank has
aggressively marketed its home equity loans and, as part of such efforts, offers
a "no point, no cost" loan for which no origination fees are charged and the
Bank absorbs closing costs. In addition, the Bank offers home equity loans in
amounts of up to, when combined with any first mortgage, 100% of the appraised
value of the security property. Recently, the Bank also commenced buying home
equity loans from its correspondents, and may increase such purchases in the
future.
Commercial Real Estate and Multi-Family Residential Real Estate Loans.
At June 30, 1998, Willow Grove's commercial real estate and multi-family
residential real estate loans amounted to $24.5 million and $7.5 million,
respectively, or 7.2% and 2.2%, respectively, of the Bank's total loan
portfolio.
The Bank's commercial real estate loans generally are secured by small
office buildings, retail and industrial use buildings, strip shopping centers
and other properties used for commercial purposes located in the Bank's market
area. The Bank's commercial real estate loans seldom exceed $3.0 million, and,
as of June 30, 1998, the average size of the Bank's commercial real estate loans
was $319,000. During fiscal 1998, the Bank originated $11.6 million in
commercial real estate loans for portfolio, compared to $6.3 million and $3.1
million, respectively, in fiscal 1997 and 1996. The Bank also purchased $600,000
in commercial real estate loans in fiscal 1998. Since May 1997, the Bank
71
has hired three new commercial loan officers in an effort to increase its
portfolio of commercial real estate, multi-family residential and commercial
business loans.
The Bank also originates loans secured by multi-family (five or more
units) residential properties. During fiscal 1998, Willow Grove originated no
multi-family residential mortgage loans compared to $1.0 million and $1.5
million, respectively, in fiscal 1997 and 1996.
The Bank's commercial real estate and multi-family residential loans
generally are fixed-rate or five-year adjustable-rate loans indexed to U.S.
Treasury obligations adjusted to a CMT, plus a margin. Generally, fees of
between 50 basis points and 1.50% of the principal loan balance are charged to
the borrower upon closing. The Bank generally charges prepayment penalties on
commercial real estate and multi-family residential mortgage loans. Although
terms for multi-family residential and commercial real estate loans may vary,
the Bank's underwriting standards generally provide for terms of up to 25 years
with amortization of principal over the term of the loan and LTV ratios of not
more than 80%. Generally, the Bank obtains personal guarantees of the principals
as additional security for any commercial real estate and multi-family
residential loans.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The Bank has also generally imposed a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 115%. The underwriting analysis also includes credit checks and a
review of the financial condition of the borrower and guarantor, if applicable.
An appraisal report is prepared by an independent appraiser commissioned by the
Bank to substantiate property values for every commercial real estate and
multi-family loan transaction. All appraisal reports are reviewed by the Bank
prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential lending
because such loans often involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks can
also be significantly affected by supply and demand conditions in the local
market for apartments, offices, warehouses, or other commercial space. The Bank
attempts to minimize its risk exposure by limiting such lending to proven
businesses, only considering properties with existing operating performance
which can be analyzed, requiring conservative debt coverage ratios, and
periodically monitoring the operation and the physical condition of the
collateral.
As of June 30, 1998, none of the Bank's commercial real estate or
multi-family residential mortgage loans were considered non-performing and none
were 60 or more days delinquent.
Construction Loans. The Bank originates construction loans for
residential and commercial uses within its market area. The Bank generally
limits its construction loans to builders and developers with whom it has an
established relationship or who are otherwise known to the Bank's officers. As
of June 30, 1998, the Bank's construction loans amounted to $13.6 million or
4.0% of
72
the Bank's total loan portfolio. In addition, the Bank had $8.9 million of
undisbursed construction loans in process as of such date. The Bank originated
$13.0 million in new construction loans in fiscal 1998, compared to $4.7 million
and $6.6 million, respectively, in fiscal 1997 and 1996.
The Bank's construction loans generally have floating rates of interest
for a term of up to three years. Construction loans to builders are typically
made with a maximum loan to value ratio of 90%. The Bank's construction loans to
local builders are made on either a pre-sold or speculative (unsold) basis.
However, the Bank generally limits the number of unsold homes under construction
to its builders, with the amount dependent on the reputation of the builder, the
present outstanding obligations of the builder, the location of the property and
prior sales of homes in the development and the surrounding area. The Bank
generally limits the number of construction loans for speculative units to two
to six model homes per project.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by independent appraisers approved by the
Board of Directors. The Bank's staff also reviews and inspects each project at
the commencement of construction and prior to every disbursement of funds during
the term of the construction loan. Loan proceeds are disbursed after inspections
of the project based on a percentage of completion. The Bank requires monthly
interest payments during the construction term.
The Bank's construction loans include loans for the acquisition and
development of land (i.e., roads, sewer and water) for resale. Such land loans
generally are originated only when a construction loan has been committed to by
the Bank, are secured by a lien on the property, are generally limited to 75% of
the appraised value of the secured property and are typically made for a period
of up to three years with a floating interest rate based on the prime rate. The
Bank requires monthly interest payments during the term of the land loan. The
principal of the loan is reduced as lots are sold and released. All of the
Bank's land loans are secured by property located in its market area. In
addition, the Bank generally obtains personal guarantees from its borrowers and
originates such loans to developers with whom it has established relationships.
Construction and land lending generally is considered to involve a
higher level of risk as compared to permanent single-family residential lending,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on developers and builders.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated cost (including interest) of the project. The nature
of these loans is such that they are generally 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 to the Bank than construction
loans to individuals on their personal residences.
The Bank has attempted to minimize the foregoing risks by, among other
things, periodically inspecting properties under construction and reviewing
construction progress before additional draws are disbursed and by working with
builders with whom it has established relationships. It is also the Bank's
policy to obtain personal guarantees from the principals of its corporate
borrowers on its construction and land loans.
73
Commercial Loans. Willow Grove had $5.4 million of commercial business
loans at June 30, 1998 compared to $1.7 million at June 30, 1997. In May 1997,
the Bank commenced a program designed to facilitate the origination of loans to
small- to mid-sized businesses in the Bank's market area. The Bank has hired
three commercial loan officers to actively solicit such loans (as well as
commercial real estate and multi-family residential mortgage loans). As a result
of such efforts, the Bank anticipates that this portion of its loan portfolio
will continue to increase. The Bank has targeted commercial business loans for
expansion due to the generally higher yields of such loans, their relatively
short terms and the prevalence of adjustable or floating rates of interest.
The Bank's commercial business loans may be structured as term loans or
revolving lines of credit. Commercial business loans generally have a term of
five years or less and adjustable or variable rates of interest based upon the
Wall Street Journal Prime Rate. The Bank's commercial business loans generally
are secured by equipment, machinery, real property or other corporate assets. In
addition, the Bank generally obtains personal guarantees from the principals of
the borrower with respect to all commercial business loans. The Bank also
provides commercial loans structured as advances based upon perfected security
interests in accounts receivable and inventory. Generally the Bank will advance
amounts up to 75% of accounts receivable and 50% of the value of inventory.
Commercial business loans generally are deemed to involve a greater
degree of risk than single-family residential mortgage loans. While commercial
business lending is relatively new to the Bank and the Bank is attempting to
aggressively increase its originations of commercial business loans, Willow
Grove has hired experienced commercial loan officers and has implemented
policies and procedures for commercial business lending which are deemed to be
prudent. As of June 30, 1998, the Bank had no non-performing commercial business
loans.
Non-Mortgage Consumer Lending Activities. The Bank offers a variety of
consumer loans including student loans, unsecured loans, automobile loans,
passbook loans and other consumer loans in order to provide a full range of
financial services to its customers. Such loans are obtained primarily through
existing and walk-in customers and direct advertising. At June 30, 1998, $4.9
million or 1.5% of the Bank's total loan portfolio was comprised of consumer
loans. At such date student loans amounted to $2.5 million, unsecured loans
amounted to $1.3 million and automobile loans were $898,000.
Consumer loans generally have shorter terms and higher interest rates
than residential mortgage loans but generally involve more credit risk than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral.
Loan Origination and Loan Fees. In addition to interest earned on
loans, Willow Grove receives loan origination fees or "points" for many of the
loans it originates. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized
74
as interest income over the contractual life, adjusted for prepayments, of the
related loans as an adjustment to the yield of such loans. At June 30, 1998, the
Bank had $1.1 million of such deferred loan fees.
Asset Quality
General. As a part of Willow Grove's efforts to maintain its asset
quality, it has developed and implemented an asset classification system. All of
the Bank's assets are subject to review under this classification system. Loans
are periodically reviewed and the classifications are reviewed by the Asset
Quality Committee of the Board of Directors on at least a quarterly basis. In
addition, the Bank has retained an independent firm to perform periodic,
generally every six months, reviews of the asset quality of a designated portion
of its loan portfolio.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 16 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
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 Bank 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.
Real estate acquired by the Bank as a result of foreclosure or by
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 costs. Costs of holding foreclosed property are usually capitalized to
the extent that carrying value does not exceed fair value less estimated selling
costs. Holding costs are charged to expense. Gains and losses on such sales are
charged to operations as incurred. Willow Grove has not had any real estate
owned at any of the five most recent fiscal year ends.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Bank's loan portfolio. The amounts presented represent
the total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
75
June 30, 1998
---------------------------------------------------------------------------
30-59 Days 60-89 Days
------------------------------------ -----------------------------------
Percent of Loan Percent of Loan
Amount Category Amount Category
--------------- ----------------- --------------- -----------------
(Dollars in Thousands)
Mortgage loans:
Residential:
Single-family...................... $2,268 0.98% $1,304 0.56%
Multi-family....................... -- -- -- --
Commercial real estate............... 288 0.90 -- -
Construction........................ -- -- -- --
Home equity.......................... 92 0.22 35 0.08
Non-mortgage consumer loans............. 17 0.34 -- --
Commercial business loans............... -- -- -- --
------ ------
Total.............................. $2,665 0.83% $1,339 0.42%
====== ======
June 30, 1997
---------------------------------------------------------------------------
30-59 Days 60-89 Days
------------------------------------ -----------------------------------
Percent of Loan Percent of Loan
Amount Category Amount Category
--------------- ----------------- --------------- -----------------
(Dollars in Thousands)
Mortgage loans:
Residential:
Single-family...................... $2,659 1.15% $519 0.23%
Multi-family....................... -- -- -- --
Commercial real estate............... 136 0.59 310 1.34
Construction........................ -- -- -- --
Home equity.......................... 32 0.13 46 0.18
Non-mortgage consumer loans............. -- -- -- --
Commercial business loans............... -- -- -- --
------ ----
Total............................ $2,827 0.98% $875 0.30%
====== ====
June 30, 1996
---------------------------------------------------------------------------
30-59 Days 60-89 Days
---------------------------------- -----------------------------------
Percent of Loan Percent of Loan
Amount Category Amount Category
--------------- ----------------- --------------- -----------------
(Dollars in Thousands)
Mortgage loans:
Residential:
Single-family...................... $1,501 0.74% $407 0.20%
Multi-family....................... -- -- -- --
Commercial real estate............... 59 0.40 -- --
Construction........................ 540 3.93 -- --
Home equity.......................... 153 0.95 -- --
Non-mortgage consumer loans............. 2 0.09 2 0.09%
Commercial business loans............... -- -- -- --
------ ----
Total............................ $2,255 0.91% $409 0.17%
====== ====
76
Non-Performing Assets. The following table sets forth information with
respect to non-performing assets identified by the Bank, including non-accrual
loans and other real estate owned.
At June 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------- ------------- ----------- ------------
(Dollars in Thousands)
Accruing loans 90 days or more past due:
Mortgage loans........................ $ 142 $ 124 $ 101 $ -- $ --
------ ------ ------ ---- ----
Total............................... 142 124 101 -- --
------ ------ ------ ---- ----
Non-accrual loans:
Mortgage loans:
Single-family residential........... 1,249 374 655 497 495
Multi-family residential............ -- -- -- -- --
Commercial real estate.............. -- 54 55 95 153
Construction........................ -- -- -- -- --
Home equity......................... -- -- 73 -- --
Non-mortgage consumer loans........... 2 17 34 -- --
Commercial business loans............. 96 1,346 1,786 -- --
------ ------ ------ ---- ----
Total non-accruing loans............ 1,347 1,791 2,603 592 648
------ ------ ------ ---- ----
Total non-performing loans.......... 1,489 1,915 2,704 592 648
------ ------ ------ ---- ----
Other real estate owned, net............. -- -- - - --
------ ------ ------ ---- ----
Total non-performing assets......... $1,489 $1,915 $2,704 $592 $648
====== ===== ====== ==== ====
Performing troubled debt
restructurings........................ -- -- -- -- --
------ ------ ------ ---- ----
Total non-performing assets and
troubled debt restructurings...... $1,489 $1,915 $2,704 $592 $648
====== ====== ====== ==== ====
Non-performing loans to total loans...... 0.47% 0.67% 1.11% 0.28% 0.42%
Non-performing assets to total assets.... 0.37% 0.54% 0.87% 0.20% 0.28%
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, if appropriate, 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
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
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. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. At June 30, 1998, Willow Grove had an aggregate
of $1.7 million of classified assets, all of which were classified substandard.
At such date the Bank also had $1.9 in assets which were deemed special mention.
77
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level believed adequate by management to absorb losses in the portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loss experience, current economic conditions,
volume, growth and composition of the portfolio, and other relevant factors.
Among other factors, Willow Grove considers the amount of loan origination
volume and the risk characteristics of new loans when establishing the
appropriate amount of the provisions to the allowance for loan losses. The
allowance is increased by provisions for loan losses which are charged against
income. As shown in the table below, at June 30, 1998, the Bank's allowance for
loan losses amounted to $2.7 million or 179.0% and 0.83% of the Bank's
non-performing loans and total loans receivable, respectively. The Bank's
provision for loan losses amounted to $993,000 for the year ended June 30, 1998.
The primary reason for the significant increase in Willow Grove's provision for
loan losses in fiscal 1998 was the increase in the Bank's total loan portfolio
including single-family residential mortgage which do not conform to FHMA and
FHLMC underwriting guidelines, the continuing shift in the loan portfolio
towards home equity second mortgage loans, commercial real estate and commercial
business loans, and a change in the bank's allowance for loan loss methodology
to give greater consideration to ratio levels of loan loss allowances maintained
by peer group institutions.
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued
a Policy Statement regarding an institution's allowance for loan and lease
losses. The Policy Statement, which reflects the position of the issuing
regulatory agencies and does not necessarily constitute GAAP, includes guidance
(i) on the responsibilities of management 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 utilized 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 an institution's loan 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 that is 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 12 months based on facts and
circumstances available on the evaluation date. While the Policy Statement sets
forth this quantitative measure, such guidance is not intended as a "floor" or
"ceiling." Willow Grove's policy for establishing loan losses is consistent with
the Policy Statement.
78
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
Year Ended June 30,
----------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
Allowance at beginning of period ............... $1,678 $1,938 $1,728 $1,668 $1,512
------ ------ ------ ------ ------
Provisions ..................................... 993 185 210 60 156
Charge-offs:
Mortgage loans ............................ -- -- -- -- --
Non-mortgage consumer loans ............... 6 5 -- -- --
Commercial business loans ................. -- 440 -- -- --
------ ------ ------ ------ ------
Total charge-offs ....................... 6 445 -- -- --
Recoveries .................................. -- -- -- -- --
------ ------ ------ ------ ------
Allowance at end of period ..................... $2,665 $1,678 $1,938 $1,728 $1,668
====== ====== ====== ====== ======
Allowance for loan losses to total
nonperforming loans at end of
period ...................................... 178.98% 87.62% 71.67% 291.89% 257.41%
====== ===== ===== ====== ======
Allowance for loan losses to total loans
at end of period ............................ 0.83% 0.58% 0.79% 0.81% 1.08%
==== ==== ==== ==== ====
Ratio of charge-offs to average loans .......... 0.002% 0.16% N/A N/A N/A
===== ====
The $440,000 of charge-offs of commercial loans and leases during
fiscal 1997 relate to an aggregate of $1.8 million of lease financings which the
Bank had purchased from the Bennett Funding Group. All of such leases became
non-performing in fiscal 1996, when the Bennett Funding Group and certain
affiliates filed for bankruptcy and it was discovered that a massive nationwide
fraud had been undertaken with respect to these lease financings. In March 1997,
the Bank accepted a settlement offer of $1.0 million in cash plus a residual
interest in $300,000 of additional amortization payments (of which $205,000 has
been received) from the trustee in bankruptcy and charged-off the remaining
$440,000.
79
Management of the Bank considers the entire allowance for loan losses
to be adequate, however, to comply with regulatory reporting requirements,
management has allocated the allowance for loan losses as shown in the table
below into components by loan type at each year end. Through such allocation,
management does not intend to imply that actual future charge-offs will
necessarily follow the same pattern or that any portion of the allowance is
restricted.
At June 30,
----------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- ---------- ----------- -------- -----------
(Dollars in Thousands)
Mortgage loans:
Single-family residential ................... $ 649 71.41% $ 261 78.09% $ 501 79.64%
Multi-family residential .................... -- 2.20 -- 2.53 -- 1.74
Commercial real estate ...................... 352 7.19 113 5.10 -- 5.68
Construction ................................ 361 4.00 188 4.33 -- 5.24
Home equity ................................. 324 12.15 128 8.43 281 6.17
------ ------ ------
Total mortgage loans ..................... 1,686 690 782
Non-mortgage consumer
loans ...................................... 28 1.45 25 0.96 -- 0.83
Commercial business loans ...................... 124 1.60 138 0.56 -- 0.70
------ ------ ------
Unallocated .................................... 827 825 1,156
------ ------ ------
Total loans ............................ $2,665 100.00% $1,678 100.00% $1,938 100.00%
====== ====== ====== ====== ====== ======
-------------------------------------------------------
1995 1994
------------------------- ------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
--------- ----------- ---------- -----------
Mortgage loans:
Single-family residential ................... $ 661 84.76% $ 521 81.74%
Multi-family residential .................... -- 1.85 -- 2.54
Commercial real estate ...................... -- 5.39 -- 8.15
Construction ................................ -- 2.50 -- 3.34
Home equity ................................. 58 4.63 24 3.57
------ ------
Total mortgage loans ..................... 719 545
Non-mortgage consumer
loans ...................................... -- 0.57 -- 0.49
Commercial business loans ...................... -- 0.30 -- 0.17
------ ------
Unallocated .................................... 1,009 1,123
------ ------
Total loans ............................ $1,728 100.00% $1,668 100.00%
====== ====== ====== ======
80
The determination of the allowance at June 30, 1998 specifically
considered various factors, including the fact that the outstanding balance of
the Bank's commercial real estate loans and commercial business loans continued
to increase during the year. Such loans generally are considered to constitute a
higher risk of loss than other components of the portfolio.
Willow Grove will continue to monitor and modify its allowance for loan
losses as conditions dictate. While management believes that, based on
information currently available, the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurance will be given that the Bank's level of allowance for loan losses will
be sufficient to absorb future loan losses incurred by the Bank or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses. In addition, the OTS, as an integral part of its examination process,
periodically reviews the Bank's allowance for loan losses. Such agency may
require the Bank to make additional provisions for estimated loan losses based
upon judgments different from those of management.
Securities Activities
General. As of June 30, 1998, Willow Grove had an aggregate of $48.1
million of securities, or 11.9% of the Bank's total assets at such date. At such
date, the unrealized net gain on the Bank's securities available for sale
amounted to $80,000, net of income taxes. The securities investment policy of
the Bank, which has been established by the Board of Directors, is designed,
among other things, to assist the Bank in its asset/liability management
policies. Willow Grove's investment policy emphasizes principal preservation,
favorable returns on investment, maintaining liquidity within designated
guidelines, minimizing credit risk and maintaining flexibility. The Bank's
current securities investment policy permits investments in various types of
securities including obligations of the U.S. Treasury and federal agencies,
investment grade corporate obligations rated in the top two grades, various
types of mortgage-related securities, commercial paper, certificates of deposit,
and federal funds sold to financial institutions approved by the Board of
Directors.
The Bank currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Similarly, the Bank has not and does not
invest in mortgage derivative securities which are deemed to be "high risk" at
the time of purchase or purchase privately issued securities which are not rated
investment grade. The Bank tests its securities on at least a quarterly basis to
determine if they are considered "high risk" securities under OTS regulations.
At June 30, 1998, all of the Bank's securities were classified as
available for sale. Securities classified as available for sale are carried at
fair value. Unrealized gains and losses on available for sale securities are
recognized as direct increases or decreases in equity, net of applicable income
taxes. Securities which are held to maturity are carried at cost, adjusted for
the amortization of premiums and the accretion of discounts using a method which
approximates a level yield. See Notes 2 and 3 of the Notes to Financial
Statements.
81
The following table sets forth information regarding the carrying and
fair value of the Bank's securities classified available for sale at the dates
indicated.
At June 30,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ ------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
---------- ---------- ---------- ----------- ---------- -----------
(In Thousands)
Available for sale (at fair value)
Equity securities........................ $ 9,940 $ 9,937 $ 6,851 $ 6,862 $ 2,543 $ 2,548
U.S. Government and government
agency securities(1).................. 20,104 20,095 7,009 7,050 1,000 999
Mortgage-related securities.............. 17,940 18,079 32,388 31,854 47,702 46,616
------- ------- ------- ------- ------- -------
$47,984 $48,111 $46,248 $45,766 $51,245 $50,163
======= ======= ======= ======= ======= =======
- ------------------------------
(1) Includes a municipal bond with a face amount of $100,000.
In addition, at June 30, 1997, the Bank had $4.0 million of U.S.
Government and government agency securities classified as held to maturity. Such
securities matured during fiscal 1998.
The following table sets forth the activity in the Bank's aggregate
securities portfolio during the periods indicated.
Year Ended June 30,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(In Thousands)
Securities at beginning of period.................. $49,765 $50,163 $58,557
Purchases.......................................... 55,878 18,296 1,100
Sales and calls.................................... (53,375) (10,076) (36)
Repayments, maturities and amortization .......... (4,766) (9,219) (7,777)
Increase (decrease) in unrealized gains
on available-for-sale securities(1).............. 609 601 (1,681)
------- ------- -------
Securities at end of period(2)..................... $48,111 $49,765 $50,163
======= ======= =======
- ------------
(1) At June 30, 1998, the cumulative unrealized gains on securities
classified as available-for-sale securities amounted to $127,000.
(2) At June 30, 1998, $7.8 million or 16.2% of the Bank's securities
portfolio consisted of adjustable rate securities, as compared to zero
and $454,000 or 0.91% at June 30, 1997 and 1996, respectively.
Mortgage-Related Securities. At June 30, 1998, Willow Grove's
securities included $10.3 million of mortgage participation certificates (which
are also known as mortgage-backed securities) and $7.8 million of collateralized
mortgage obligations ("CMOs") which have qualified under the Code as real estate
mortgage investment conduits ("REMICs").
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages. The principal and interest payments
on mortgage-backed securities are
82
passed from the mortgage originators, as servicer, through intermediaries
(generally U.S. Government agencies and government-sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the Government National
Mortgage Association ("GNMA").
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities portfolio includes investments in
mortgage-backed securities backed by ARMs or securities which otherwise have an
adjustable rate feature.
CMOs have been developed in response to investor concerns regarding the
uncertainty of cash flows associated with the prepayment option of the
underlying mortgagor and are typically issued by governmental agencies,
governmental sponsored enterprises and special purpose entities, such as trusts,
corporations or partnerships, established by financial institutions or other
similar institutions. In contrast to pass-through mortgage-backed securities, in
which cash flow is received pro rata by all security holders, the cash flow from
the mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By allocating
the principal and interest cash flows from the underlying collateral among the
separate CMO classes, different classes of bonds are created, each with its own
stated maturity, estimated average life, coupon rate and prepayment
characteristics. As of June 30, 1998, the Bank's mortgage-related securities did
not include any residual interests or interest-only or principal-only
securities. As a matter of policy, the Bank does not invest in residual
interests of mortgage-related securities or interest-only and principal-only
securities.
Mortgage-related securities generally yield less than the loans which
underlie such securities because of their payment guarantees. In addition,
mortgage-related securities are more liquid than individual mortgage loans and
may be used to collateralize borrowings of the Bank. Mortgage-related securities
issued or guaranteed by the FNMA or the FHLMC (except interest-only securities
or the residual interests in CMOs) are weighted at no more than 20.0% for
risk-based capital purposes, compared to a weight of 50.0% to 100.0% for
residential loans.
At June 30, 1998, the estimated weighted average life of the Bank's
mortgage-related securities was approximately 2.6 years. Prepayments that are
faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with GAAP, premiums are amortized and discounts are
accreted over the estimated lives of the loans, which decrease and increase
interest income, respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed or mortgage-related security, and these assumptions
are
83
rviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments.
During periods of rising mortgage interest rates, if the coupon rates
of the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related securities. Under such
circumstances, the Bank may be subject to reinvestment risk because to the
extent that the Bank's mortgage-backed and mortgage-related securities amortize
or prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. At June 30,
1998, of the $18.1 million of mortgage-backed securities, an aggregate of $10.3
million were secured by fixed-rate securities and an aggregate of $7.8 million
were secured by adjustable-rate securities.
Other Securities. Other than mortgage-related securities, the Bank's
securities consist primarily of U.S. Treasury and Federal agency obligations,
which amounted to $20.1 million at June 30, 1998, and various equity securities,
which amounted to $9.9 million at such date. At June 30, 1998, the Bank's equity
securities were comprised primarily of a $7.0 million investment in a mutual
fund backed by Federal agency obligations and $2.7 million in FHLB stock. As
with its mortgage-related securities, the Bank attempts to maintain a high
degree of liquidity in its other debt securities. As of June 30, 1998, the
estimated weighted average lives of Willow Grove's other debt securities was
less than one year due to their callable nature.
The following table sets forth certain information regarding the
maturities of the Bank's debt securities at June 30, 1998.
Contractually Maturing
------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1-5 Average 6-10 Years Average Over 10 Average
Year Yield Years Yield --------- Yield Years Yield
--------- --------- ---------- --------- --------- -------- ---------
(Dollars in Thousands)
U.S. Government and government
agency obligations............ $-- --% $1,000 6.82% $7,004 6.72% $12,100 7.05%
Sources of Funds.
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and prepayments and borrowings. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the
84
availability of funds from other sources. They may also be used on a longer term
basis for general business purposes.
Deposits. The Bank's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
money market accounts, non-interest bearing checking accounts, regular savings
accounts and term certificate accounts. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
The Bank utilizes traditional marketing methods to attract new
customers and savings deposits. The Bank does not advertise for deposits outside
of its market area and management believes that an insignificant number of
deposit accounts were held by non-residents of Pennsylvania. The Bank does not
utilize the services of deposit brokers. The Bank traditionally has relied on
customer service and convenience in marketing its deposit products, and the Bank
generally has not sought to be a price leader on its deposits. In recent years,
many depository institutions have experienced disintermediation of their
deposits due, in part, to higher returns provided by competing investment
products offered by non-depository institutions. However, Willow Grove
experienced increases in deposits before interest credited of $19.0 million,
$31.0 million and $19.8 million during fiscal 1998, 1997 and 1996, respectively.
Such increases, in management's view, primarily were the result of the increase
in the Bank's branch network as well as its business development efforts.
Commencing in 1996, the Bank's business development officers have actively
solicited, through individual meetings and other contacts, increased deposits
particularly commercial transaction accounts, with businesses and individuals in
the Bank's market areas. In addition, in recent periods, the Bank's business
development officers, lending officers and branch personnel have increased their
efforts to solicit new deposits from the Bank's loan customers and other
residents in its market area. The Bank provides monetary incentives to its
business development officers and branch personnel to obtain new deposits from
customers.
The following table sets forth the activity in the Bank's deposits
during the periods indicated.
Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(In Thousands)
Beginning balance...................... $309,726 $267,695 $237,645
Net increase before interest credited.. 18,985 30,999 19,833
Interest credited...................... 12,082 11,032 10,217
-------- -------- --------
Net increase in deposits............... 31,067 42,031 30,050
-------- -------- --------
Ending balance......................... $340,793 $309,726 $267,695
======== ======== ========
85
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
June 30,
-----------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
(In Thousands)
0.00% to 2.99%............................. $ 132 $ 30 $ 110
3.00% to 3.99%............................. 12 11 1,281
4.00% to 4.99%............................. 41,261 37,989 42,589
5.00% to 6.99%............................. 180,858 167,923 134,816
7.00% to 8.99%............................. 9,133 9,817 10,880
9.00% to 10.99%............................ 606 1,057 1,465
11.00% and over............................ -- -- --
-------- -------- --------
Total.................................. $232,002 $216,827 $191,141
======== ======== ========
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit at June 30, 1998.
Over Six Over One Over Two
Months Year Years
Six Months Through One Through Through Over Three
and Less Year Two Years Three Years Years
--------------- ---------------- -------------- --------------- -------------
(In Thousands)
0.00% to 1.99%............. $ -- $ -- $ -- $ -- $ --
2.00% to 2.99%............. 132 -- -- -- --
3.00% to 3.99%............. 12 -- -- -- --
4.00% to 4.99%............. 19,274 17,232 4,755 -- --
5.00% to 6.99%............. 49,292 42,570 44,882 27,798 16,316
7.00% to 8.99%............. 379 848 1,285 5,448 1,173
9.00% to 10.99% ........... 216 367 23 -- --
11.00% and over............ -- -- -- -- --
------- ------- ------- ------- -------
Total.................. $69,305 $61,017 $50,945 $33,246 $17,489
======= ======= ======= ======= =======
As of June 30, 1998, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $38.5 million. The following table presents the maturity of these
time certificates of deposit at such dates.
June 30, 1998
--------------------------
(In Thousands)
3 months or less.............................. $ 8,023
Over 3 months through 6 months................ 6,754
Over 6 months through 12 months............... 10,312
Over 12 months................................ 13,380
-------
$38,469
=======
86
The following table sets forth the dollar amount of deposits in various
types of deposits offered by the Bank at the dates indicated.
June 30,
-------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ---------------------------- ----------------------------
Amount Percentage Amount Percentage Amount Percentage
------------ ---------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Savings accounts.......... $ 40,225 11.80% $ 36,373 11.74% $ 33,805 12.63%
Certificates of deposit... 232,002 68.08 216,827 70.01 191,141 71.40
Money market accounts..... 20,487 6.01 19,715 6.36 17,412 6.50
NOW accounts.............. 48,079 14.11 36,811 11.89 25,337 9.47
-------- ------ -------- ------ -------- ------
Total................. $340,793 100.00% $309,726 100.00% $267,695 100.00%
======== ====== ======== ====== ======== ======
Borrowings. Traditionally, the Bank made very limited use of
borrowings. The Bank recently determined to increase its use of leverage through
increased utilization of borrowings. At June 30, 1998, the Bank had $21.0
million of borrowed funds, all of which were FHLB advances. Advances from the
FHLB of Pittsburgh are obtained upon the security of the common stock Willow
Grove owns in that bank and certain of its residential mortgage loans, provided
certain standards related to creditworthiness have been met. Such advances are
available pursuant to several credit programs, each of which has its own
interest rate and range of maturities. In recent years, the Bank has used FHLB
advances as an additional source of funds and, pursuant to guidelines of the
Bank's Board of Directors, has reinvested such funds in securities with
estimated lives approximating the lives of the advances but with effective
yields higher than the rate paid for the advances. The Bank intends to continue
to utilize borrowings as a source of funds subsequent to the Reorganization.
The following table sets forth certain information regarding the
short-term borrowings of the Bank at or for the dates indicated.
At or For the Year Ended June 30,
---------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
FHLB advances: (Dollars in Thousands)
Average balance outstanding........................... $ 9,532 $10,349 $12,956
Maximum amount outstanding at any
month-end during the period.......................... 21,000 16,120 16,120
Balance outstanding at end of period.................. 21,000 6,000 10,120
Average interest rate during the period............... 5.55% 5.36% 5.60%
Average interest rate at end of period................ 5.62% 5.50% 5.25%
Other:
Average balance outstanding........................... $ 263 $ 218 $ --
Maximum amount outstanding at any
month-end during the period.......................... 500 500 --
Balance outstanding at end of period.................. -- 500 --
Average interest rate during the period............... --% --% --%
Average interest rate at end of period................ --% --% --%
87
The majority of the Bank's FHLB advances are callable at the discretion
of the FHLB within certain parameters and substantially all of such advances
could be called within one year.
Subsidiaries
The Bank currently has no subsidiaries.
Legal Proceedings
The Bank is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by management
to be immaterial to the financial condition and results of operations of the
Bank.
Employees
The Bank had 96 full-time employees and 25 part-time employees at June
30, 1998. None of these employees is represented by a collective bargaining
agent, and the Bank believes that it enjoys good relations with its personnel.
88
The following table sets forth certain information relating to the
Bank's offices at June 30, 1998.
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date June 30, 1998 June 30, 1998
- ------------------------------------ ----------- ------------ --------------------- ----------------------
(In Thousands)
Executive Office:
Welsh & Norristown Roads(1)
Maple Glen, PA 19002-8030 Owned N/A $1,884 $96,602
Branch Offices:
1555 West Street Road
Warminster, PA 18974-3103 Leased 01/2001 7 46,147
1141 Ivyland Road
Warminster, PA 18974-2048 Leased 06/2004 39 12,468
9 Easton Road
Willow Grove, PA 19090-0905 Owned N/A 690 109,381
715 Twining Road(2)
Dresher, PA 19025-1894 Leased 09/1998 -- 34,398
761 Huntingdon Pike
Huntingdon, PA 19006-8399 Owned N/A 350 33,672
2 N. York Road
Hatboro, PA 19040-3201 Leased 05/2002 196 8,125
- ---------------------------
(1) Includes adjacent nine acre property that could be used for future
expansion.
(2) Office was relocated to 701 Twining Road on July 13, 1998.
89
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company, the Bank and the MHC. 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
The Bank, as a federally chartered savings institution, is subject to
federal regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the FDIC,
which insures the deposits of the 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 OTS and are
subject to periodic examinations by the OTS and the FDIC. The investment and
lending authority of savings institutions are 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 shareholders. This regulatory oversight will continue
to apply to the Bank following the Reorganization.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that it may
find in the Bank's operations. The FDIC also has the authority to examine the
Bank in its role as the administrator of the SAIF. The Bank's relationship with
its depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage requirements. The OTS'
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 OTS. Any change in such regulations, whether by the FDIC,
OTS or Congress, could have a material adverse impact on the MHC, the Company
and the Bank and their operations.
The Company
Upon consummation of the Reorganization, the Company will be a savings
and loan holding company within the meaning of Section 10 of the HOLA. As such,
the Company will be required to register with and be subject to OTS examination
and supervision as well as certain reporting requirements. In addition, because
the Bank's deposits are insured by the SAIF maintained by the FDIC, the Bank is
subject to certain restrictions in dealing with the Company and with other
persons affiliated with the Bank.
90
One of the requirements for OTS approval of the Reorganization is that
the Company will operate under the activities restrictions applicable to
multiple savings and loan holding companies. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities specifically permissible by statute for
multiple savings and loan holding companies and to activities of bank holding
companies which the Federal Reserve Board has deemed permissible by regulation
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the
"BHCA"), subject to prior approval by the OTS, and to other activities
authorized by OTS regulation.
Pursuant to regulations of the OTS and the terms of the Company's
federal stock charter, the purpose and powers of the Company is to pursue any or
all of the lawful objectives of a federal mutual holding company and to exercise
any of the powers accorded to a mutual holding company. A mutual holding company
is permitted to, among other things: (i) invest in the stock of a savings
institution; (ii) acquire a mutual institution through the merger of such
institution into a savings institution subsidiary of such mutual holding company
or an interim savings institution of such mutual holding company; (iii) merge
with or acquire another mutual holding company, one of whose subsidiaries is a
savings institution; (iv) acquire non-controlling amounts of the stock of
savings institutions and savings institution holding companies, subject to
certain restrictions; (v) invest in a corporation the capital stock of which is
available for purchase by a savings institution under Federal law or under the
law of any state where the subsidiary savings institution or institutions have
their home offices; (vi) furnish or perform management services for a savings
institution subsidiary of such company; (vi) hold, manage or liquidate assets
owned or acquired from a savings institution subsidiary of such company; (viii)
hold or manage properties used or occupied by a savings institution subsidiary
of such company; and (ix) act as a trustee under deed or trust.
The HOLA prohibits a savings and loan holding company, such as the
Company, directly or indirectly, from (1) acquiring control (as defined) of a
savings institution (or holding company thereof) without prior OTS 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 OTS approval, or (3) acquiring through merger, consolidation or
purchase of assets, another savings institution (or holding company thereof) or
acquiring all or substantially all of the assets, another savings institution
(or holding company thereof) without prior OTS 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 (i) in the case of certain emergency acquisitions approved by
the FDIC, (ii) if the holding company controlled (as defined) such savings
institution as of March 5, 1987 or (iii) 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 25% of such holding company's voting
shares may, except with the prior approval of the OTS, acquire control of any
savings institution which is not a subsidiary of such holding company.
91
The Mutual Holding Company
Upon completion of the Reorganization and Stock Issuance, the MHC will
become a federal mutual holding company within the meaning of Section 10(o) of
the HOLA. As such, the MHC will be required to register with and be subject to
OTS examination and supervision as well as certain reporting requirements. In
addition, the OTS has enforcement authority over the MHC and its non-savings
Bank subsidiaries, if any. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings Bank. The MHC
will be subject to the same activities limitations to which the Company is
subject. See " -- The Company."
The Bank
Insurance of Accounts. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
Under current FDIC regulations, SAIF-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 ranging
prior to September 30, 1996 from 23 basis points for well capitalized, healthy
institutions to 31 basis points for undercapitalized institutions with
substantial supervisory concerns.
The deposits of the Bank are currently insured by the SAIF. Both the
SAIF and the BIF are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF achieved a fully funded status
first, and therefore as discussed below, effective January 1, 1996, the FDIC
substantially reduced the average deposit insurance premium paid by BIF-insured
banks. On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their then-current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
92
On September 30, 1996 Congress passed, and the President signed, the
DIF Act which mandated that all institutions which have deposits insured by SAIF
were required to pay a one-time special assessment of 65.7 basis points on such
deposits (subject to adjustment for certain types of banks with SAIF deposits)
that were held at March 31,1995 payable by November 27, 1996 to recapitalize the
SAIF. The assessment increased the SAIF's reserve ratio to a comparable level to
that of the BIF at 1.25% of total insured deposits. The Bank's share of this
special assessment totaled $1.5 million and is reflected in the fiscal 1997
operating results. The FDIC, in connection with the recapitalization, also
lowered SAIF premiums from $0.23 per $100 to $0.064 per $100 of insured deposits
beginning in January 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the 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 FDIC. 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 FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Regulatory Capital Requirements. The OTS capital requirements consist
of a "tangible capital requirement," a "leverage capital requirement" and a
"risk-based capital requirement." The OTS 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 OTS, savings
Banks must maintain "core capital" in an amount equal to at least 3% of adjusted
total assets. Core capital is defined as common shareholders' 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 GAAP,
and "qualifying supervisory goodwill," less non-qualifying intangible assets. At
June 30, 1998, the Bank's ratio of core capital to total adjusted assets was
8.3%.
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
93
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, 1998, represented 73.6% of the total
loans receivable, 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. Supplementary capital 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 GAAP capital.
The OTS 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 the Bank's level of
ownership, including the assets of includable subsidiaries in which the Bank has
a minority interest that is not consolidated for GAAP purposes. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 1998, the Bank had no investments subject
to a deduction from tangible capital.
The OTS amended its risk-based capital requirements that would require
institutions with an "above normal" level of interest rate risk to maintain
additional capital. A savings Bank is considered to have a "normal" level of
interest rate risk if the decline in the market value of its portfolio equity
after an immediate 200 basis point increase or decrease in market interest rates
(whichever leads to the greater decline) is less than two percent of the current
estimated market value of its assets. The market value of portfolio equity is
defined as the net present value of expected cash inflows and outflows from an
Bank's assets, liabilities and off-balance sheet items. The amount of additional
capital that an institution with an above normal interest rate risk is required
to maintain (the "interest rate risk component") equals one-half of the dollar
amount by which its measured interest rate risk exceeds the normal level of
interest rate risk. The interest rate risk component is in addition to the
capital otherwise required to satisfy the risk-based capital
94
requirement. Implementation of this component has been postponed by the OTS. The
final rule was to be effective as of January 1, 1994, subject however to a three
quarter lag time in implementation. However, in October 1994, the Director of
the OTS indicated that it would waive the capital deductions for institutions
with a greater than "normal" risk until the OTS published an appeals process. On
August 21, 1995, the OTS released Thrift Bulletin 67, which established (i) an
appeals process to handle "requests for adjustments" to the interest rate risk
component and (ii) a process by which "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to determine their
interest rate risk component. The Director of the OTS indicated, concurrent with
the release of Thrift Bulletin 67, that the OTS will continue to delay the
implementation of the capital deduction for interest rate risk pending the
testing of the appeals process set forth in Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim policy issued
in August 1993 under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS 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 GAAP capital.
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 8.3%, 8.3%
and 14.9%, respectively.
The OTS and the FDIC 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, an 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 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirement, 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.
Under the FDICIA, which became effective on December 19, 1992, an
institution is deemed to be (i) "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
95
to any order or final capital directive to meet and maintain a specific capital
level for any capital measure, (ii) "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,"
(iii) "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), (iv) "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 (v) "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 FDIC 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, 1998, the Bank was in the "well capitalized" category for
purposes of the above regulations.
Alteration of Financial Services Industry. On May 21, 1997, the Clinton
Administration announced a plan to modernize the financial services industry.
The proposal, among other things, addresses the ongoing debate concerning mixing
banking and commerce, elimination of the savings Bank charter and the merger of
the SAIF and BIF. Under the proposal, companies that own banks (bank holding
companies) and meet certain qualifications would -- subject to certain
safeguards -- be permitted to engage in any financial activity, including the
full range of securities activities, insurance activities, investment advisory
activities and mutual fund sponsorship and merchant banking. Likewise, financial
companies could own banks.
Regarding financial activities of insured depository institutions and
their subsidiaries, the proposal provides that national banks (and state banks
to the extent permitted by state law) would be authorized, subject to certain
safeguards, to conduct any financial activity through subsidiaries (except that
national bank subsidiaries would not be authorized to engage in real estate
development). National banks would be permitted to engage in the full scope of
activities that have
96
previously been permissible for national banks or federally chartered savings
Banks (except engaging in the real estate development). Moreover, national banks
(and state banks to the extent permitted by state law) would be permitted to act
as general agents for the sale of insurance, but would be prohibited from
engaging directly in insurance underwriting other than what is currently
permissible (for instance, credit-related insurance). Additionally, national
banks (and state banks to the extent permitted by state law) would be permitted
to underwrite and deal in municipal revenue bonds in addition to other
securities activities currently permissible in the bank.
The Clinton Administration's proposal also addressed affiliations
between banking organizations and non-financial companies. The proposal
recommended two alternative approaches -- the "basket" approach and the
"financial-only" approach. Under the basket approach, bank holding companies
that derive some significant percentage (as specified by the U.S. Congress) of
their gross revenues in the U.S. from financial activities could derive the
remainder of their revenues from non-financial activities. In addition to the
basket limitation, the proposal suggested prohibiting any affiliation between a
bank holding company and a non-financial firm having assets in excess of a
specified amount (calculated to be approximately the 1,000 largest non-financial
companies). Moreover, banks would be prohibited from extending any credit to, or
for the benefit of, any non-financial affiliate.
Under the basket approach, the federal savings Bank charter would be
eliminated after two years (thereby requiring all federal thrifts to convert to
bank charters), and existing unitary thrift holding companies (which presently
have no activity restrictions) would be given a grandfather exemption from the
"basket" test (terminable upon a change of control). All remaining
state-chartered thrifts would be treated as banks for federal bank regulatory
purposes. The OTS and the OCC would be merged at the end of the
two-year-Reorganization period and the SAIF and BIF would be merged. The Federal
Reserve Board, however, would continue to approve the formation of, and to
supervise and regulate all bank holding companies.
Under the financial-only approach, bank holding companies would not be
permitted to engage in any non-financial activities. But the existing federal
savings Bank charter would be preserved, and thrift holding companies would
retain their current authority to engage in any lawful activity. Furthermore,
the OTS and OCC would be kept in tact, but the SAIF and BIF would be merged.
The Administration's proposal also sets forth capital protections and
other safeguards associated with the new activities contemplated for banks. In
order for a bank holding company or a subsidiary of a bank to engage as a
principal in activities not permissible for a national bank to engage in
directly, the bank would have to remain "well capitalized" -- that is, to be in
the highest regulatory capital category, with regulatory capital exceeding
normal requirements -- and it would have to deduct from its regulatory capital
the entire amount of its equity investment in a subsidiary engaged in such
activities. The Bank also would have to be well-managed.
97
On June 20, 1997, the House Committee on Banking and Financial Services
of the U.S. House of Representatives passed H.R. 10 (the "Act"), the "Financial
Services Competition Act of 1997," by a vote of 28 to 26. Like the proposal
announced by the Clinton Administration on May 2, 1997, H.R. 10 is a sweeping
proposal for financial modernization of the banking system that would permit
affiliations between commercial banks, securities firms, insurance companies
and, subject to certain limitations, other commercial enterprises. The stated
purposes of the Act are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition.
H.R. 10 removes the restrictions contained in the Glass-Steagall Act of
1933 and the BHCA, thereby allowing qualified financial holding companies to
control banks, securities firms, insurance companies, and other financial firms.
Conversely, securities firms, insurance companies and financial firms would be
allowed to own or affiliate with a commercial bank. The Act also provides that
subsidiaries of national banks may engage in financial activities not allowed in
the bank itself (except real estate investment and development, merchant banking
and insurance underwriting), but only if the bank and all of its depository
institutions are well capitalized and well managed and have achieved a
"satisfactory" rating under the Community Reinvestment Act.
Under the new framework, the Federal Reserve would serve as an umbrella
regulator to oversee the new financial holding company structure. Securities
affiliated would be required to comply with all applicable federal securities
laws, including registration and other requirements applicable to
broker-dealers. The Act also would provide that insurance affiliates be subject
to applicable state insurance regulations and supervision.
With respect to the thrift industry, H.R. 10 would eliminate the
federal savings Bank charter by requiring all federal thrifts to convert to
national banks, state-chartered savings Banks or state-chartered banks within
two years after the date of the Act's adoption. State-chartered savings Banks
would be treated as commercial banks for purposes of federal banking law. After
Reorganization, the new institution would be permitted to retain its existing
investments, affiliations and branches. In addition, the Act would merge the OTS
with the OCC, and merge the SAIF and BIF. Unitary savings and loan holding
companies could maintain their affiliations with nonfinancial enterprises and
engage in all currently permissible activities.
The U.S. Congress has been considering the Administration's proposal,
as well as proposals offered by others, in recent months. H.R. 10, specifically,
is being considered by the Commerce Committee of the House of Representatives,
but a vote on the bill has been indefinitely postponed. It is unknown whether
legislation will be enacted that alters the financial services industry, or if
enacted, what form such legislation might take.
Safety and Soundness Guidelines. The OTS 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
are required to submit compliance plans to their appropriate federal
98
regulators. The OTS and the other agencies have also established guidelines
regarding asset quality and earnings standards for insured institutions. The
Bank believes that it is in compliance with these guidelines and standards.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. The Bank consistently has had liquidity well in excess
of the Federal requirements during the past three fiscal years.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulations create a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's tangible, core or
risk-based capital ratio exceeds its tangible, core or risk-based capital
requirement. Failure to meet minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval. See "- Regulatory Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit 30 days written notice to the OTS prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. In addition, a Tier 1
institution deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination. At June 30, 1998, the Bank was a Tier 1 institution for purposes
of this regulation.
Branching by Federal Savings Institutions. OTS 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").
99
The IRS Test requirement does not apply if: (i) 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 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); (ii) 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
(iii) the branch was operated lawfully as a branch under state law prior to the
savings institution's Reorganization to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA 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 CRA and related regulations of the
OTS 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 (together, the "Fair Lending Laws") 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 CRA 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 OTS, as well as other federal regulatory agencies and
the Department of Justice.
Qualified Thrift Lender Test. All savings institutions are required to
meet a QTL 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 QTL test by either qualifying as a
domestic building and loan Bank as defined in Section 7701(a)(19) of the Code or
by meeting the second prong of the QTL test set forth in Section 10(m) of the
HOLA. A savings institution that does not meet the QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) 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; (ii) the branching powers of the institution
shall be restricted to those of a national bank; (iii) the institution shall not
be eligible to obtain any new advances from its FHLB, other than special
liquidity advances with the approval of the OTS; and (iv) 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 QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the portion of the QTL test that is based on Section 10(m)
of the HOLA rather than the Code requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain
100
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 FHLB of
Atlanta; and direct or indirect obligations of the FDIC. In a recent amendment
to the QTL, small business loans, credit card loans, student loans and loans for
personal, family and household purposes were allowed to be 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 consumer and
educational loans (limited to 10% of total portfolio assets); and stock issued
by the FHLMC or the FNMA. Portfolio assets consist of total assets minus the sum
of (i) goodwill and other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up to 20% of the
institution's total assets. At June 30, 1998, substantially all of the portfolio
assets of the Bank were qualified thrift investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB 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
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. At
June 30, 1998, the Bank had $21.0 million of FHLB advances.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta 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. At June 30, 1998, the Bank had $2.7 million in FHLB
stock, which was in compliance with this requirement.
The FHLBs 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 FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. The dividend yield on the Bank's FHLB stock
was 6.4% for each of the fiscal years ended June 30, 1998 and 1997.
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, 1998, the 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 OTS.
101
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 FHLB
advances, before borrowing from a Federal Reserve Bank.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on the
development of a common charter for federal savings institutions and commercial
banks; and, in the event that the thrift charter was eliminated by January 1,
1999, would require the merger of the BIF and the SAIF into a single Deposit
Insurance Fund on that date. The Bank cannot determine whether, or in what form,
such legislation may eventually be enacted and there can be no assurance that
any legislation that is enacted would not adversely affect the Bank and its
parent holding company.
Affiliate Restrictions. Section 11 of HOLA 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 ("FRA").
In general, Sections 23A and 23B and OTS 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. In addition, a savings institution and its subsidiaries may engage
in covered transactions and certain other transactions only 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.
In addition, under the OTS 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
102
100% to 130% (depending on the type of collateral) of the amount of the loan or
extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
institution subsidiaries of savings institutions from treatment as affiliates,
except to the extent that the OTS 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 OTS prior notice of affiliate transactions.
Federal Securities Law
The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock to be issued in the Offerings. Upon completion of the
Offerings, the Common Stock will be registered with the SEC under the Exchange
Act and, under OTS regulations, generally may not be deregistered for at least
three years thereafter. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Provision may be made in the future by the Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Company at some future time determines to issue
additional shares from its authorized but unissued shares, the Company might
offer registration rights to certain of its affiliates who want to sell their
shares.
TAXATION
Federal Taxation
General. The Company and the Bank will be subject to federal income
taxation in the same general manner as other corporations with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax
103
matters and is not a comprehensive description of the tax rules applicable to
the Company or the Bank. The Bank's federal income tax returns have been closed
without audit by the IRS through 1994.
Following the Reorganization, the Company anticipates that it will file
a consolidated Federal income tax return with the Bank commencing with the first
taxable year after consummation of the Reorganization. Accordingly, it is
anticipated that any cash distributions made by the Company to its stockholders
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, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending June 30, for filing its federal income tax return.
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.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual 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 its 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
such reserve subject to recapture as of June 30, 1998 is approximately $2.4
million for the Bank.
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 should the Bank fail 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 cease to maintain a bank
charter.
At June 30, 1998 the total federal pre-1988 reserve was approximately
$6.2 million for the Bank. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
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. The Bank has
not been subject to the alternative minimum tax nor does the Bank have any such
amounts available as credits for carryover.
104
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning before August 6, 1997. At June 30, 1998, the Bank had no
net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
State and Local Taxation
Pennsylvania Taxation. The Company is subject to the Pennsylvania
Corporate Net Income Tax and Capital Stock and Franchise Tax. The Corporation
Net Income Tax rate for 1997 is 9.99% and is imposed on the Company's
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 1.2% 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 taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended to include thrift institutions having capital
stock. Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the
Bank from all 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 GAAP with certain
adjustments. The MTIT, in computing GAAP income, allows for the deduction of
interest earned on state and federal securities, 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.
MANAGEMENT
Management of the Company
The Board of Directors of the Company will consist of the same
individuals who serve as directors of the Bank. The Board of Directors of the
Company is divided into three classes, each of which contains approximately
one-third of the Board. The directors shall be elected by the stockholders of
the Company for staggered three year terms, or until their successors are
elected and qualified. One class of directors, consisting of Messrs. Langan,
O'Brien and Ramsey, has a term of office expiring at the first annual meeting of
stockholders, a second class, consisting of
105
Messrs. Hull, Kitzelman and Kremp, has a term of office expiring at the second
annual meeting of stockholders and a third class, consisting of Messrs. Kirk,
Marcell and Weihenmayer, has a term of office expiring at the third annual
meeting of stockholders.
The following individuals are executive officers of the Company and
hold the offices set forth below opposite their names.
Executive Position Held with Company
- ------------------------------------- -----------------------------------------------------
Frederick A. Marcell, Jr. President and Chief Executive Officer
Thomas M. Fewer Senior Vice President and Chief Credit
Officer
John J. Foff, Jr. Senior Vice President, Chief Financial
Officer and Treasurer
John T. Powers Senior Vice President and Corporate
Secretary
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
Information concerning the principal occupations, employment and
compensation of the directors and officers of the Company during the past five
years is set forth under "- Management of the Bank" and "- Executive Officers
Who Are Not Directors." Directors of the Company initially will not be
compensated by the Company but will serve and be compensated by the Bank. It is
not anticipated that separate compensation will be paid to directors of the
Company until such time as such persons devote significant time to the separate
management of the Company's affairs, which is not expected to occur until the
Company becomes actively engaged in additional businesses other than holding the
stock of the Bank. The Company may determine that such compensation is
appropriate in the future.
Management of the Bank
Because the Bank is a mutual savings bank, its members have elected its
Board of Directors. Upon completion of the Reorganization and Stock Issuance,
the directors of the Bank immediately prior to the Stock Issuance will continue
to serve as directors of the Bank until successors are eligible and qualified.
Currently, the term of each director is three years, and all of the members of
the Board of Directors stand for election upon the expiration of their term.
This will continue to be the case for the Bank following the Reorganization and
Stock Issuance. Because the Company will own all the issued and outstanding
capital stock of the Bank following the Reorganization and Stock Issuance, the
Board of Directors of the Company will elect the directors
106
of the Bank. The persons who are serving as directors of the Bank will also
serve as directors of the MHC and the Company upon consummation of the
Reorganization and Stock Issuance.
The following table sets forth certain information regarding the Board
of Directors of the Bank.
Positions Held
With Director
Name Age(1) the Bank Since
- ------------------------- ------ ----------------------------- --------------
Lewis W. Hull 81 Director 1974
J. Ellwood Kirk 68 Director 1978
Stanley B. Kitzelman 76 Director 1979
Charles F. Kremp, 3rd 55 Director 1994
William W. Langan 58 Chairman of the Board 1986
Frederick A. Marcell, Jr. 60 Director, President and Chief 1992
Executive Officer
A. Brent O'Brien 60 Director 1996
Samuel H. Ramsey, III 55 Director 1988
William B. Weihenmayer 51 Director 1996
- ------------------------------
(1) As of August 26, 1998.
Set forth below is information with respect to the principal
occupations during at least the last five years for the directors of the Bank.
Lewis W. Hull. Mr. Hull is currently Chairman of Hull Corp and Hull
Company, manufacturing companies located in Hatboro, Pennsylvania. He is the
controlling shareholder of Hull Corp.
J. Ellwood Kirk. Mr.Kirk is currently retired. Previously, Mr. Kirk
served as President of the Bank.
Stanley B. Kitzelman. Mr. Kitzelman is currently retired. Previously,
Mr. Kitzelman was an insurance executive.
Charles F. Kremp, 3rd. Mr. Kremp is President and owner of Charles F.
Kremp, 3rd, florist, Willow Grove, Pennsylvania.
107
William W. Langan. Mr. Langan is the President and owner of Marmetal
Industries, Inc., Horsham, Pennsylvania.
Frederick A. Marcell, Jr. Mr. Marcell has served as President and Chief
Executive Officer of the Bank since April 1992.
A. Brent O'Brien. Mr. O'Brien is President and owner of the insurance
broker firm Bean, Mason & Eyer, Inc., Doylestown, Pennsylvania.
Samuel H. Ramsey, III. Mr. Ramsey is President and owner of Samuel H.
Ramsey III, certified public accountants since 1973.
William B. Weihenmayer. Mr. Weihenmayer is a self-employed real estate
investor, Huntingdon Valley, Pennsylvania.
Executive Officers Who Are Not Directors
Set forth below is information with respect to the principal
occupations during at least the last five years for the three executive officers
of the Bank who do not serve as directors.
Thomas M. Fewer. Age 46 years. Mr. Fewer has served as Senior Vice
President of the Bank since 1997. Mr. Fewer has been employed by the Bank since
1991 and has previously served as Vice President and Senior Lending Officer.
John J. Foff, Jr. Age 47 years. Mr. Foff currently is Senior Vice
President and Chief Financial Officer of the Bank. Mr. Foff joined the Bank in
1986 as Vice President and Treasurer. Mr. Foff has served as a financial manager
in the banking industry since 1976.
John T. Powers. Age 48 years. Mr. Powers currently is Senior Vice
President, Community Banking and Corporate Secretary of the Bank and has served
with the Bank since 1986.
Directors' Compensation
The Chairman of the Board of Directors receives $1,260 per Board
meeting while the other non-employee directors receive $1,000 per meeting. In
addition, the Chairman of committees of the Board receives $600 per committee
meeting while other directors receive $500 per committee meeting. In order to
receive such compensation, directors may not be absent for more than two Board
meetings or committee meetings, as the case may be. Board fees are subject to
periodic adjustment by the Board of Directors. See "- Benefits - Stock Option
Plan" and "- Recognition Plan."
The Bank has adopted a non-qualified retirement plan for the Bank's
non-employee directors (the "Directors' Plan"). Assuming the completion of ten
years of service, the Directors'
108
Plan provides for fixed annual payments at retirement of $12,000 a year for a
period of ten years. The Directors' Plan provides that directors become 20%
vested after six years of service, with the vested benefit increasing by 20% per
year through year ten. The plan, which was adopted in fiscal 1998, provides for
credit for past service and, as such, resulted in the Bank accruing $566,000 in
expense for the year ended June 30, 1998.
Compensation Committee Interlocks and Insider Participation
Determinations regarding compensation of the Bank's employees are made
by the Compensation Committee of the Board of Directors. Messrs. Langan, Hull
and O'Brien, directors of the Bank, and Mr. Marcell, President and Chief
Executive Officer of the Bank, serve as members of the Compensation Committee.
Summary Compensation Table
The following table sets forth a summary of certain information
concerning the compensation paid by the Bank (including amounts deferred to
future periods by the officers) for services rendered in all capacities during
the fiscal year ended June 30, 1998 to the President and Chief Executive Officer
of the Bank and the three other officers of the Bank whose compensation exceeded
$100,000.
Annual Compensation Long Term Compensation
--------------------------------- ------------------------------------
Other Awards Payouts
Name and Fiscal Annual ------------------------------------ All Other
Principal Position Year Salary Bonus Compensation Securities Compensation(1)
Restricted Underlying LTIP
Stock Options Payouts
- ------------------------- ------ -------- ------- ------------ ---------- ----------- ------- ---------------
Frederick A. Marcell,
Jr., President and Chief
Executive Officer 1998 $142,000 $21,675 - - - - - - - - $15,700
Thomas M. Fewer,
Senior Vice President 1998 $87,500 $13,977 - - - - - - - - $10,937
John J. Foff, Jr.
Senior Vice President
and Chief Financial 1998 $87,500 $13,977 - - - - - - - - $10,937
Officer
John T. Powers, Senior
Vice President,
Community Banking 1998 $87,500 $13,977 - - - - - - - - $10,079
- -------------------
(1) Consists of the Bank's contributions to the Bank's 401(k) profit
sharing plan and the Bank's money purchase plan to the account of the
named executive officers. In addition to the amounts allocated under
the Bank's 401(k) profit sharing plan and money purchase plan, in
fiscal 1998, the Bank adopted a supplemental executive retirement plan
("SERP") for the benefit of Mr. Marcell. The Bank accrued $234,000 with
respect to such SERP in the fiscal year. Under the Bank's 401(k) profit
sharing plan for fiscal 1998, $5,050, $4,375, $4,375 and $3,516,
respectively, was allocated to the accounts of Messrs. Marcell, Fewer,
Foff and Powers. Under the Bank's money purchase pension plan in fiscal
1998, $10,650, $6,562, $6,562 and $6,562, respectively, was allocated
to the accounts of Messrs. Marcell, Fewer, Foff and Powers.
109
Employment Agreements
In connection with the Reorganization and Stock Issuance, the Bank (the
"Employer") intends to enter into employment agreements with each of Messrs.
Frederick A. Marcell, Jr., John J. Foff, Jr., Thomas M. Fewer and John T. Powers
(the "Executives"). The Employer has agreed to employ Mr. Marcell for a term of
two years and Messrs. Foff, Fewer and Powers for a term of one year, in each
case in their current respective positions. The agreements with the Executives
initially will be at their current salary levels. With respect to the
Executives, the employment agreements will be reviewed annually by the Board of
Directors of the Employer. The term of the Executives' employment agreements
shall be extended annually for a successive additional one-year periods unless
the Company and the Bank provide notice not less than 30 days prior to such
date, not to extend the employment term.
Each of the employment agreements shall be terminable with or without
cause by the Employer. The Executives shall have no right to compensation or
other benefits pursuant to the employment agreements for any period after
voluntary termination or termination by the Employer for cause, disability,
retirement or death. In the event that (i) the Executive terminates his
employment because of failure to comply with any material provision of the
employment agreement or the Employer changes the Executive's title or duties or
(ii) the employment agreement is terminated by the Employer other than for
cause, disability, retirement or death, the Executive will be entitled to
receive his salary for the remaining term of the Agreement. If employment is
terminated by the Employer or by the executive as a result of certain adverse
actions which are taken with respect to the executive's employment following a
change in control of the Company, as defined, the Executives will be entitled to
a cash severance amount equal to their base salary plus bonus received in the
prior year, multiplied by the number of years in the initial term of the
employment agreement (two in the case of Mr. Marcell and one in the case of the
other Executives).
A change in control is generally defined in the employment agreements
to include any change in control of the Company required to be reported under
the federal securities laws, as well as (i) the acquisition by any person of 20%
or more of the Company's outstanding voting securities and (ii) a change in a
majority of the directors of the Company during any three-year period without
the approval of at least two-thirds of the persons who were directors of the
Company at the beginning of such period. If the new employment agreements were
in effect and a change-of-control of the Company had occurred on June 30, 1998,
Mr. Marcell would be entitled to receive $327,000, and Messrs. Foff, Fewer and
Powers would each be entitled to receive $101,000 in severance payments.
Although the above-described employment agreements could increase the
cost of any acquisition of control of the Company, management of the Company
does not believe that the terms thereof would have a significant anti-takeover
effect. The Company and/or the Bank may determine to enter into similar
employment agreements with other officers of the Company and/or the Bank in the
future.
110
Benefits
Employee Stock Ownership Plan. The Company has established the ESOP for
employees of the Company and the Bank to become effective upon the
Reorganization and Stock Issuance. Full-time employees of the Company and the
Bank who have been credited with at least 1,000 hours of service during a twelve
month period are eligible to participate in the ESOP.
As part of the Reorganization and Stock Issuance, in order to fund the
purchase of up to 8% of the Common Stock sold in the Reorganization and Stock
Issuance, it is anticipated that the ESOP will borrow funds from the Company. It
is anticipated that such loan will equal 100% of the aggregate purchase price of
the Common Stock acquired by the ESOP. The loan to the ESOP will be repaid
principally from the Company's and the Bank's contributions to the ESOP over a
period of not less than 10 years, and the collateral for the loan will be the
Common Stock purchased by the ESOP. The interest rate for the ESOP loan is
expected to be a fixed rate at the Bank's prime rate as of the date of the loan.
The Company may, in any plan year, make additional discretionary contributions
for the benefit of plan participants in either cash or shares of Common Stock,
which may be acquired through the purchase of outstanding shares in the market
or from individual stockholders, upon the original issuance of additional shares
by the Company or upon the sale of treasury shares by the Company. Such
purchases, if made, would be funded through additional borrowings by the ESOP or
additional contributions from the Company. The timing, amount and manner of
future contributions to the ESOP will be affected by various factors, including
prevailing regulatory policies, the requirements of applicable laws and
regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released to participants on a pro rata basis as debt
service payments are made. Shares released from the ESOP will be allocated to
each eligible participant's ESOP account based on the ratio of each such
participant's compensation to the total compensation of all eligible ESOP
participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount the Company might otherwise have contributed
to the ESOP. Upon the completion of seven years of service, the account balances
of participants within the ESOP will become 100% vested. Credit is given for
years of service with the Bank prior to adoption of the ESOP. In the case of a
"change in control," as defined, however, participants will become immediately
fully vested in their account balances. Benefits may be payable upon retirement
or separation from service. The Company's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
Messrs. Marcell, Fewer, Foff and Powers will serve as trustees of the
ESOP. Under the ESOP, the trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of the participating employees, and
unallocated shares will be voted in the same ratio on any matter as those
allocated shares for which instructions are given.
See "Risk Factor-Potential Increased Compensation Expense After the
Reorganization" for discussion which addresses compensation expense to be
incurred as a result of the ESOP.
111
GAAP requires that any third party borrowing by the ESOP be reflected
as a liability on the Company's statement of financial condition. Since the ESOP
is borrowing from the Company, such obligation is not treated as a liability,
but will be excluded from stockholders' equity. If the ESOP purchases newly
issued shares from the Company, total stockholders' equity would neither
increase nor decrease, but per share stockholders' equity and per share net
earnings would decrease as the newly issued shares are allocated to the ESOP
participants.
The ESOP will be subject to the requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the regulations of the
IRS and the Department of Labor thereunder.
Stock Option Plan. Following consummation of the Reorganization and
Stock Issuance, the Board of Directors of the Company intends to adopt a Stock
Option Plan, which will be designed to attract and retain qualified personnel in
key positions, provide directors, officers and key employees with a proprietary
interest in the Company as an incentive to contribute to the success of the
Company and reward key employees for outstanding performance. The Stock Option
Plan will provide for the grant of incentive stock options intended to comply
with the requirements of Section 422 of the Code ("incentive stock options"),
non-incentive or compensatory stock options, stock appreciation rights and
limited rights which will be exercisable only upon a change in control of the
Company or the Bank (collectively "Awards"). Awards may be granted to directors
and key employees of the Company and any subsidiaries. The Stock Option Plan
will be administered and interpreted by a committee of the Board of Directors
("Committee"). Unless sooner terminated, the Stock Option Plan shall continue in
effect for a period of 10 years from the date the Stock Option Plan is adopted
by the Board of Directors. Subject to any applicable OTS regulations, upon
exercise of "Limited Rights" in the event of a change in control, the employee
will be entitled to receive a lump sum cash payment equal to the difference
between the exercise price of the related option and the fair market value of
the shares of common stock subject to the option on the date of exercise of the
right in lieu of purchasing the stock underlying the option.
Under the Stock Option Plan, the Committee will determine which
directors, officers and key employees will be granted Awards, whether options
will be incentive or compensatory options, the number of shares subject to each
Award, the exercise price of each option, whether options may be exercised by
delivering other shares of Common Stock and when such options become
exercisable. The per share exercise price of an incentive stock option must at
least equal the fair market value of a share of Common Stock on the date the
option is granted (110% of fair market value in the case of incentive stock
options granted to employees who are 5% stockholders). The granting or vesting
of stock options may be conditioned upon the achievement of individual or
company-wide performance goals, which could include goals such as the
achievement by the Company or the Bank of specified levels of net income, asset
growth, return on assets, return on equity or other specific performance goals.
112
At a meeting of stockholders of the Company following the
Reorganization, which under applicable OTS regulations may be held no earlier
than six months after the completion of the Reorganization, the Board of
Directors intends to present the Stock Option Plan to stockholders for approval
and to reserve an amount equal to 10% of the shares of Common Stock sold in the
Offerings (or 231,725 shares based upon the issuance of 2,317,250 shares), for
issuance under the Stock Option Plan. OTS regulations provide that, in the event
such plan is implemented within the one year following the Reorganization, no
individual officer or employee of the Bank may receive more than 25% of the
options granted under the Stock Option Plan and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the options
granted under the Stock Option Plan. OTS regulations also provide that the
exercise price of any options granted under any such plan must be the fair
market value of the Common Stock as of the date of grant. Each stock option or
portion thereof will be exercisable at any time on or after it vests and will be
exercisable until 10 years after its date of grant or for periods of up to one
year following the death, disability or other termination of the optionee's
employment or service as a director. However, failure to exercise incentive
stock options within three months after the date on which the optionee's
employment terminates may result in adverse tax consequences to the optionee.
At the time an Award is granted pursuant to the Stock Option Plan, the
recipient will not be required to make any payment in consideration for such
grant. With respect to incentive or compensatory stock options, the optionee
will be required to pay the applicable exercise price at the time of exercise in
order to receive the underlying shares of Common Stock. The shares reserved for
issuance under the Stock Option Plan may be authorized but previously unissued
shares, treasury shares, or shares purchased by the Company on the open market
or from private sources. In the event of a stock split, reverse stock split or
stock dividend, the number of shares of Common Stock under the Stock Option
Plan, the number of shares to which any Award relates and the exercise price per
share under any option or stock appreciation right shall be adjusted to reflect
such increase or decrease in the total number of shares of Common Stock
outstanding. In the event the Company declares a special cash dividend or return
of capital following the implementation of the Stock Option Plan in an amount
per share which exceeds 10% of the fair market value of a share of Common Stock
as of the date of declaration, the per share exercise price of all previously
granted options which remain unexercised as of the date of such declaration
shall, subject to certain limitations, be proportionately adjusted to give
effect to such special cash dividend or return of capital as of the date of
payment of such special cash dividend or return of capital.
Under current provisions of the Code, the federal income tax treatment
of incentive stock options and compensatory stock options is different. As
regards incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
fair market value on the date of exercise and the option exercise price
generally will be treated as compensation income upon exercise, and the Company
will be entitled to a deduction in the amount of income so recognized by the
optionee. Upon the exercise of a stock appreciation right, the holder will
realize income for federal income tax
113
purposes equal to the amount received by him, whether in cash, shares of stock
or both, and the Company will be entitled to a deduction for federal income tax
purposes in the same amount.
It is currently expected that the Stock Option Plan will provide that
no individual officer will be able to receive stock options for more than 25% of
the shares available under the Stock Option Plan, or 57,931 shares if the amount
of Common Stock sold in the Reorganization is equal to the maximum of the
Estimated Offering Range, vesting over a five-year period (or 11,586 shares per
year based upon the maximum of the Estimated Offering Range).
Recognition Plan. Following consummation of the Reorganization and
Stock Issuance, the Board of Directors of the Company intends to adopt a
Recognition Plan for directors, officers and employees. The objective of the
Recognition Plan will be to enable the Company to provide directors, officers
and employees with a proprietary interest in the Company as an incentive to
contribute to its success. The Company intends to present the Recognition Plan
to stockholders for their approval at a meeting of stockholders which, pursuant
to applicable OTS regulations, may be held no earlier than six months subsequent
to completion of the Reorganization.
The Recognition Plan will be administered by a committee of the Board
of Directors, which will have the responsibility to invest all funds contributed
to the trust created for the Recognition Plan (the "Trust"). The Company will
contribute sufficient funds to the Trust so that the Trust can purchase,
following the receipt of stockholder approval, a number of shares equal to an
aggregate of 4% of the Common Stock sold in the Offerings (92,690 shares based
on the sale of 2,317,250 shares at the maximum of the Estimated Offering Range).
Based on the Purchase Price, the shares of Common Stock in the Recognition Plan
will have an aggregate value of $927,000 and $1.1 million assuming the sale of
shares at the maximum and the maximum, as adjusted, of the Estimated Offering
Range. Shares of Common Stock granted pursuant to the Recognition Plan generally
will be in the form of restricted stock vesting at the rate of 20% per year over
the five years following the date of grant. For accounting purposes,
compensation expense in the amount of the fair market value of the Common Stock
at the date of the grant to the recipient will be recognized pro rata over the
period during which the shares are earned. A recipient will be entitled to all
voting and other stockholder rights, except that the shares, while restricted,
may not be sold, pledged or otherwise disposed of and are required to be held in
the Trust. Under the terms of the Recognition Plan, recipients of awards will be
entitled to instruct the trustee of the Recognition Plan as to how the
underlying shares should be voted, and the trustee will be entitled to vote all
unallocated shares in its discretion. If a recipient's employment is terminated
as a result of death or disability, all restrictions will expire and all
allocated shares will become unrestricted. The Board of Directors of the Company
can terminate the Recognition Plan at any time, and if it does so, any shares
not allocated will revert to the Company. Recipients of grants under the
Recognition Plan will not be required to make any payment at the time of grant
or when the underlying shares of Common Stock become vested, other than payment
of withholding taxes.
The amount and timing of awards made to participants in the Recognition
Plan will be solely in the discretion of the committee of the Board of
Directors, subject to the limitations imposed by OTS regulations. In making
grants under the Recognition Plan, it is expected that the committee will
consider factors such as the duties, responsibilities and performance of
participants, their past and anticipated Future Contributions to the growth and
success of the bank, compensation levels and other factors as deemed
appropriate.
It is currently expected that the Recognition Plan will provide that no
individual officer will be able to receive an award for more than 25% of the
shares available under the Recognition Plan,
114
or 23,172 shares if the amount of Common Stock sold in the Reorganization and
Stock Issuance is equal to the maximum of the Estimated Offering Range, vesting
over a five-year period (or 4,634 shares per year based upon the maximum of the
Estimated Offering Range).
Money Purchase Plan. The Bank maintains a Money Purchase Plan (the
"Retirement Plan") which provides retirement benefits for all full-time
employees who have attained the age of 21 and have completed one year of service
with the Bank. The Retirement Plan is a tax-qualified money purchase plan
pursuant to which the Bank's contributions are fixed based upon the compensation
of each participant. For each participant, the Bank's contribution is an amount
equal to 7.5% of the participant's base salary. With the consent of the
Retirement Plan's administrator, the Retirement Plan may also accept rollover
contributions from employees. Messrs. Marcell, Fewer, Foff and Powers are
trustees of the Retirement Plan. A participant's account balance becomes 100%
vested after completion of seven years of service. A participant also becomes
100% vested in his account balance in the event of death, disability or
retirement. Normal retirement age under the Retirement Plan is 65. Retirement
expense is funded as accrued and amounted to $182,000 for fiscal year 1998.
Supplemental Executive Retirement Plan. The Bank adopted the SERP in
fiscal 1998 in order to supplement the retirement benefits payable to Mr.
Marcell pursuant to the Bank's qualified plans. The SERP provides for payments
for a period of ten years beginning at retirement based on a percentage of
annual cash compensation. Assuming Mr. Marcell remains in the Bank's employ at
age 68, the SERP provides for an annual benefit equal to 50% of his annual cash
compensation. In the event that Mr. Marcell retires prior to age 68, his benefit
will be reduced in increments of 5% per year. The Bank accrued $234,000 on a
pre-tax basis $144,000 after tax for the year ended June 30, 1998, which
included estimated costs for past service.
401(k) Plan. The Bank has adopted a 401(k) Plan, which is a
tax-qualified defined contribution plan which permits salaried employees with at
least one year of service and who are 21 years of age or older to make pre-tax
salary deferrals under section 401(k) of the Code. Salary deferrals are made by
election and are limited to 10% of compensation up to $10,000 (for 1998). The
Bank generally makes matching contributions equal to 50% of deferred amounts.
Employees are fully vested in their salary deferrals, and become gradually
vested in the Bank's contribution over seven years of participation in the Plan.
The 401(k) Plan provides that employees select the investment of their accounts
from several options.
The Bank's 401(k) Plan is being amended to include the option to invest
401(k) Plan assets in Common Stock. In addition, participating employees may
elect to invest all or any part of their 401(k) Plan account balances in Common
Stock. Common Stock held by the 401(k) Plan may be newly issued or treasury
shares acquired from the Company or outstanding shares purchased on the open
market or in privately negotiated transactions. All Common Stock held by the
401(k) Plan will be held by an independent trustee and allocated to the accounts
of individual participants. Participants will control the exercise of voting and
tender rights relating to the Common Stock held in their accounts.
115
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of the Company's directors and
for all of the directors and executive officers as a group, the proposed
purchases of Common Stock, assuming sufficient shares are available to satisfy
their subscriptions. The amounts include shares that may be purchased through
individual retirement accounts and by associates.
At the Minimum of the Estimated At the Maximum of the
Offering Range Estimated Offering Range
------------------------------- --------------------------
As a Percent
Number of As a Percent of Number of of Shares
Name Amount Shares Shares Offered Shares Offered
- --------------------------- ---------- --------- --------------- --------- ------------
Lewis W. Hull $200,000 20,000 1.17% 20,000 0.86%
J. Ellwood Kirk 100,000 10,000 0.58 10,000 0.43
Stanley B. Kitzelman 50,000 5,000 0.29 ,000 0.22
Charles F. Kremp, 3rd 100,000 10,000 0.58 10,000 0.43
William W. Langan 150,000 15,000 0.88 15,000 0.65
Frederick A. Marcell, Jr. 300,000 30,000 1.75 30,000 1.29
A. Brent O'Brien 50,000 5,000 0.29 5,000 0.22
Samuel H. Ramsey, III 300,000 30,000 1.75 30,000 1.29
William B. Weihenmayer 300,000 30,000 1.75 30,000 1.29
All directors and executive
officers as a group (12
persons) $2,000,000 200,000 11.68% 200,000 8.63%
In addition, the ESOP currently intends to purchase 8% of the Common
Stock sold in the Offerings for the benefit of officers and employees. Stock
options and stock grants may also be granted in the future to directors,
officers and employees upon the receipt of stockholder approval of the Company's
proposed stock benefit plans. See "Management - Management of the Bank -
Benefits" for a description of these plans.
THE REORGANIZATION AND STOCK ISSUANCE
General
The Board of Directors of the Bank adopted the Plan of Reorganization,
pursuant to which the Bank will reorganize into the federal mutual holding
company form of organization as a wholly owned subsidiary of the Company, which
in turn will be a majority-owned subsidiary of the MHC. Following receipt of all
required regulatory approvals, the approval of the members of the Bank
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entitled to vote on the Plan of Reorganization, and the satisfaction of all
other conditions precedent to the Reorganization, the Bank will consummate the
Reorganization. Following completion of the Reorganization, the Bank in its
stock form will continue to conduct its business and operations from the same
offices with the same personnel as the Bank conducted prior to the
Reorganization. The Reorganization will not affect the balances, interest rates
or other terms of the Bank's loans or deposit accounts, and the deposit accounts
will continue to be issued by the FDIC to the same extent as they were prior to
the Reorganization. The MHC initially will be capitalized with $100,000. Upon
consummation of the Reorganization, such capital will be used for general
corporate purposes.
Pursuant to the Plan of Reorganization, the Reorganization will be
effected as follows or in any other manner that is consistent with applicable
federal law and regulations and the intent of the Plan of Reorganization:
(i) the Bank will organize an interim stock savings bank as a
wholly owned subsidiary ("Interim One");
(ii) Interim One will organize an interim stock savings bank as a
wholly owned subsidiary ("Interim Two");
(iii) Interim One will organize the Company as a wholly owned
subsidiary;
(iv) the Bank will convert its charter to a federal stock savings
bank charter and Interim One will convert its charter to a
federal mutual holding company charter to become the MHC;
(v) simultaneously with step (iv), Interim Two will merge with and
into the Bank with the Bank as the resulting institution;
(vi) all of the initially issued stock of the Bank will be
transferred to the MHC in exchange for membership interests in
the MHC;
(vii) the MHC will contribute the capital stock of the Bank to the
Company, and the Bank will become a wholly-owned subsidiary of
the Company; and
(viii) contemporaneously with the Reorganization, the Company will
sell a Minority Interest in shares of Common Stock in the
Offerings.
The Company expects to receive the approval of the OTS to become a
savings and loan holding company and to own all of the common stock of the Bank.
The Company intends to contribute at least 50% of the net proceeds of the
Offerings to the Bank. The Reorganization will be effected only upon completion
of the sale of all of the shares of Common Stock to be issued pursuant to the
Plan of Stock Issuance.
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The discussion herein provides a brief summary of material aspects of
the Reorganization and Stock Issuance. The summary is qualified in its entirety
by reference to the provisions of the Plan of Reorganization and the Plan of
Stock Issuance. Copies of the Plan of Reorganization and the Plan of Stock
Issuance are available for inspection at any office of the Bank and at the OTS.
The Plan of Reorganization and the Plan of Stock Issuance are also filed as an
exhibit to the Registration Statement of which this Prospectus is a part, copies
of which may be obtained from the SEC. See "Additional Information."
THE BOARD OF DIRECTORS OF THE BANK, AND THE OTS, HAVE APPROVED THE PLAN
OF REORGANIZATION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO
VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY.
Purposes of the Reorganization
As a mutual institution, the Bank has no authority to issue shares of
capital stock and consequently has no access to market sources of equity
capital. Only by generating and retaining earnings from year to year is the Bank
able to enhance its capital position.
As a stock corporation upon consummation of the Reorganization, the
Bank will be organized in the form used by commercial banks and corporations and
by an increasing number of savings associations. The ability to raise new equity
capital through the issuance and sale of the Bank's capital stock will allow the
Bank the flexibility to enhance its capital position more rapidly than by
accumulating earnings and at times deemed advantageous by the Board of Directors
of the Bank, thereby supporting future growth and expanded operations (including
increased lending and investment activities) as business and regulatory needs
dictate. The ability to attract new capital also will assist in increasing the
capabilities of the Bank to address the needs of the communities it serves and
enhance its ability to effect acquisitions or pursue business diversification
opportunities. Thus, whereas the acquisition alternatives available to the Bank
are quite limited as a mutual institution (because of a requirement in OTS
regulations that the surviving institution in a merger involving a mutual
institution generally must be in mutual form), upon consummation of the
Reorganization the Bank will have increased ability to merge with other mutual
and stock institutions and the Company may acquire control of other mutual or
stock savings associations and retain the acquired association as a separate
subsidiary of the Company. Finally, the ability to issue capital stock will
enable the Bank to establish stock compensation plans for directors, officers
and employees, thereby granting them equity interests in the Bank and greater
incentive to improve its performance. For a description of the stock
compensation plans which will be adopted by the Bank in connection with the
Reorganization, see "Management." Although the Bank's ability to raise capital
and general business flexibility will be enhanced by organizing as a subsidiary
of a stock subsidiary of a mutual holding company, such advantages will be
limited by (i) the requirement in applicable laws and regulations that a mutual
holding company maintain a majority ownership interest in its savings
association
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holding company subsidiary and (ii) the Company's proposed offering of up to
approximately 46.0% of its to-be-outstanding Common Stock (prior to the proposed
issuance of shares to the Foundation), which will affect the Company's ability
to issue additional shares of Common Stock in the future absent additional
issuances of such stock to the MHC.
The foregoing advantages of the Reorganization also could be achieved
if the Bank were to reorganize into a wholly owned subsidiary of a stock form
holding company (a "standard conversion") rather than as a second-tier
subsidiary of a mutual holding company. A standard conversion also would free
the Bank from the restrictions on its ability to raise capital which result from
the requirement that its mutual holding company maintain a majority ownership
interest in the Company. Nevertheless, the Board of Directors of the Bank
unanimously believes that the Reorganization is in the best interests of the
Bank and its account holders. Because OTS regulations require that savings
institutions converting to stock form in a standard conversion sell all of their
to-be-outstanding capital stock rather than a minority interest in such capital
stock, however, the amount of equity capital that would be raised in a standard
conversion would be substantially more than that which could be raised in a
minority stock offering by a subsidiary of a mutual holding company, which would
make it more difficult for the Bank to maximize the return on its equity.
Finally, such a reorganization also would eliminate all aspects of the mutual
form of organization. Consummation of the Reorganization does not foreclose the
possibility of the MHC converting from mutual to stock form in the future;
however, no such action is contemplated at this time. See "Conversion of the MHC
to Stock Form."
After considering the foregoing advantages and disadvantages of the
Reorganization, as well as applicable fiduciary duties and alternative
transactions, including a reorganization into a wholly owned subsidiary of a
stock form holding company rather than as a second-tier subsidiary of a mutual
holding company, the Board of Directors of the Bank unanimously approved the
Reorganization as being in the best interests of the Bank and equitable to its
account holders.
Effects of the Reorganization
General. The Reorganization will have no effect on the Bank's present
business of accepting deposits and investing its funds in loans and other
investments permitted by law. The Reorganization will not result in any change
in the existing services provided to depositors and borrowers, or in existing
offices, management and staff. The Bank will continue to be subject to
regulation, supervision and examination by the OTS and the FDIC.
Deposits and Loans. Each holder of a deposit account in the Bank at the
time of the Reorganization will continue as an account holder in the Bank after
the Reorganization, and the Reorganization will not affect the deposit balance,
interest rate or other terms of such accounts. Each such account will be insured
by the FDIC to the same extent as before the Reorganization. Depositors in the
Bank will continue to hold their existing certificates, passbooks and other
evidence of their accounts. The Reorganization will not affect the loans of any
borrower from the Bank. The amount, interest rate, maturity, security for and
obligations under each loan will remain contractually
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fixed as they existed prior to the Reorganization. See "- Voting Rights" and "-
Liquidation Rights" below for a discussion of the effects of the Reorganization
on the voting and liquidation rights of the depositors of the Bank.
Continuity. During the Reorganization and Stock Issuance process, the
normal business of the Bank of accepting deposits and making loans will continue
without interruption. Following consummation of the Reorganization and Stock
Issuance, the Bank will continue to be subject to regulation by the OTS, and
FDIC insurance of accounts will continue without interruption. After the
Reorganization and Stock Issuance, the Bank will continue to provide services
for depositors and borrowers under current policies and by its present
management and staff.
The Board of Directors presently serving the Bank will serve as the
Board of Directors of the Bank after the Reorganization and Stock Issuance. The
Board of Directors of the Company and the MHC will consist of the individuals
currently serving on the Board of Directors of the Bank. All current officers of
the Bank will retain their positions with the Bank after the Reorganization and
Stock Issuance.
Voting Rights. Upon the completion of the Reorganization and Stock
Issuance, depositor and borrower members as such will have no voting rights in
the Bank or the Company and, therefore, will not be able to elect directors of
the Bank or the Company or to control their affairs. Currently these rights are
accorded to depositors of the Bank. Subsequent to the Reorganization and Stock
Issuance, voting rights will be vested exclusively in the stockholders of the
Company which, in turn, will own all of the stock of the Bank. Each holder of
Common Stock shall be entitled to vote on any matter to be considered by the
stockholders of the Company, subject to the provisions of the Company's Articles
of Incorporation.
As a federally chartered mutual holding company, the MHC will have no
authorized capital stock and, thus, no stockholders. The MHC will be controlled
by members of the Bank (i.e., depositors and certain borrowers), and such
members have granted proxies in favor of the Bank's management. According to
regulations of the OTS, the revocable proxies that members of the Bank have
granted to the Board of Directors of the Bank, which confer on the Board of
Directors of the Bank general authority to cast a member's vote on any and all
matters presented to the members, shall be deemed to cover the member's votes as
members of the MHC, and such authority shall be conferred on the Board of
Directors of the MHC. The Plan of Reorganization also provides for the transfer
of proxy rights to the Board of Directors of the MHC. Accordingly, the Board of
Directors of the MHC will, in effect, be able to govern the operations of the
MHC, and hence the Company, notwithstanding objections raised by members of the
MHC or stockholders of the Company, respectively, so long as the Board of
Directors has been appointed proxy for a majority of the outstanding votes of
members of the MHC and such proxies have not been revoked. In addition, all
persons who become depositors of the Bank following the Reorganization will have
membership rights with respect to the MHC. Borrowers who were borrowers of the
Bank on May 15, 1995 and whose loans continue in existence are members of the
Bank and will have membership rights in the
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MHC; all other borrowers are not members of the Bank and, thus, will not receive
membership rights in the MHC.
Liquidation Rights. In the event of a voluntary liquidation of the Bank
prior to the Reorganization, holders of deposit accounts in the Bank would be
entitled to distribution of any assets of the Bank remaining after the claims of
such depositors (to the extent of their deposit balances) and all other
creditors are satisfied. Following the Reorganization, the holder of the Bank's
common stock, i.e., the Company, would be entitled to any assets remaining upon
a liquidation, dissolution or winding-up of the Bank and, except through their
liquidation interests in the MHC, discussed below, holders of deposit accounts
in the Bank would have not interest in any such assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the MHC following consummation of the Reorganization, holders of
deposit accounts in the Bank would be entitled, pro rata to the value of their
accounts, to distribution of any assets of the MHC remaining after the claims of
all creditors of the MHC are satisfied. Stockholders of the Company will have no
liquidation or other rights with respect to the MHC in their capacities as such.
In the event of a liquidation, dissolution or winding up of the
Company, each holder of shares of the Common Stock would be entitled to receive,
after payment of all debts and liabilities of the Company, a pro rata portion of
all assets of the Company available for distribution to holders of the Common
Stock.
There currently are no plans to liquidate the Bank, the Company or the
MHC in the future.
Tax Effects. The Bank has received an opinion from its special counsel,
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., as to the material
federal income tax consequences of the Reorganization and Stock Issuance to the
Bank, the Company and the MHC, and as to the generally applicable material
federal income tax consequences of the Reorganization and Stock Issuance to the
Bank's account holders and to persons who purchase Common Stock in the Offering.
In the following discussion, "Stock Bank" refers to the Bank after the
Reorganization and Stock Issuance.
The opinion provides that, among other things, (i) the Bank's adoption
of a charter in stock form (the "Bank Conversion") will qualify as a tax-free
reorganization under Internal Revenue Code of 1986, as amended (the "Code"),
Section 368(a)(1)(F); (ii) the conversion of the Bank's wholly owned subsidiary
("Interim 1") into the MHC will qualify as a tax-free reorganization under Code
Section 368(a)(1)(F); (iii) the merger of the wholly owned subsidiary of Interim
1 ("Interim 2") into the Stock Bank with the Stock Bank as the survivor will
qualify as a tax-free reorganization under Code Section 368(a)(1)(A); (iv) no
gain or loss will be recognized by the Bank in the Bank Conversion; (v) neither
the Stock Bank nor the MHC will recognize gain or loss upon the receipt by the
Stock Bank of substantially all of the assets of the Bank in exchange for equity
interests in the MHC and the Stock Bank's assumption of the Bank's
liabilities;(vi) the MHC's basis in the stock of the Stock Bank will increase by
an amount equal to the Bank's net basis in the property transferred to the Stock
Bank; (vii) the Stock Bank's basis in the property received from the Bank will
be the
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same as the basis of such property in the hands of the Bank immediately prior to
the Reorganization and Stock Issuance; (viii) the Stock Bank's holding period
for the property received from the Bank will include the period during which
such property was held by the Bank; (ix) subject to the conditions and
limitations set forth in Code Sections 381, 382, 383, and 384 and the Treasury
regulations promulgated thereunder, the Stock Bank will succeed to and take into
account the items of the Bank described in Code Section 381(c); (x) no gain or
loss will be recognized by the depositors of the Bank on the receipt of equity
interests with respect to the MHC in exchange for their equity interests
surrendered therefor; (xi) the exchange of stock by depositors in exchange for
equity interests in the MHC will constitute a tax-free exchange of property
solely for voting "stock" pursuant to Code Section 351; (xii) each Bank
depositor's aggregate basis, if any, in the MHC equity interest received in the
exchange will equal the aggregate basis, if any, of each depositor's equity
interest in the Bank; (xiii) the holding period of the MHC equity interests
received by the depositors of Bank will include the period during which the Bank
equity interests surrendered in exchange therefor were held; (xiv) the MHC will
recognize no gain or loss upon the transfer of the Stock Bank stock to the
Company in exchange for Common Stock pursuant to Code Section 351; (xv) the
Company will recognize no gain or loss upon its receipt of Stock Bank stock from
the MHC in exchange for Common Stock; (xvi) the MHC will increase its basis in
its shares of the Common Stock by the MHC's basis in its Stock Bank stock;
(xvii) the Company will recognize no gain or loss upon the receipt of money in
exchange for shares of Common Stock; (xviii) no gain or loss will be recognized
by the Bank's account holders upon the issuance to them of accounts in the Stock
Bank in stock form immediately after the Reorganization and Stock Issuance, in
the same dollar amounts and on the same terms and conditions as their accounts
at the Bank immediately prior to the Reorganization and Stock Issuance; (xix)
the tax basis of the Common Stock purchased in the Reorganization and Stock
Issuance will be equal to the amount paid therefor increased, in the case of the
Common Stock acquired to the exercise of Subscription Rights, by the fair market
value, if any, of the Subscription Rights exercised; (xx) the holding period for
the Common Stock purchased in the Reorganization and Stock Issuance will
commence upon the exercise of such holder's Subscription Rights and otherwise on
the day following the date of such purchase; (xxi) gain or loss will be
recognized to account holders upon the receipt or exercise of Subscription
Rights in the Reorganization and Stock Issuance, but only to the extent such
Subscription Rights are deemed to have value, as discussed below.
The opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based in part
upon, and subject to the continuing validity in all material respects through
the date of the Reorganization and Stock Issuance of various representations of
the Bank and upon certain assumptions and qualifications, including that the
Reorganization and Stock Issuance are consummated in the manner and according to
the terms provided in the Plan of Reorganization and Plan of Stock Issuance.
Such opinion is also based upon the Code, regulations now in effect or proposed
thereunder, current administrative rulings and practice and judicial authority,
all of which are subject to change and such change may be made with retroactive
effect. Unlike private letter rulings received from the Internal Revenue Service
("IRS"), an opinion is not binding upon the IRS and there can be no assurance
that the IRS will not take a position contrary to the positions reflected in
such opinion, or that such opinion will be upheld by the courts if challenged by
the IRS.
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The Bank has also obtained an opinion from KPMG Peat Marwick LLP that
the income tax effects of the Reorganization and Stock Issuance under
Pennsylvania tax laws will be substantially the same as described above with
respect to federal income tax laws.
The Company and the Bank have received a letter from RP Financial
stating its belief that the subscription rights do not have any value, based on
the fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the unsubscribed
shares of Common Stock. If the subscription rights granted to eligible
subscribers are deemed to have an ascertainable value, receipt of such rights
would be taxable probably only to those eligible subscribers who exercise the
subscription rights (either as a capital gain or ordinary income ) in an amount
equal to such value, and the Company and the Bank could recognize gain on such
distribution. Eligible subscribers are encouraged to consult with their own tax
advisor as to the tax consequences in the event that such subscription rights
are deemed to have an ascertainable value. Unlike private rulings, the letter of
RP Financial is not binding on the IRS, and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding.
Establishment of the Foundation
General. In furtherance of the Bank's commitment to the communities
that it serves, the Plan of Reorganization provides that the Bank and the
Company will establish the Foundation, which will be incorporated under Delaware
law as a non-stock corporation, and will fund the Foundation with Common Stock
of the Company. By further enhancing the Bank's visibility and reputation in the
communities that it serves, the Bank believes that the Foundation will enhance
the long-term value of the Bank's community banking franchise. The Foundation
will be dedicated to charitable purposes within the communities served by the
Bank, including community development activities.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities in the
local communities served by the Bank. Traditionally, the Bank has emphasized
community lending and community development activities within the communities
that it serves. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. While
the Bank intends to continue to emphasize community lending and community
development activities following the Reorganization, such activities are not the
Bank's sole corporate purpose. The Foundation, conversely, will be completely
dedicated to community activities and the promotion of charitable causes, and
may be able to support such activities in ways that are not currently available
to the Bank. The Bank believes that the Foundation will enable the Company and
the Bank to assist their local community in areas beyond community development
and lending. The Bank believes the establishment of the Foundation will enhance
its activities under the CRA. In this regard, the Board of Directors believes
the establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Board further believes that the funding of
the Foundation with Common Stock of the Company is a means of enabling the
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communities served by the Bank to share in the growth and success of the Company
long after completion of the Reorganization. The Foundation will accomplish that
goal by providing for continued ties between the Foundation and Bank, thereby
forming a partnership with the Bank's community. The establishment of the
Foundation will also enable the Company and the Bank to develop a unified
charitable donation strategy and will centralize the responsibility for
administration and allocation of corporate charitable funds. Charitable
foundations have been formed by other financial institutions for this purpose,
among others. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending
activities. In this respect, subsequent to the Reorganization the Bank may
continue to make contributions to other charitable organizations and/or it may
make additional contributions to the Foundation.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial Board of Directors will be comprised of two members of
the Company's and the Bank's Boards of Directors (Messrs. William B. Weihenmayer
and Charles F. Kremp, 3rd) and four other individuals chosen in light of their
commitment and service to charitable and community purposes. The other persons
expected to serve as directors of the Foundation are Stewart J. Greenleaf,
Robert Abel, Joe Conti and Sandra Fields-Henley, none of whom is affiliated with
the Company or Willow Grove. There are no plans to change the size of the
Foundation's Board of Directors during the one-year period subsequent to
consummation of the Reorganization. The Bank currently intends that, for at
least the three-year period subsequent to consummation of the Reorganization,
less than a majority of the Bank's directors will also serve as directors of the
Foundation. During at least the five-year period subsequent to the
Reorganization, at least one director of the Foundation shall be a person from
the local communities served by the Bank, with the experience in local grant
making activities and who is not an officer, director or employee of the Bank
and at least one director of the Foundation shall also be a director of the
Bank. A Nominating Committee of the Foundation's Board will nominate individuals
eligible for election to the Board of Directors. The members of the Foundation,
who are comprised of its Board members, will elect the Directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee. Only
persons serving as Directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms. It is not anticipated that the
members of the Company's and the Bank's Boards of Directors who also serve as a
director of the Foundation will receive any additional compensation for serving
as a director of the Foundation. No determination has been made at this point
what, if any, compensation the other Foundation directors will receive. The
certificate of incorporation of the Foundation provides that the corporation is
organized exclusively for charitable purposes, including community development,
as set forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members. No award, grant or distribution shall be made by the
Foundation to any director, officer or employee of the Company or the Bank or
any affiliate thereof. In addition, any of such persons, to the extent that they
serve as an officer, director or employee of the Foundation will be subject to
the conflict of interest regulations of the OTS.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for
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which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's Board of Directors will
adopt such a policy upon establishment of the Foundation. As directors of a
nonprofit corporation, directors of the Foundation will at all times be bound by
their fiduciary duty to advance the Foundation's charitable goals, to protect
the assets of the Foundation and to act in a manner consistent with the
charitable purpose for which the Foundation is established. The directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company held by
the Foundation. However, it is expected that as a condition to receiving the
approval of the OTS to the Bank's Reorganization, that the Foundation will be
required to commit to the OTS that all shares of Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Company's
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that, consistent with such expected condition, the OTS would
waive this voting restriction under certain circumstances if compliance with the
voting restriction would: (i) cause a violation of the law of the State of
Delaware and the OTS determines that federal law would not preempt the
application of the laws of Delaware to the Foundation; (ii) would cause the
Foundation to lose its tax-exempt status, or cause the IRS to deny the
Foundation's request for a determination that it is an exempt organization or
otherwise have a material and adverse tax consequence on the Foundation; or
(iii) would cause the Foundation to be subject to an excise tax under Section
4941 of the Code. In order for the OTS to waive such voting restriction, the
Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the OTS that compliance with the voting requirement
would have the effect described in clauses (I), (ii) or (iii) above. Under those
circumstances, the OTS would grant a waiver of the voting restriction upon
submission of such legal opinions(s) by the Company or the Foundation that are
satisfactory to the OTS. In the event that the OTS were to waive the voting
requirement, the Directors would direct the voting of the Common Stock held by
the Foundation.
The Foundation's place of business is expected to initially be located
at the Bank's administrative offices and initially the Foundation is expected
initially to have no separate employees but will utilize the members of the
staff of the Company or the Bank. The Board of Directors of the Foundation will
appoint such officers as may be necessary to manage the operations of the
Foundation. In this regard, it is expected that the Bank will be required to
provide the OTS with a commitment that, to the extent applicable, the Bank will
comply with the affiliate restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act with respect to any transactions between the Bank and the
Foundation.
The Company intends to capitalize the Foundation with 4.0% of the
shares of Common Stock of the Company sold in the Offerings which would have a
market value of $685,000 to $927,000 ($1.1 million at the maximum, as adjusted),
based on the Purchase Price of $10.00 per share. Messrs. Weihenmayer and Kremp,
who will serve as initial directors of the Foundation, and their affiliates
intend to purchase, subject to availability, an aggregate of 40,000 shares of
Common Stock. No other director of the Foundation expects to purchase any shares
of Common Stock. The shares of Common Stock to be acquired by the Foundation,
when combined with the proposed purchases of shares of Common Stock by Messrs.
Weihenmayer and Kremp and their affiliates will total 132,690
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shares or 2.5% of the total number of shares of Common Stock to be issued and
outstanding (assuming the sale of 2,317,250 shares of Common Stock).
The Company and the Bank determined to fund the Foundation with Common
Stock rather than cash because it desired to form a bond with the communities
the Bank serves in a manner that would allow such communities to share in the
growth and success of the Company and the Bank over the long term. The funding
of the Foundation with stock also provides the Foundation with a potentially
larger endowment than if the Company contributed cash to the Foundation since,
as a stockholder, the Foundation will share in the growth and success of the
Company. As such, the contribution of Common Stock to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that the Company, if it were not making the stock donation, would
have to contribute to the Foundation in future years in order to maintain a
level amount of charitable grants and donations. Because the MHC is deemed to be
a "disqualified person" (defined under the Code), in order to avoid certain
excise tax provisions, which could be significant, the Foundation may not own
more than 2.0% of the issued and outstanding shares of Common Stock. The Bank
considered such excise tax provisions and determined that it would be prudent to
ensure that the initial contributions of Common Stock to the Foundation will
monitor the Foundation's ownership interest in Common Stock and will take
actions as may be appropriate in order to ensure continued compliance with the
safe-harbor.
The Foundation will receive working capital from any dividends that may
be paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of the
sale of any of the Common Stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average
market value of the assets held by the Foundation, except where the Board of
Directors of the Foundation determines that the failure to sell an amount of
Common Stock greater than such amount would result in a longer term reduction of
the value of the Foundation's assets and as such would jeopardize the
Foundation's capacity to carry out its charitable purposes. Upon completion of
the Reorganization and the Stock Issuance and the contribution of shares of
Common Stock to the Foundation, the Company would have 3,936,010, 4,630,600,
5,325,190 and 6,123,970 shares issued and outstanding based on the minimum,
midpoint and maximum of the Estimated Offering Range. Because the Company will
have an increased number of shares outstanding, the voting and ownership
interests of Minority Stockholders in the Company's Common Stock would be
diluted to 43.5% as compared to a 44.3% interest in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Pro Forma Data."
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created and operated for the above
charitable purposes would generally qualify as a Section 501(c)(3) exempt
organization under the Code, and further that such an organization would likely
be classified as a private foundation. This opinion presumes that the Foundation
will submit a timely request to the IRS to be recognized as an exempt
organization. As long as the Foundation files its application for recognition of
tax-exempt status within 15 months from the date of its organization, and
provided the IRS approves the application, the effective date of the
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization. The Company's and the Bank's independent tax advisor, however, has
not rendered any advice on the
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regulatory condition to the contribution which requires that all shares of
Common Stock of the Company held by the Foundation must be voted in the same
ratio as all other outstanding shares of Common Stock of the Company on all
proposals considered by stockholders of the Company. Consistent with the
expected condition, in the event that the Company or the Foundation receives an
opinion of its legal counsel that compliance with this voting restriction would
have the effect of causing the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Foundation, or
subject the Foundation to an excise tax under Section 4941 of the Code, it is
expected that the OTS would waive such voting restriction upon submission of a
legal opinion(s) by the Company or the Foundation satisfactory to the OTS. See
"- Regulatory Conditions Imposed on the Foundation."
Under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must be within reasonable limits as to amount
and purpose to be valid. Under the Code, the Company is generally allowed a
deduction for charitable contributions made to qualifying donees within the
taxable year of up to 10% of its taxable income (with certain modifications) for
such year. Charitable contributions made by the Company in excess of the annual
deductible amount will be deductible over each of the five succeeding taxable
years, subject to certain limitations. The Company and the Bank believe that the
Reorganization presents a unique opportunity to establish and fund a charitable
foundation given the substantial amount of additional capital being raised in
the Reorganization. In making such a determination, the Company and the Bank
considered the dilutive impact of the contribution of Common Stock to the
Foundation on the amount of Common Stock available to be offered for sale in the
Reorganization. Based on such consideration, the Company and Bank believe that
the contribution to the Foundation in excess of the 10% annual deduction
limitation is justified given the Bank's capital position and its earnings, the
substantial additional capital being raised in the Stock Issuance and the
potential benefits of the Foundation to the communities served by the Bank. In
this regard, assuming the sale of shares at the maximum of the Estimated
Offering Range, the Company would have pro forma stockholders' equity of $55.6
million or 13.1% of pro forma consolidated assets and the Bank's pro forma
tangible, core and total risk-based capital ratios would be 10.1% and 18.1%,
respectively. See "Regulatory Capital," "Capitalization," "Comparison of
Valuation and Pro Forma Information with No Foundation" and "Pro Forma Data."
The Company and the Bank believe that the amount of the charitable contribution
is reasonable given the Company's and the Bank's pro forma capital positions. As
such, the Company and the Bank believe that the contribution does not raise
safety and soundness concerns.
The Company and the Bank have received an opinion of their independent
tax advisors that the Company's contribution of its own stock to the Foundation
would not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal par value that the Foundation is
required to pay to the Company for such stock, subject to the annual deduction
limitation described above. The Company, however, would be able to carry forward
any unused portion of the deduction for five years following the contribution,
subject to certain limitations. The Company's and the Bank's
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independent tax advisor, however, has not rendered advice as to fair market
value for purposes of determining the amount of the tax deduction. If the
Foundation would have been established in fiscal 1998, the Company would have
received tax benefit of approximately $315,000 (based on the Bank's pre-tax
income for fiscal 1998, an assumed tax rate of 34.0% and a deduction for the
contribution of Common Stock equal to $927,000). The Company is permitted under
the Code to carry over the excess contribution over the five-year period
following the contribution to the Foundation. Assuming the close of the
Offerings at the maximum of the Estimated Price Range, the Company estimates
that all of the contribution should be deductible over the six-year period. The
Company and/or the Bank may make further contributions to the Foundation
following the initial contribution. In addition, the Bank and the Company also
may continue to make charitable contributions to other qualifying organizations.
Any such decisions would be based on an assessment of, among other factors, the
financial condition of the Company and the Bank at that time, the interests of
stockholders and depositors of the Company and the Bank, and the financial
condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that a deduction
for the charitable contribution will be allowed. In such event, the Company's
tax benefit related to the contribution to the Foundation would be expensed
without tax benefit, resulting in a reduction in earnings in the year in which
the IRS makes such a determination. See "Risk Factors-Establishment of the
Foundation."
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year to maintain its tax-exempt status. The Foundation
will be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of each
grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is expected to be subject to the following conditions being agreed to
by the Foundation in writing as a condition to receiving the OTS' approval of
the Reorganization: (i) the Foundation will be subject to examination by the
OTS; (ii) the Foundation must comply with supervisory directives imposed by the
OTS; (iii) the Foundation will operate in accordance with written policies
adopted by its Board of Directors, including a conflict of interest policy; (iv)
any shares of Common Stock held by the Foundation must be voted in the same
ratio as all other shares of Common Stock voting on all proposals considered by
stockholders of the Company; provided, however, that, consistent with the
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condition, the OTS would waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (a) cause a
violation of the law of the State of Delaware, and the OTS determines that
federal law would not preempt the application of the laws of Delaware to the
Foundation; (b) would cause the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Foundation; or (c)
would cause the Foundation to be subject to an excise tax under Section 4941 of
the Code; and (v) any shares of Common Stock subsequently purchased by the
Foundation will be aggregated with any shares repurchased by the Company or the
Bank for purposes of calculating the number of shares which may be repurchased
during the three-year period subsequent to Reorganization. In order for the OTS
to waive such voting restriction, the Company's or the Foundation's legal
counsel would be required to render an opinion satisfactory to the OTS. While
there is no current intention for the Company or the Foundation to seek a waiver
from the OTS from such restrictions, there can be no assurances that a legal
opinion addressing these issues could be rendered, or if rendered, that the OTS
would grant an unconditional waiver of the voting restriction. If the voting
restriction is waived or becomes unenforceable, the OTS may either impose a
condition that provides a certain portion of the members of the Foundation's
Board of Directors shall be persons who are not directors, officers or employees
of the Company, the Bank or any affiliate or impose such other conditions
relating to control of the Foundation's Common Stock as is determined by the OTS
to be appropriate at the time. In no event would the voting restriction survive
the sale of shares of the Common Stock held by the Foundation.
Various OTS regulations may be deemed to apply to the Foundation
including regulations regarding (i) transactions with affiliates, (ii) conflicts
of interest, (iii) capital distributions and (iv) repurchases of capital stock
within the three-year period subsequent to the Stock Issuance. Because only one
of the directors of the Company and the Bank is expected to serve as a director
of the Foundation, the Company and the Bank do not believe that the Foundation
should be deemed an affiliate of the Bank. The Company and the Bank anticipate
that the Foundation's affairs will be conducted in a manner consistent with the
OTS' conflict of interest regulations. The Bank has provided information to the
OTS demonstrating that the initial contribution of Common Stock to the
Foundation would be within the amount which the Bank would be permitted to make
as a capital distribution assuming such contribution is deemed to have been made
by the Bank.
Stock Pricing and Number of Shares to be Issued
The Plan of Reorganization requires that the purchase price of the
Common Stock must be based on the appraised pro forma market value of the Common
Stock, as determined on the basis of an independent valuation. The Bank has
retained RP Financial to make such valuation. For its services in making such
appraisal, RP Financial's fees and out-of-pocket expenses are estimated to be
$42,500. The Bank has agreed to indemnify RP Financial and any employees of RP
Financial who act for or on behalf of RP Financial in connection with the
appraisal against any and all loss, cost, damage, claim, liability or expense of
any kind (including claims under federal and state securities laws) arising out
of any misstatement or untrue statement of a material fact or an omission to
state a material fact in the information supplied by the Bank to RP Financial,
unless RP Financial is determined to be negligent or otherwise at fault.
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An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the Financial Statements. RP
Financial also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the Bank
and the economic and demographic conditions in the Bank's existing marketing
area; certain historical, financial and other information relating to the Bank;
a comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly traded mutual holding companies
located in Pennsylvania and the mid-Atlantic region; the aggregate size of the
offering of the Common Stock; the impact of the Reorganization on the Bank's net
worth and earnings potential; the proposed dividend policy of the Company and
the Bank; and the trading market for securities of comparable institutions and
general conditions in the market for such securities. In its review of the
appraisal provided by RP Financial, the Board of Directors reviewed the
methodologies and the appropriateness of the assumptions used by RP Financial in
addition to the factors enumerated above, and the Board of Directors believes
that such assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised the Company and
the Bank that in its opinion, dated September 4, 1998, as amended on October 30
and November 11, 1998, the estimated pro forma market value of the Common Stock
on a fully converted basis, assuming a contribution to a charitable foundation
in an amount equal to 4.0% of the shares sold, ranged from a minimum of $39.4
million to a maximum of $53.3 million with a midpoint of $46.3 million. The
Board of Directors of the Bank determined that the Common Stock should be sold
at $10.00 per share and that 44.3% of the to-be-outstanding shares (prior to the
contribution to the Foundation) should be offered to Minority Stockholders.
Based on the Estimated Valuation Range and the Purchase Price, the number of
shares of Common stock that the Company will issue will range from between
1,712,750 shares to 2,317,250 shares, with a midpoint of 2,015,000 shares. The
anticipated issuance of 43.5% of the shares of Common Stock sold in the Offering
to the Foundation as part of the Stock Issuance will result in shareholders
other than the MHC and the Foundation owning 43.6% of the shares of the Common
Stock outstanding at the conclusion of the Reorganization and Stock Issuance.
The remaining shares of the Company's Common Stock that are not sold in the
Offering or contributed to the Foundation will be issued to the MHC. The
Estimated Valuation Range may be amended with the approval of the OTS, if
required, or if necessitated by subsequent developments in the financial
condition of the Company and the Bank or market conditions generally, or to fill
the order of the ESOP. In the event the Estimated Valuation Range is updated to
amend the value of the Common Stock below $39.5 million or above $61.2 million
(the maximum of the Estimated Valuation Range, as adjusted by 15%), the new
appraisal will be filed with the Securities and Exchange Commission ("SEC") by
post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Company receives orders for Common
Stock in excess of $23.2 million (the maximum of the Estimated Offering Range)
and up to $26.6 million (the maximum of the Estimated Offering Range, as
adjusted by 15%), the Company may be required by the OTS to accept all such
orders. No assurances, however, can be made that the Company will receive orders
for Common Stock in excess of the maximum of the Estimated Offering Range or
that, if such orders are received,
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that all such orders will be accepted because the Company's final valuation and
number of shares to be issued are subject to the receipt of an updated appraisal
from RP Financial which reflects such an increase in the valuation and the
approval of such increase by the OTS. In addition, an increase in the number of
shares above 2,012,500 shares will first be used, if necessary, to fill the
order of the ESOP. There is no obligation or understanding on the part of
management to take and/or pay for any shares in order to complete the
Reorganization.
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
RP Financial did not independently verify the consolidated financial statements
and other information provided by the Bank, nor did RP Financial value
independently the assets or liabilities of the Bank. The valuation considers the
Bank as a going concern and should not be considered as an indication of the
liquidation value of the Bank. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing Common Stock in the Offering will thereafter be able to sell such
shares at prices at or above the Purchase Price or in the range of the foregoing
valuation of the pro forma market value thereof.
Prior to completion of the Reorganization, the maximum of the Estimated
Offering Range may be increased up to 15% and the number of shares of Common
Stock may be increased to up to 2,314,375 shares to reflect changes in market
and financial conditions or to fill the order of the ESOP, without the
resolicitation of subscribers. See "- Limitations on Common Stock Purchases" as
to the method of distribution and allocation of additional shares that may be
issued in the event of an increase in the Estimated Offering Range to fill
unfilled orders in the Subscription Offering.
No sale of shares of Common Stock in the Reorganization may be
consummated unless prior to such consummation RP Financial confirms that nothing
of a material nature has occurred which, taking into account all relevant
factors, would cause it to conclude that the Purchase Price is materially
incompatible with the estimate of the pro forma market value of a share of
Common Stock upon consummation of the Reorganization. If such is not the case, a
new Estimated Offering Range may be set and a new Subscription and Community
Offering and/or Syndicated Community Offering may be held or such other action
may be taken as the Company and the Bank shall determine and the OTS may permit
or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of Common
Stock may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares times the Purchase Price
is not below the minimum or more than 15% above the maximum of the Estimated
Offering Range. In the event market or financial conditions change so as to
cause the aggregate Purchase Price of the shares to be below the minimum of the
Estimated Offering Range or more than 15% above the maximum of such range,
purchasers will be resolicited (i.e., permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the
131
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Bank's passbook rate of interest, or be
permitted to modify or rescind their subscriptions). Any change in the Estimated
Offering Range must be approved by the OTS. If the number of shares of Common
Stock issued in the Reorganization is increased due to an increase of up to 15%
in the Estimated Offering Range to reflect changes in market or financial
conditions or to fill the order of the ESOP, persons who subscribed for the
maximum number of shares will be given the opportunity to subscribe for the
adjusted maximum number of shares. See "- Limitations on Common Stock
Purchases."
An increase in the number of shares of Common Stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Company's pro forma net income and
stockholders' equity on a per share basis while increasing pro forma net income
and stockholders' equity on an aggregate basis. A decrease in the number of
shares of Common Stock would increase both a subscriber's ownership interest and
the Company's pro forma net income and stockholders' equity on a per share basis
while decreasing pro forma net income and stockholders' equity on an aggregate
basis. See "Risk Factors - Possible Increase in Number of Shares Issued in the
Reorganization" and "Pro Forma Data."
Copies of the appraisal report of RP Financial, including any
amendments thereto, and the detailed report of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at the
main office of the Bank and the other locations specified under "Additional
Information."
Subscription Offering and Subscription Rights
In accordance with the Plan of Reorganization and the related Plan of
Stock Issuance, rights to subscribe for the purchase of Common Stock have been
granted under the Plan of Stock Issuance to the following persons in the
following order of descending priority: (1) Eligible Account Holders, (2) the
ESOP, (3) Supplemental Eligible Account Holders, (4) Other Members and (5)
directors, officers and employees of the Bank. All subscriptions received will
be subject to the availability of Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering
and to the maximum and minimum purchase limitations set forth in the Plan of
Stock Issuance and as described below under "- Limitations on Common Stock
Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (i)
$150,000 (15,000 shares) of Common Stock, (ii) one- tenth of one percent (0.10%)
of the total offering of shares of Common Stock or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Common Stock to be issued by a fraction, of which the numerator is
the amount of the Eligible Account Holder's qualifying deposit and the
denominator of which is the total amount of qualifying deposits of all Eligible
Account Holders, in each case as of the close of business on June 30, 1997
132
(the "Eligibility Record Date"), subject to the overall purchase limitations.
See "- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining after each subscribing Eligible Account Holder
has been allocated the lesser of the number of shares subscribed for or 100
shares will be allocated among the subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective eligible deposits bear to the total amount of eligible deposits of
all subscribing Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued. Subscription Rights of
Eligible Account Holders will be subordinated to the priority rights of
Tax-Qualified Employee Stock Benefit Plans to purchase shares in excess of the
maximum of the Estimated Offering Range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding June 30, 1997.
Priority 2: Employee Stock Ownership Plan. The ESOP will receive,
without payment therefor, second priority, nontransferable subscription rights
to purchase, in the aggregate, up to 10% of the Common Stock, including any
increase in the number of shares of Common Stock after the date hereof as a
result of an increase of up to 15% in the maximum of the Estimated Offering
Range. The ESOP intends to purchase 8% of the shares of Common Stock sold in the
Offering, or 137,000 shares and 185,000 shares based on the minimum and maximum
of the Estimated Offering Range, respectively. Subscriptions by the ESOP will
not be aggregated with shares of Common Stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription and
Community Offerings, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. In the event that the total number of
shares offered in the Offering is increased to an amount greater than the number
of shares representing the maximum of the Estimated Offering Range ("Maximum
Shares"), the ESOP will have a priority right to purchase any such shares
exceeding the Maximum Shares up to an aggregate of 10% of the Common Stock sold
in the Offering. See "Management - Benefits - Employee Stock Ownership Plan."
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the ESOP, each Supplemental Eligible Account Holder
will receive, without payment therefor, third priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of (i) $150,000 (15,000 shares) of Common Stock, (ii) one-tenth of one
percent (0.10%) of the total
133
offering of shares of Common Stock or (iii) 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction, of which the numerator is the amount of
the Supplemental Eligible Account Holder's qualifying deposit and the
denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders, in each case as of the close of business
on ________, 1998 (the "Supplemental Eligibility Record Date"), subject to the
overall purchase limitations. See "- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
equal to the lesser of the number of shares subscribed for or 100 shares.
Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective eligible deposits bear to the
total amount of eligible deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled, provided that no fractional
shares shall be issued.
Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP and Supplemental Eligible Account Holders, each Other Member
will receive, without payment therefor, fourth priority, nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of (i) $150,000 (15,000 shares) of Common Stock or (ii)
one-tenth of one percent (0.10%) of the total offering of shares of Common
Stock, subject to the overall purchase limitations. See "- Limitations on Common
Stock Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the ESOP
and Supplemental Eligible Account Holders, is in excess of the total number of
shares of Common Stock offered in the Offering, available shares first will be
allocated so as to permit each subscribing Other Member, to the extent possible,
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of the number of shares subscribed for or 100 shares. Thereafter, any
remaining shares will be allocated among such subscribing Other Members on a pro
rata basis in the same proportion as each Other Member's subscription bears to
the total subscriptions of all subscribing Other Members, provided that no
fractional shares shall be issued.
Priority 5: Directors, Officers and Employees. To the extent that there
are sufficient shares remaining after satisfaction of all subscriptions by
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and
Other Members, then directors, officers and employees of the Bank will receive,
without payment therefor, fifth priority, nontransferable subscription rights to
subscribe for, in this category, an aggregate of up to 15% of the shares of
Common Stock offered in the Subscription Offering. The ability of directors,
officers and employees to purchase Common Stock under this category is in
addition to rights which are otherwise available to them under the Plan
134
as they may fall within higher priority categories, and the Plan generally
allows such persons to purchase in the aggregate up to 27% of Common Stock sold
in the Offering. See "- Limitations on Common Stock Purchases."
In the event of an oversubscription in this category, subscription
rights will be allocated among the individual directors, officers and employees
on a point system basis, whereby such individuals will receive subscription
rights in the proportion that the number of points assigned to each of them
bears to the total points assigned to all directors, officers and employees,
provided that no fractional shares shall be issued. One point will be assigned
for each year of service with the Bank, one point for each salary increment of
$5,000 per annum and five points for each office presently held in the Bank,
including directorships. For information as to the number of shares proposed to
be purchased by certain of the directors and officers, see "Proposed Management
Purchases."
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00, noon, Eastern Time, on __________, 1998 (the
"Subscription Expiration Date"), unless extended for up to 45 days or for such
additional periods by the Company and the Bank as may be approved by the OTS.
The Subscription Offering may not be extended beyond _________, 2000.
Subscription rights which have not been exercised prior to the Subscription
Expiration Date (unless extended) will become void.
The Company and the Bank will not execute orders until at least the
minimum number of shares of Common Stock (1,712,750 shares) have been subscribed
for or otherwise sold. If all shares have not been subscribed for or sold within
45 days after the Subscription Expiration Date, unless such period is extended
with the consent of the OTS, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
45-day period following the Subscription Expiration Date is granted, the Company
and the Bank will notify subscribers of the extension of time and of any rights
of subscribers to modify or rescind their subscriptions.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders, Other Members and directors, officers and
employees of the Bank, the Company and the Bank anticipate that they will offer
shares pursuant to the Plan to certain members of the general public, with
preference given to natural persons residing in Montgomery and Bucks Counties,
Pennsylvania (such natural persons referred to as "Preferred Subscribers"). Such
persons, together with associates of and persons acting in concert with such
persons, may purchase up to the greater of (i) $150,000 or 15,000 shares of
Common Stock, or (ii) one-tenth of one percent (0.10%) of the total offering of
shares of Common Stock, subject to the maximum purchase limitations. See "-
Limitations on Common Stock Purchases." This amount may be increased at the sole
discretion of the Bank up to 5% (provided that any such increased amount may not
exceed the maximum purchase limit provided to subscribers in the Subscription
Offering. See "- Limitations on Common Stock
135
Purchases"). The opportunity to subscribe for shares of Common Stock in any
Community Offering category will be subject to the right of the Company and the
Bank, in their sole discretion, to accept or reject any such orders in whole or
in part either at the time of receipt of an order or as soon as practicable
following the Expiration Date. The Community Offering may be commenced at any
time subsequent to the Subscription Offering.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Community Offering, such stock
will be allocated first to each Preferred Subscriber whose order is accepted by
the Company, in an amount equal to the lesser of 100 shares or the number of
shares subscribed for by each such Preferred Subscriber, if possible.
Thereafter, unallocated shares will be allocated among the Preferred Subscribers
whose accepted orders remain unsatisfied on an equal number of shares basis per
order until all orders have been filled or the remaining shares have been
allocated, provided that no fractional shares shall be issued. Orders for Common
Stock in the Community Offering will first be filled to a maximum of 2% of the
total number of shares of Common Stock sold in the Offering and thereafter any
remaining shares shall be allocated on an equal number of shares basis per order
until all orders have been filled. If there are any shares remaining, shares
will be allocated to other members of the general public who subscribe in the
Community Offering applying the same allocation described above for Preferred
Subscribers.
Syndicated Community Offering
As a final step in the Offering, the Plan of Stock Issuance provides
that, if feasible, all shares of Common Stock not purchased in the Subscription
and Community Offerings may be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed. The Bank expects to market any shares which remain unsubscribed
after the Subscription and Community Offerings through a Syndicated Community
Offering. The Company and the Bank have the right to reject orders in whole or
part in their sole discretion in the Syndicated Community Offering. Neither Webb
nor any registered broker-dealer shall have any obligation to take or purchase
any shares of Common Stock in the Syndicated Community Offering; however, Webb
has agreed to use its best efforts in the sale of shares in the Syndicated
Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be the same price at which shares are offered and sold in the
Subscription and Community Offerings. No person will be permitted to subscribe
in the Syndicated Community Offering for more than $150,000 or 15,000 shares of
Common Stock, subject to the maximum purchase limitations. See "- Limitations on
Common Stock Purchases." This amount may be increased to up to 5% of the total
offering of shares in the Subscription Offering, provided that orders for Common
Stock in the Syndicated Community Offering will first be filled to a maximum of
2% of the total number of shares of Common Stock sold in the Offering.
Thereafter, any remaining shares will be allocated on an equal number of shares
basis per order until all orders have been filled.
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Webb may enter into agreements with broker-dealers ("Selected Dealers")
to assist in the sale of the shares in the Syndicated Community Offering,
although no such agreements exist as of the date of this Prospectus. No orders
may be placed or filled by or for a Selected Dealer during the Subscription
Offering. After the close of the Subscription Offering, Webb will instruct
Selected Dealers as to the number of shares to be allocated to each Selected
Dealer. Only after the close of the Subscription Offering and upon allocation of
shares to Selected Dealers may Selected Dealers take orders from their
customers. During the Subscription and Community Offerings, Selected Dealers may
only solicit indications of interest from their customers to place orders with
the Company as of a certain date ("Order Date") for the purchase of shares of
Common Stock. When, and if, Webb and the Bank believe that enough indications of
interest and orders have not been received in the Subscription and Community
Offerings to consummate the Reorganization, Webb will request, as of the Order
Date, Selected Dealers to submit orders to purchase shares for which they have
previously received indications of interest from their customers. Selected
Dealers will send confirmations of the orders to such customers on the next
business day after the Order Date. Selected Dealers will debit the accounts of
their customers on the "Settlement Date" which date will be three business days
from the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Settlement Date. On the Settlement Date, Selected Dealers
will remit funds to the account established by the Bank for each Selected
Dealer. Each customer's funds so forwarded to the Bank, along with all other
accounts held in the same title, will be insured by the FDIC up to $100,000 in
accordance with applicable FDIC regulations. After payment has been received by
the Bank from Selected Dealers, funds will earn interest at the Bank's passbook
rate until the consummation or termination of the Reorganization. Funds will be
promptly returned, with interest, in the event the Reorganization is not
consummated as described above.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Bank with the
approval of the OTS. See "- Stock Pricing and Number of Shares to be Issued"
above for a discussion of rights of subscribers, if any, in the event an
extension is granted.
Persons in Nonqualified States or Foreign Countries
The Bank will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the Plan of Stock Issuance reside. However, the Bank is
not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which: (a) the number of persons otherwise eligible to subscribe for
shares under the Plan of Stock Issuance who reside in such jurisdiction is
small; (b) the granting of subscription rights or the offer or sale of shares of
Common Stock to such persons would require any of the Company and the Bank or
their officers, directors or employees, under the laws of such jurisdiction, to
register as a broker, dealer, salesman or selling agent or to register or
otherwise qualify its securities for sale in such jurisdiction or to qualify as
a foreign corporation or file a consent to service of process in such
jurisdiction; and (c) such registration, qualification or filing in the judgment
of the Bank would be impracticable or unduly
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burdensome for reasons of cost or otherwise. Where the number of persons
eligible to subscribe for shares in one state is small, the Bank will base its
decision as to whether or not to offer the Common Stock in such state on a
number of factors, including but not limited to the size of accounts held by
account holders in the state, the cost of registering or qualifying the shares
or the need to register the Bank, its officers, directors or employees as
brokers, dealers or salesmen.
Limitations on Common Stock Purchases
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased in the Offering:
(1) No fewer than 25 shares of Common Stock may be purchased,
to the extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i) $150,000
or 15,000 shares of Common Stock, (ii) one-tenth of one percent (0.10%)
of the total offering of shares of Common Stock or (iii) 15 times the
product (rounded down to the next whole number) obtained by multiplying
the total number of shares of Common Stock to be issued by a fraction,
of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders, in each case as of
the close of business on the Eligibility Record Date, subject to the
overall limitation in clause (7) below;
(3) The ESOP may purchase in the aggregate up to 10% of the
shares of Common Stock sold in the Stock Issuance, including any
additional shares issued in the event of an increase in the Estimated
Offering Range; although at this time it intends to purchase only 8% of
such shares;
(4) Each Supplemental Eligible Account Holder may subscribe
for and purchase in the Subscription Offering up to the greater of (i)
$150,000 or 15,000 shares of Common Stock, (ii) one-tenth of one
percent (0.10%) of the total offering of shares of Common Stock or
(iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to
be issued by a fraction, of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all
Supplemental
Eligible Account Holders, in each case as of the close of business on
the Supplemental Eligibility Record Date, subject to the overall
limitation in clause (7) below;
(5) Each Other Member or any Person purchasing shares of
Common Stock in the Community Offering may subscribe for and purchase
in the Subscription Offering or Community Offering, as the case may be,
up to the greater of (i) $150,000 or 15,000 shares
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of Common Stock or (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Common Stock, subject to the overall limitation
in clause (7) below;
(6) Persons purchasing shares of Common Stock in the Community
Offering or Syndicated Community Offering may purchase in the Community
Offering or Syndicated Community Offering up to $150,000 or 15,000
shares of Common Stock, subject to the overall limitation in clause (7)
below;
(7) Except for the ESOP and certain Eligible Account Holders
and Supplemental Eligible Account Holders whose subscription rights are
based upon the amount of their deposits, the maximum number of shares
of Common Stock subscribed for or purchased in all categories of the
Offering by any person, together with associates of and groups of
persons acting in concert with such persons, shall not exceed $500,000
or 50,000 shares of Common Stock; and
(8) No more than 15% of the total number of shares offered for
sale in the Subscription Offering may be purchased by directors and
officers of the Bank in the fourth priority category in the
Subscription Offering. No more than 27% of the total number of shares
offered for sale in the Stock Issuance may be purchased by directors
and officers of the Bank and their associates in the aggregate,
excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, the individual amount permitted to be subscribed for may be increased
up to a maximum of 5% of the number of shares sold in the Stock Issuance. If
such amount is increased, subscribers for the maximum amount will be, and
certain other large subscribers in the sole discretion of the Bank may be, given
the opportunity to increase their subscriptions up to the then applicable limit.
The term "associate" of a person is defined to mean (i) any corporation
or other organization (other than the Company, MHC and the Bank or a
majority-owned subsidiary of the Bank) of which such person is a director,
officer or partner or is directly or indirectly the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity, provided, however, that
such term shall not include any tax-qualified employee stock benefit plan of the
Company and the Bank in which such person has a substantial beneficial interest
or serves as a trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such person, or any relative of such spouse, who either
has the same home as such person or who is a director or officer of the Bank or
any of their subsidiaries.
The term "acting in concert" is defined to mean (1) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement, or (2) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or
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other arrangement, whether written or otherwise. The Bank may presume that
certain persons are acting in concert based upon, among other things, joint
account relationships and the fact that such persons have filed joint Schedules
13D with the SEC with respect to other companies.
Marketing Arrangements
The Company and the Bank have retained Webb to consult with and to
advise the Bank, and to assist the Company, on a best efforts basis, in the
distribution of the shares of Common Stock in the Subscription and Community
Offering. The services that Webb will provide include, but are not limited to
(i) training the employees of the Bank who will perform certain ministerial
functions in the Subscription and Community Offering regarding the mechanics and
regulatory requirements of the stock offering process, (ii) managing the Stock
Information Center by assisting interested stock subscribers and by keeping
records of all stock orders, (iii) preparing marketing materials, and (iv)
assisting in the solicitation of proxies from the Bank's members for use at the
Special Meeting. For its services, Webb will receive a management fee of $40,000
and a success fee of 1.25% of the aggregate Purchase Price of the shares of
Common Stock sold in the Subscription Offering and Community Offering excluding
shares purchased by the ESOP, and officers, directors and employees of the Bank
and members of their immediate families as well as shares issued to the
Foundation. The success fee paid to Webb will be reduced by the amount of the
management fee. In the event that selected dealers are used to assist in the
sale of shares of Common Stock in the Community Offering, such dealers will be
paid a fee of up to 5.5% of the aggregate Purchase Price of the shares sold by
such dealers. The Bank has agreed to indemnify Webb against certain claims or
liabilities, including certain liabilities under the Securities Act, and will
contribute to payments Webb may be required to make in connection with any such
claims or liabilities.
Sales of shares of Common Stock will be made primarily by registered
representatives affiliated with Webb or by the broker-dealers managed by Webb.
Webb has undertaken that the shares of Common Stock will be sold in a manner
which will ensure that the distribution standards of the NYSE (round lots,
public shares, and aggregate market value) will be met. A Stock Information
Center will be established at the main office of the Bank. The Company will rely
on Rule 3a4-1 of the Exchange Act and sales of Common Stock will be conducted
within the requirements of such Rule, so as to permit officers, directors and
employees to participate in the sale of the Common Stock in those states where
the law so permits. No officer, director or employee of the Company or the Bank
will be compensated directly or indirectly by the payment of commissions or
other remuneration in connection with his or her participation in the sale of
Common Stock.
Willow Grove may utilize certain space in its offices for activities
related to the Offerings. OTS regulations prohibit securities sales activities
by the Company or the Bank unless certain OTS requirements are satisified and
the OTS does not object. Among other requirements, if the offices of the Bank or
any affiliate are utilized, no commissions, bonuses, or payments may be made to
employees (except standard compensation to securities personnel of registered
broker-dealers), no offers or sales may be made by tellers or at the teller
counter, sales activiites must be conducted in a segregated or separately
identifiable area of the Bank's offices apart from the area used by the general
public for deposit activities and offers and sales must be made only by regular,
full-time Bank employees or securities personnel who are subject to supervision
by a registered broker-dealer. In addition, subscribers must sign a
certification form acknowledging that the Common Stock is not federally insured
or guaranteed and that he or she has receivbed a copy of this prospectus and
understands the risks involved in purchasing any shares of Common Stock. The
Company and the Bank will comply with the above-described OTS regulation as well
as Federal and state securities laws.
Procedure for Purchasing Shares in the Subscription Offering
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date (unless extended) in accordance with
Rule 15c2-8 of the Exchange Act, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus.
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To purchase shares in the Subscription Offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be received
by the Bank by 12:00 noon, Eastern Time, on the Subscription Expiration Date
(unless extended). In addition, the Company and the Bank will require a
prospective purchaser to execute a certification in the form required by
applicable OTS regulations in connection with any sale of Common Stock. Order
forms which are not received by such time or are executed defectively or are
received without full payment (or appropriate withdrawal instructions) are not
required to be accepted. In addition, the Bank will not accept orders submitted
on photocopied or facsimilied order forms nor order forms unaccompanied by an
executed certification form. The Bank has the right to waive or permit the
correction of incomplete or improperly executed forms, but does not represent
that it will do so. Once received, an executed order form may not be modified,
amended or rescinded without the consent of the Bank, unless the Reorganization
has not been completed within 45 days after the end of the Subscription
Offering, unless such period has been extended.
In order to purchase shares of Common Stock in the Offerings,
subscribers must submit a properly completed order form as well as a related
certification form. The certification form is required pursuant to regulations
of the OTS. It is the Bank's understanding that the certification form is merely
to provide furhter assurance that investors have received a Prospectus, advises
investors that certain risk factors are discussed in Prospectus and that the
shares of Common Stock are not insured deposits nor are they guaranteed by the
Bank or any government agency. The certification form will be used only in the
determination whether shares of Common Stock should be issued and will not be
used by the Company or the Bank for any purpose subsequent to such issuance.
Execution of the certification form will not constitute a waiver of any rights
that an investor may have under the Securities Act of 1933.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (June 30, 1997) or the Supplemental Eligibility Record Date
(_______, 1998) and depositors as of the close of business on the Voting Record
Date (_________, 1998) must list all accounts on the stock order form giving all
names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
person, (ii) by check or money order or (iii) by authorization of withdrawal
from deposit accounts maintained with the Bank. No wire transfers will be
accepted. Interest will be paid on payments made by cash, check or money order
at the Bank's passbook rate of interest from the date payment is received until
completion or termination of the Reorganization. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Reorganization, but a
hold will be placed on such funds, thereby making them unavailable to the
depositor until completion or termination of the Reorganization.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the effective
date of the Reorganization. The Bank will waive any applicable penalties for
early withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance requirement
at the time that the funds actually are transferred under the authorization, the
certificate will be canceled at the time of the withdrawal, without penalty, and
the remaining balance will earn interest at the passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
by it at the Purchase Price upon consummation of the
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Subscription and Community Offerings, if all shares are sold, or upon
consummation of the Syndicated Community Offerings if shares remain to be sold
in such offering, provided that there is in force from the time of its
subscription until such time, a loan commitment from an unrelated financial
institution or the Company to lend to the ESOP, at such time, the aggregate
Purchase Price of the shares for which it subscribed.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Common Stock in the Subscription and Community Offerings
provided such IRAs are not maintained at the Bank. ERISA provisions and IRS
regulations require that officers, directors and 10% stockholders who use
self-directed IRA funds to purchase shares of Common Stock in the Offerings make
such purchases for the exclusive benefit of the IRAs. Any interested parties
wishing to use IRA funds for stock purchases are advised to contact the Stock
Sales Center at (215) ___- ____ for additional information.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address as may be specified in properly
completed order forms, as soon as practicable following consummation of the
Reorganization. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan of Stock Issuance or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. Federal regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase such subscription rights or shares of Common Stock prior to the
completion of the Reorganization.
The Bank will refer to the OTS any situations that it believes may
involve a transfer of subscription rights and will not honor orders believed by
it to involve the transfer of such rights.
Delivery of Certificates
Certificates representing Common Stock issued in the Stock Issuance
will be mailed by the Company's transfer agent to the persons entitled thereto
at the addresses of such persons appearing on the stock order form as soon as
practicable following consummation of the Reorganization. Any certificates
returned as undeliverable will be held by the Company until claimed by persons
legally entitled thereto or otherwise disposed of in accordance with applicable
law. Until certificates for
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Common Stock are available and delivered to subscribers, such subscribers may
not be able to sell the shares of Common Stock for which they have subscribed,
even though trading of the Common Stock may have commenced.
Required Approvals
Various approvals of the OTS are required in order to consummate the
Reorganization. The OTS has approved the Plan of Reorganization, subject to
approval by the Bank's members and other standard conditions. The Company's
holding company application is currently pending.
The Company is required to make certain filings with state securities
regulatory authorities in connection with the issuance of Common Stock in the
Offering.
Judicial Review
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves a plan of reorganization may obtain review
of such action by filing in the court of appeals of the United States for the
circuit in which the principal office or residence of such person is located, or
in the United States Court of Appeals for the District of Columbia, a written
petition praying that the final action of the OTS be modified, terminated or set
aside. Such petition must be filed within 30 days after the publication of
notice of such final action in the Federal Register, or 30 days after the
mailing by the applicant of the notice to members as provided for in 12 C.F.R.
ss. 563b.6(c), whichever is later. The further procedure for review is as
follows: A copy of the petition is forthwith transmitted to the OTS by the clerk
of the court and thereupon the OTS files in the court the record in proceeding,
as provided in Section 2112 of Title 28 of the United States Code. Upon the
filing of the petition, the court has jurisdiction, which upon the filing of the
record is exclusive, to affirm, modify, terminate, or set aside in whole or in
part, the final action of the OTS. Review of such proceedings is as provided in
Chapter 7 of Title 5 of the United States Code. The judgment and decree of the
court is final, except that they are subject to review by the Supreme Court upon
certiorari as provided in Section 1254 of Title 28 of the United States Code.
Certain Restrictions on Purchase or Transfer of Shares After the Reorganization
All shares of Common Stock purchased in connection with the
Reorganization by a director or an officer of the Company and the Bank will be
subject to a restriction that the shares not be sold for a period of one year
following the Reorganization except in the event of the death of such director
or officer or pursuant to a merger or similar transaction approved by the OTS.
Each certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that any
transfer within such time period of any certificate or record ownership of such
shares other than as provided above is a violation of the restriction. Any
shares of Common Stock issued at a later date within this one year period as a
stock dividend, stock split or otherwise with respect to such restricted stock
will be subject to the same restrictions.
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Purchases of Common Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Reorganization may be made only through a broker or dealer registered
with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of the Company's outstanding Common Stock or to certain purchases of
stock pursuant to an employee stock benefit plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of the Common Stock within one year following
consummation of the Reorganization, although the OTS under its current policies
may approve a request to repurchase shares of Common Stock following the
six-month anniversary of the Reorganization. During the second and third years
following consummation of the Reorganization, the Company may not repurchase any
shares of its Common Stock other than pursuant to (i) an offer to all
stockholders on a pro rata basis which is approved by the OTS (provided,
however, that the MHC may be excluded with the approval of the OTS); (ii) the
repurchase of qualifying shares of a director, if any; (iii) purchases in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan; or (iv) purchases that
are part of an open-market stock repurchase program not involving more than 5%
of its outstanding capital stock during a 12-month period, if the repurchases do
not cause the Bank to become undercapitalized and the Bank provides to the
Regional Director of the OTS no later than 10 days prior to the commencement of
a repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
The OTS may permit stock repurchases in excess of such amounts prior to the
third anniversary of the Reorganization if exceptional circumstances are shown
to exist.
CERTAIN RESTRICTIONS ON ACQUISITION
OF THE COMPANY AND THE BANK
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire the Company, the Bank or their
respective capital stock are described below. Also discussed are certain
provisions in the Company's Charter and Bylaws which may be deemed to affect the
ability of a person, firm or entity to acquire the Company.
Federal Law
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings association unless the OTS has been given 60 days'
prior written notice. The HOLA provides that no company may acquire "control" of
a savings institution without the prior approval of the OTS. Any company that
acquires such control becomes a savings and loan holding company subject to
registration, examination and regulation by the OTS. Pursuant to federal
regulations, control of a savings institution is conclusively deemed to have
been acquired by, among other things, the acquisition of
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more than 25% of any class of voting stock of the institution or the ability to
control the election of a majority of the directors of an institution. Moreover,
control is presumed to have been acquired, subject to rebuttal, upon the
acquisition of more than 10% of any class of voting stock, or of more than 25%
of any class of stock, of a savings institution, where certain enumerated
"control factors" are also present in the acquisition. The OTS may prohibit an
acquisition of control if (i) it would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or of the public to permit the acquisition of
control by such person. The foregoing restrictions do not apply to the
acquisition of a savings institution's capital stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security of the savings institution.
For a period of three years following consummation of the Stock
Issuance, OTS regulations generally prohibit, among other things, any person
from acquiring or making an offer to acquire, directly or indirectly, beneficial
ownership of more than 10% of the stock of the Company or the Bank without OTS
approval.
Mutual Holding Company Structure and the Company's Ownership of a Majority of
the Common Stock
For information relating to the mutual holding company form of
organization and the MHC's ownership of a majority of the Common Stock that
could discourage certain transactions which involve an actual or threatened
change in control of the Company or the Bank and perpetuate existing management,
see "Risk Factors - Factors Relating to Mutual Holding Company Structure" and
"The Reorganization."
Charter and Bylaws of the Company
The following discussion is a summary of certain provisions of the
Charter and Bylaws of the Company that relate to corporate governance. The
description is necessarily general and qualified by reference to the Charter and
Bylaws.
Classified Board of Directors. The Board of Directors of the Company is
required by the Charter and Bylaws to be divided into three classes which are as
equal in size as is possible, and one of such classes is required to be elected
annually by stockholders of the Company for three-year terms. A classified Board
of Directors promotes continuity and stability of management of the Company but
makes it more difficult for stockholders to change a majority of the directors
because it generally takes at least two annual elections of directors for this
to occur.
Authorized but Unissued Shares of Capital Stock. Following the
Offering, the Association will have authorized but unissued shares of Preferred
Stock and Common Stock. See "Description of Capital Stock." Although such shares
could be used by the Board of Directors of the Association
145
to render more difficult or to discourage an attempt to obtain control of the
Association by means of a merger, tender offer, proxy contest or otherwise, it
is anticipated that such uses will be unlikely given the MHC's ownership of a
majority of the Common Stock.
Special Meetings of Stockholders. The Company's Charter provides that
for a period of five years following consummation of the Reorganization, special
meetings of stockholders may be called only upon direction of the Company's
Board of Directors, for matters relating to changes in control of the Company or
amendments to its charter.
Absence of Cumulative Voting. The Company's Charter provides that there
shall not be cumulative voting by stockholders for the election of the Company's
directors. The absence of cumulative voting rights effectively means that the
holders of a majority of the shares voted at a meeting of stockholders (i.e.,
the MHC) may, if they so choose, elect all directors of the Company to be
selected at that meeting, thus precluding minority stockholder representation on
the Company's Board of Directors.
Restrictions on Acquisitions of Securities. The Company's Charter
provides that for a period of five years from the effective date of the Stock
Issuance, no person other than the MHC may directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of any class of the
equity security of the Company. This provision does not apply to any
tax-qualified employee stock benefit plan of the Company or to an underwriter or
member of an underwriting or selling group involving the public sale or resale
of securities of the Company or a subsidiary thereof; provided, that upon
completion of the sale or resale, no such underwriter or member of the selling
group is a beneficial owner of more than 10% of any class of equity securities
of the Company. In addition, during such five-year period, no shares
beneficially owned in violation of the foregoing percentage limitation shall be
entitled to vote in connection with any matter submitted to stockholders for a
vote.
Procedures for Stockholder Nominations. The Company's Bylaws provide
that any stockholder desiring to make a nomination for the election of directors
or a proposal for new business at a meeting of stockholders must submit written
notice to the Secretary of the Company not less than 30 or more than 60 days in
advance of the meeting. The Bylaws further provide that if a stockholder seeking
to make a nomination or a proposal for new business fails to follow the
prescribed procedures, the chairman of the meeting may disregard the defective
nomination or proposal. Management believes that it is in the best interests of
the Company and its stockholders to provide sufficient time to enable management
to disclose to stockholders information about a dissident slate of nominations
for directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations should management determine that doing so is in the best interest of
stockholders generally. Similarly, adequate advance notice of stockholder
proposals will give management time to study such proposals and to determine
whether to recommend to the stockholders that such proposals be adopted.
146
Benefit Plans
In addition to the provisions of the Company's Charter and Bylaws
described above, certain benefit plans of the Company and the Bank adopted in
connection with the Reorganization and Stock Issuance contain provisions which
also may discourage hostile takeover attempts which the Boards of Directors of
the Bank might conclude are not in the best interests of the Company, the
Company and the Bank or the Company's stockholders. For a description of the
benefit plans and the provisions of such plans relating to changes in control of
the Company or the Bank, see "Management -- Benefits."
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 25,000,000 shares of Common Stock
having a par value of $0.01 per share and 10,000,000 shares of preferred stock
having a par value of $0.01 per share (the "Preferred Stock"). The Company
currently expects to issue up to a maximum of 2,317,250 shares (2,664,838 shares
in the event that the maximum of the Estimated Offering Range is increased by
15%) of Common Stock and no shares of Preferred Stock in the Stock Issuance.
Each share of the Company's Common Stock will have the same relative rights as,
and will be identical in all respects with, each other share of Common Stock.
Upon payment of the Purchase Price for the Common Stock in accordance with the
Plan of Stock Issuance, all such stock will be duly authorized, fully paid and
nonassessable. Presented below is a description of all aspects of the Company's
capital stock which are deemed material to an investment decision with respect
to the Stock Issuance.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
Common Stock
Distributions. The Company can pay dividends if, as and when declared
by its Board of Directors, subject to compliance with limitations which are
imposed by law. See "Dividend Policy" and "Waiver of Dividends by the MHC." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. Each holder of
Common Stock will be entitled to one vote per share and will not have any right
to cumulate votes in the election of directors. Under certain circumstances,
shares in excess of 10.0% of the issued and outstanding shares of Common Stock
may be considered "Excess Shares" and, accordingly, not be entitled to vote. See
"Restrictions
147
on Acquisition of the Company and the Bank." If the Company issues Preferred
Stock, holders of the Preferred Stock may also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Reorganization and Stock Issuance -- Liquidation Rights"), all assets
of the Bank available for distribution. In the event of liquidation, dissolution
or winding up of the Company, the holders of its Common Stock would be entitled
to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Company available for distribution. If
Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Stock Issuance. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control. The Company has
no present plans to issue Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
- -------------------.
EXPERTS
The financial statements of the Bank as of June 30, 1998 and 1997, and
for each of the years in the three-year period ended June 30, 1998, have been
included in this Prospectus in reliance upon the report of KPMG Peat Marwick
LLP, independent public accountants, appearing elsewhere herein and upon the
authority of said firm as experts in accounting and auditing.
148
RP Financial has consented to the publication herein of the summary of
its report to the Bank setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Reorganization and its opinion with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the Federal income tax
consequences of the Reorganization will be passed upon for the Bank by Elias,
Matz, Tiernan & Herrick L.L.P., Washington, D.C., special counsel to the Bank
and the Company. The Pennsylvania income tax consequences of the Reorganization
will be passed upon for the Bank by KPMG Peat Marwick LLP. The federal income
tax consequences of certain matters relating to establishment of the Foundation
will be passed upon for the Bank by KPMG Peat Marwick LLP. Certain legal matters
will be passed upon for Charles Webb & Company by Stevens & Lee, Wayne,
Pennsylvania.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information, including
the Appraisal Report which is an exhibit to the Registration Statement, can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including the Company. The statements contained in this Prospectus
as to the contents of any contract or other document filed as an exhibit to the
Registration Statement summarize the provisions of such contract or other
document which are deemed material. However, such summaries are, of necessity,
brief descriptions thereof and are not necessarily complete; each such statement
is qualified by reference to such contract or document.
The Bank has filed Applications on Form MHC-1 and Form MHC-2 and an
Application H-(e)1 with the OTS with respect to the Reorganization and Stock
Issuance. This Prospectus omits certain information contained in those
applications. The Applications may be examined at the principal office of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the Northeast Regional
Office of the OTS located at 10 Exchange Place, 18th Floor, Jersey City, New
Jersey 07302.
In connection with the Reorganization, the Company will register its
Common Stock with the SEC under Section 12 of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the
149
Plan, the Company has undertaken that it will not terminate such registration
for a period of at least three years following the Reorganization.
A copy of the Plan of Reorganization and Plan of Stock Issuance and the
Charter and Bylaws of the Company, the Bank and the MHC are available without
charge from the Bank. Requests for such information should be directed to:
Stockholder Relations, Willow Grove Bank, Welsh and Norristown Roads, Maple
Glen, Pennsylvania 19002.
150
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants............................................ F-1
Statements of Financial Condition as of June 30, 1998 and 1997...................... F-2
Statements of Operations for the Years Ended June 30, 1998, 1997
and 1996........................................................................ 55
Statements of Changes in Equity for the Years Ended June 30,
1998, 1997 and 1996............................................................. F-3
Statements of Cash Flows for the Years Ended June 30, 1998, 1997
and 1996........................................................................ F-4
Notes to Financial Statements....................................................... F-5
All schedules are omitted as the required information is not applicable or the
information is presented in the Financial Statements.
The financial statements of Willow Grove Bancorp, Inc. have been omitted because
Willow Grove Bancorp, Inc. has not yet issued any stock, has no assets or
liabilities, and has not conducted any business other than of an organizational
nature.
151
[LETTERHEAD OF PEAT MARWICK LLP]
Independent Auditors' Report
The Board of Directors
Willow Grove Bank:
We have audited the accompanying statements of financial condition of Willow
Grove Bank (the Bank) as of June 30, 1998 and 1997, and the related statements
of operations, changes in equity, and cash flows for each of the years in the
three-year period ended June 30, 1998. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted audited standards.
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 financial statements referred to above present fairly, in
all material respects, the financial position of Willow Grove Bank as of June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended June 30, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
August 13, 1998
Philadelphia, Pennsylvania
F-1
WILLOW GROVE BANK
Statements of Financial Condition
June 30, 1998 and 1997
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
Cash on hand and non-interest bearing deposits $2,932 $1,604
Interest bearing deposits 15,359 2,600
------ -----
Total cash and cash equivalents 18,291 4,204
Assets available for sale:
Securities (amortized cost of $47,984 in 1998 and
$46,248 in 1997) 48,111 45,766
Loans 12,152 6,173
Securities held to maturity (market
value of $3,998 in 1997) - 3,999
Loans (net of allowance for loan losses of $2,665
in 1998 and $1,678 in 1997) 315,705 284,596
Accrued income receivable 2,109 1,937
Real estate held for investment, net - 180
Property and equipment, net 4,772 3,824
Intangible assets 2,360 2,770
Other assets 1,874 1,230
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $405,374 $354,679
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity
- ---------------------------------------------------------------------------------------------------------------------------
Deposits $340,793 $309,726
Notes payable - 500
Federal Home Loan Bank advances 21,000 6,000
Advance payments from borrowers for taxes 4,481 4,196
Accrued interest payable 389 288
Other liabilities 2,766 847
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities $369,429 $321,557
Commitments and contingencies (note 11)
Retained earnings (substantially restricted) 35,865 33,420
Net unrealized gain (loss) on securities available 80 (298)
for sale, net of taxes
- ---------------------------------------------------------------------------------------------------------------------------
Total Equity $35,945 $33,122
Total Liabilities and Equity $405,374 $354,679
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-2
WILLOW GROVE BANK
Statements of Changes in Equity
Years ended June 30, 1998, 1997, and 1996
Net
Unrealized
Gain (Loss)
On Securities
Available
Retained for Sale Total
(Dollars in thousands) Earnings (net of taxes) Equity
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $28,043 $377 $28,420
Change in net unrealized gain on securities available for - ($1,048) ($1,048)
sale, net of taxes
Net income $3,002 - $3,002
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $31,045 ($671) $30,374
- -------------------------------------------------------------------------------------------------------------------
Change in net unrealized loss on securities available for
sale, net of taxes - $373 $373
Net income $2,375 - $2,375
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $33,420 ($298) $33,122
- -------------------------------------------------------------------------------------------------------------------
Change in net unrealized gain on securities available for
sale, net of taxes - $378 $378
Net income $2,445 - $2,445
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $35,865 $80 $35,945
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-3
WILLOW GROVE BANK
Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities:
Net income $2,445 $2,375 $3,002
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 453 313 266
Amortization of premium and accretion of discount, net 85 46 81
Amortization of intangible assets 410 410 410
Provision for loan losses 993 185 210
Loss (gain) on sale of real estate held for investment 25 (16) (314)
Loss (gain) on sale of loans available for sale (69) (29) 66
(Gain) loss on sale of securities available for sale 105 8 (564)
Decrease in deferred loan fees (385) (59) (311)
Increase in accrued income receivable (172) (272) (151)
Decrease in real estate held for investment - 24 2
Increase in other assets (147) (10) (220)
Increase (decrease) in accrued interest payable 101 - (144)
Deferred income tax expense (benefit) (738) 30 199
Increase (decrease) in other liabilities 1,919 733 (419)
Originations and purchases of loans available for sale (36,396) (29,127) (37,211)
Proceeds from sale of loans available for sale 30,486 26,039 38,343
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ($885) $650 $3,245
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans ($31,706) ($39,323) ($29,966)
Purchase of securities available for sale (55,878) (14,296) (1,100)
Purchase of securities held to maturity - (3,999) -
Proceeds from maturities and calls of securities 3,999 - -
held to maturity
Proceeds from sales and calls of securities available 53,270 10,067 600
for sale
Principal repayments of securities available for sale 682 9,170 4,621
Principal repayments of securities held to maturity - - 3,075
Proceeds from sale of real estate held for investment 155 16 314
Purchase of property and equipment, net (1,401) (1,234) (895)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ($30,879) ($39,599) ($23,351)
- ------------------------------------------------------------------------------------------------------------------------------------
F-4
WILLOW GROVE BANK
Statements of Cash Flows, Continued
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits $31,067 $42,030 $30,050
Net increase (decrease) in FHLB advances with 11,000 (5,000) (32,000)
original maturity less than 90 days
Net increase (decrease) in FHLB advances with 4,000 11,000 30,500
original maturity greater than 90 days
Repayment of FHLB advances with original maturity - (10,120) (11,000)
greater than 90 days
Net increase (decrease) in advance payments from 284 461 (33)
borrowers for taxes
Issuance (repayment) of notes payable (500) 500 -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $45,851 $38,871 $17,517
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $14,087 ($78) ($2,589)
Cash and cash equivalents:
Beginning of year $4,204 $4,282 $6,871
- -----------------------------------------------------------------------------------------------------------------------
End of year $18,291 $4,204 $4,282
- -----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash and cash flow information:
Interest paid $14,966 $13,718 $12,513
Income taxes paid $1,854 $1,109 $1,595
- -----------------------------------------------------------------------------------------------------------------------
Noncash items:
Change in unrealized gain (loss) on securities available
for sale (net of taxes of $233, $229 and $378 $373 ($1,048)
$633) in 1998, 1997 and 1996, respectively
Securities transferred from held to maturity to
assets available for sale (see note 3) - - $54,739
Loans transferred from loans available for sale to
loans receivable - $2,089 $3,028
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-5
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Description of Business
Willow Grove Bank (the Bank) provides a full range of banking services
through its seven branches in Dresher, Willow Grove, Maple Glen,
Warminster (2), Hatboro and Huntingdon Valley, Pennsylvania. All of the
branches are full-service and offer commercial and retail products.
These products include checking accounts (interest and non-interest
bearing), savings accounts, certificates of deposit, commercial and
consumer loans, real estate loans, and home equity loans. The Bank is
subject to competition from other financial institutions and other
companies that provide financial services. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The Bank has prepared its accompanying financial statements in
accordance with generally accepted accounting principles (GAAP) and
general practice within the banking industry. Certain amounts in prior
years have been reclassified for comparative purposes. Such
reclassification had no effect on net income.
In preparing the financial statements, the Bank is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenue and
expense for the period. Actual results could differ significantly from
those estimates. A material estimate that is particularly susceptible
to significant change in the near-term relates to the determination of
the allowance for loan losses. Management believes that the allowance
for loan losses is adequate.
Risks and Uncertainties
In the normal course of its business, the Bank 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 Bank is subject to interest rate risk to the degree
that its interest-bearing liabilities mature or reprice at different
speeds, or on different bases from its interest-earning assets. The
Bank's primary credit risk is the risk of default on the Bank's loan
portfolio that results from the borrowers inability or unwillingness to
make contractually required payments. The Bank's lending activities are
concentrated in Pennsylvania. The largest concentration of the Bank's
loan portfolio is located in Eastern Pennsylvania. The ability of the
Bank'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 Bank, the valuation of loans held for sale, securities
available for sale and mortgage servicing assets. The Bank is subject
to certain regulations as further described herein and in note 12.
Compliance with regulations causes the Bank to incur significant costs.
In addition, the possibility of future changes to such regulation
presents the risk that future costs will be incurred which may
materially impact the Bank.
Year 2000 Issues
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date
after December 31, 1999 (the "Year 2000 Issue"). The erroneous date can
be interpreted in a number of different ways; typically, the year 2000
is interpreted as the year 1900. Correctly identifying the year 2000 as
a leap year may also be an issue. These misidentifications could result
in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions, track important customer account information,
provide convenient access to this information, or engage in normal
business operations.
F-6
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
In order to ready for the year 2000, the Bank has developed a Year 2000
Action and Assessment Plan (the "Action Plan") which was presented to
the Board of Directors during February 1998. The Action Plan was
developed using the guidelines outlined in the Federal Financial
Institutions Examination Council's "The Effect of 2000 on Computer
Systems." The Bank's Board of Directors assigned responsibility for the
Action Plan to the Bank's Year 2000 Committee (the "Committee") which
reports to the Board of Directors on a quarterly basis. The Action Plan
recognizes that the Bank's operating, processing and accounting
operations are computer reliant and could be affected by the Year 2000
Issue. The Bank is primarily reliant on third party vendors for its
computer output and processing, as well as other significant functions
and services (i.e., securities, safekeeping services, securities
pricing information, etc.). The Year 2000 Committee is currently
working with these third party vendors to assess their year 2000
readiness. The Bank also has commenced testing its data processing
systems for Year 2000 preparedness. Based upon the initial assessment,
management presently believes that with planned modifications to
existing software and hardware and planned conversions to new software
and hardware, the Bank's third party vendors are taking the appropriate
steps to ensure critical systems will function property. The Bank
currently expects such modifications and conversions and related
testing to be completed by December 31, 1998.
The Year 2000 Issue also affects certain of the Bank's customers,
particularly in the areas of access to funds and additional
expenditures to achieve compliance. The Bank has engaged in a program
of contacting its commercial customers regarding the customer's
awareness of the Year 2000 Issue.
The Bank has completed its own company-wide Year 2000 contingency plan.
Individual contingency plans concerning specific software and hardware
issues have been formulated for the specific departments of the Bank.
To the extent the Bank's systems are not fully Year 2000 compliant,
there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a materially adverse
effect on the Bank's business, financial condition, results of
operations and business prospects. Further, any Year 2000 failure on
the part of the Bank's customers could result in additional expense or
loss to the Bank.
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 Bank is required to maintain certain daily average balances in
accordance with Federal Reserve Bank requirements. The reserve balances
maintained in accordance with such requirements at June 30, 1998 and
1997 were $75,000 and $75,000, respectively.
Loans Available 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
operations. Loans transferred from loans available for sale to loans
receivable are transferred at the lower of cost or market value at the
date of transfer.
F-7
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
Securities
The Bank divides its securities portfolio into two segments: (a) held
to maturity and (b) available for sale. Securities in the held to
maturity category are accounted for at cost, adjusted for amortization
of premiums and accretion of discounts, using the level yield method,
based on the Bank's intent and ability to hold the securities until
maturity. Marketable securities included in the available for sale
category are accounted for at fair value, with unrealized gains or
losses, net of taxes, being reflected as adjustments to equity. The
fair value of marketable securities available 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.
At the time of purchase, the Bank 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 Bank
believes may be involved in interest rate risk, liquidity, or other
asset/liability management 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
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 that management
considers adequate to provide for inherent loan losses based on an
evaluation of known and inherent risks in the loan portfolio.
Management's judgment is based upon periodic evaluation of the
portfolio, past loss experience, current economic conditions, and other
relevant factors. While management uses the best information available
to make such evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on
their judgment of information available to them at the time of their
examination.
A loan is considered to be impaired when, based on current information,
it is probable that the company will not receive all amounts due in
accordance with the contractual terms of the loan agreement. For
purposes of applying the measurement criteria for impaired loans, the
Bank excludes large groups of smaller balance homogeneous loans,
primarily consisting of residential real estate and consumer loans, as
well as commerical loans with balances of less than $100,000. Interest
income recognition on impaired loans ceases and any accrued interest is
reversed. Cash receipts on impaired loans are applied to principal.
Impaired loans are charged off when the Bank determines that
foreclosure is probable, and the fair value of the collateral is less
than the recorded investment of the impaired loan.
Mortgage Servicing Rights
The Bank 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 operations. There is no
impairment in the mortgage servicing rights at June 30, 1998 and 1997.
F-8
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
Real Estate Owned
Real estate acquired through foreclosure is recorded at the lower of
cost or fair value less estimated selling costs. Costs of holding
foreclosed property are usually capitalized to the extent that carrying
value does not exceed fair value less estimated selling costs. Holding
costs are charged to expense. Gains and losses on such sales are
charged to operations as incurred. There was no real estate owned as of
June 30, 1998 and 1997.
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 using the
level yield method over the contractual life of the related loans as an
adjustment of the yield on the loans.
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 Bank 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 Bank computes depreciation and
amortization using the straight-line method over the estimated useful
lives of the assets which range from 5 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 goodwill, which
represents the excess cost over fair value of assets acquired and
liabilities assumed. The core deposit intangible is being amortized to
expense over a ten-year life on an accelerated basis and goodwill is
being amortized to expense using the straight-line method over a period
of fifteen years. The carrying amount of intangible assets at June 30,
1998 and 1997 is net of accumulated amortization of $1.7 million and
$1.3 million, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the 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.
F-9
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
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.
Recent Accounting Pronouncements
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. According to the statement, all items of
comprehensive income are to be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. Along with net income, examples of
comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on available-for-sale securities,
changes in the market value of a futures contract that qualifies as a
hedge of an asset reported at fair value, and minimum pension liability
adjustments. Currently, the comprehensive income of the Bank would
consist primarily of net income and unrealized holding gains and losses
on available-for-sale securities. This statement becomes effective for
fiscal years beginning after December 15, 1997.
Disclosures About Segments of an Enterprise and Related Information
In June 1997 the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement, which
supersedes SFAS No. 14, requires public companies to report financial
and descriptive information about their reportable operating segments
on both an annual and interim basis. SFAS No. 131 mandates disclosure
of a measure of segment profit/loss, certain revenue and expense items
and segment assets. In addition, the statement requires reporting
information on the entity's products and services, countries in which
the entity earns revenues and holds assets, and major customers. This
statement requires changes in disclosures only and would not affect the
financial condition operating results or equity of the Bank. This
statement becomes effective for fiscal years beginning after December
15, 1997.
Employer's Disclosures About Pensions and Other Post Retirement
Benefits
In February 1998 the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Post Retirement Benefits." This statement
revises employer's disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of
those plans. It standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer useful. This
statement requires changes in disclosures only and would not affect the
financial condition, operating results, or equity of the Bank. This
statement becomes effective for fiscal years beginning after December
31, 1997.
Accounting for Derivative Instruments and Hedging Activities
In June 1998 the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial condition and measure
those instruments at fair value. The
F-10
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated
as (a) a hedge of certain exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of an exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of a foreign currency exposure. This
Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier adoption is permitted. The
Company has not yet determined the impact, if any, of this Statement,
including its provisions for the potential reclassifications of
investment securities, on operations, financial condition, and equity.
However, the Company currently has no derivatives covered by this
statement and currently conducts no hedging activities.
F-11
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(2) Securities Available for Sale
Securities available for sale at June 30, 1998 and 1997 consisted of
the following (dollars in thousands):
1998
---------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- --------------------------------------------------------------------------------------------------------------------
Equity securities:
Mutual fund $7,010 - ($25) $6,985
Federal Home Loan Mortgage 100 $1 - 101
Corporation preferred stock
Federal Home Loan Mortgage 89 5 - 94
Corporation common stock
Federal National Mortgage 8 16 - 24
Association stock
Federal Home Loan Bank 2,733 - - 2,733
of Pittsburgh stock
U.S. Government and government 20,004 30 (35) 19,999
agency securities (matures
within six months)
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 3 - - 3
Federal National Mortgage
Association 13,532 112 (100) 13,544
Government National
Mortgage Association 4,405 127 - 4,532
Municipal security 100 - (4) 96
- --------------------------------------------------------------------------------------------------------------------
Total $47,984 $291 ($164) $48,111
- --------------------------------------------------------------------------------------------------------------------
1997
---------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- --------------------------------------------------------------------------------------------------------------------
Equity securities:
Mutual fund $4,010 - - $4,010
Federal Home Loan Mortgage
Corporation preferred stock 100 1 - 101
Federal Home Loan Mortgage
Corporation common stock 8 10 - 18
Federal Home Loan Bank
of Pittsburgh stock 2,733 - - 2,733
U.S. Government and government
agency securities (matures
within six months) 7,009 42 (1) 7,050
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 7,135 - (204) 6,931
Federal National Mortgage
Association 21,877 - (421) 21,456
Government National
Mortgage Association 3,376 91 - 3,467
- -------------------------------------------------------------------------------------------------------------------
Total $46,248 $144 ($626) $45,766
- -------------------------------------------------------------------------------------------------------------------
F-12
(Continued}
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(2) Continued
Proceeds from sales and calls of securities for the years ended June
30, 1998, 1997 and 1996 were $53.3 million, $10.1 million and $600,000,
respectively. Gross gains of $24,000, $44,000 and $564,000 were
realized in 1998, 1997 and 1996, respectively. There were gross losses
of $129,000 and $52,000 in 1998 and 1997 respectively, and no gross
losses in 1996.
Accrued interest receivable on securities amounted to $492,000 and
$395,000 at June 30, 1998 and 1997, respectively.
The unamortized premiums on mortgage-related securities amounted to
$257,000 and $253,000 as of June 30, 1998 and 1997, respecively. The
unearned discount on mortgage-related securities amounted to $1,000 and
$7,000 as of June 30, 1998 and 1997, respectively.
The amortized cost and estimated fair value of securities available for
sale at June 30, 1998, by contractual maturity, are shown below.
Maturing Maturing
after one after 5
Maturing year but years but Maturing
within one within within 10 after 10
(Dollars in thousands) year 5 years years years Total
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Gov't/Gov't agency securities - $1,005 $7,001 $11,993 $19,999
Municipal securities:
PA school district - - - 96 96
-------------------------------------------------------------------------------
Total debt securities $1,005 $7,001 $12,089 $20,095
Equity securities $9,937
Mortgage backed securities $18,079
-------------------------------------------------------------------------------
Total securities at fair value - $1,005 $7,001 $12,089 $48,111
===============================================================================
Total securities at amortized cost - $1,000 $7,004 $12,100 $47,984
===============================================================================
Weighted average yield 6.75% 6.47%
The Bank must maintain stock as a member of the Federal Home Loan Bank
of Pittsburgh (FHLB) of $2.7 million and $2.6 million as of June 30,
1998 and 1997, respectively.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Substantially all of the U.S.
Government and Government agency securities are callable within one
year. Weighted average yields are based on market value.
As described in note 10, certain securities available for sale are
maintained to collateralize advances from the FHLB.
F-13
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(3) Securities Held to Maturity
In December 1995 the Bank's management transferred $54.7 million of
investments and mortgage-backed securities classified as held to
maturity to the assets available for sale portfolio, as permitted by
the FASB, at a net unrealized gain of $242,000. As of June 30, 1997,
the Bank classified certain government securities as held-to-maturity
investments. The investment securities held at June 30, 1997 matured
during fiscal year 1998 and no investments were classified as
held-to-maturity at June 30, 1998. Investment securities at June 30,
1997 consisted of the following:
1997
- -------------------------------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized market
cost gains losses value
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Investments:
U.S. Government and
Government Agency
Securities $3,999 $4 ($5) $3,998
- -------------------------------------------------------------------------------------------------------
(4) Loans
Loans receivable as of June 30, 1998 and 1997 consisted of the
following:
- --------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
First mortgage loans:
One-to-four family $230,980 $230,659
Multiple family and commercial 31,978 23,141
Construction 4,771 3,776
- --------------------------------------------------------------------------------------------------------------
Total real estate loans $267,729 $257,576
Consumer loans:
Home equity loans and lines of credit $41,366 $25,553
Automobile 898 940
Education 2,501 1,459
Unsecured lines of credit and loans 1,338 316
Other 193 209
- --------------------------------------------------------------------------------------------------------------
Total consumer loans $46,296 $28,477
Commercial loans and leases $5,437 $1,698
- --------------------------------------------------------------------------------------------------------------
Total loans $319,462 $287,751
Less:
Allowances for loan losses 2,665 1,678
Deferred loan origination fees 1,092 1,477
- --------------------------------------------------------------------------------------------------------------
Total loans, net $315,705 $284,596
- --------------------------------------------------------------------------------------------------------------
As described in note 10, certain loans are maintained to collateralize
advances from the FHLB.
F-14
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(4) Continued
Included in loans receivable are loans on nonaccrual status in the
amounts of $1.3 million and $1.9 million at June 30, 1998 and 1997,
respectively. Interest income that would have been recognized on such
nonaccrual loans during the years ended June 30, 1998, 1997 and 1996
had they been current in accordance with their original terms is
$90,000, $111,000 and $99,000, respectively. Interest income that was
recognized on these nonaccrual loans during the years ended June 30,
1998, 1997 and 1996 totaled $46,000, $15,000 and $117,000,
respectively.
As of June 30, 1998 and 1997, the Bank had impaired loans with a total
recorded investment of $96,000 and $1.3 million, respectively, and an
average recorded investment for the years ended June 30, 1998, 1997 and
1996 of $464,000, $1.6 million and $1.7 million, respectively. As of
June 30, 1998 and 1997, the amount of recorded investment in impaired
loans for which there is a related allowance for credit losses and the
amount of related allowance is $96,000 and $1.3 million., respectively,
and $10,000 and $135,000, respectively. There were no impaired loans
for which there was no related allowance for credit losses at June 30,
1998 and 1997. No cash was collected on these impaired loans during the
year ended June 30, 1998, 1997, and 1996. No interest income was
recognized on such loans during the year ended June 30, 1998, 1997 and
1996.
The following is a summary of the activity in the allowance for loan
losses for the years ended June 30, 1998, 1997, and 1996:
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of year $1,678 $1,938 $1,728
Provision for loan losses 993 185 210
Charge-offs (6) (445) -
Recoveries - - -
- --------------------------------------------------------------------------------------------------------------
Balance, end of year $2,665 $1,678 $1,938
- --------------------------------------------------------------------------------------------------------------
(5) Mortgage Servicing Activity
A summary of mortgage servicing rights activity follows:
- ----------------------------------------------------------------------------------------------------------------
Years ended June 30,
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Balance, beginning of year $213 - -
Originated servicing rights 144 265 -
Amortization (106) (52) -
- ----------------------------------------------------------------------------------------------------------------
Balance, end of year $251 $213 -
- ----------------------------------------------------------------------------------------------------------------
F-15
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(5) Continued
At June 30, 1998, 1997, and 1996, the Bank serviced loans for others of
$66.4 million, $58.8 million, and $34.8 million, respectively. Loans
serviced by others for the Bank as of June 30, 1998, 1997, and 1996
were $2.9 million, $3.5 million, and $3.8 million, respectively.
(6) Deposits
Deposit balances by type with related interest rates consisted of the
following at June 30, 1998 and 1997:
- ----------------------------------------------------------------------------------------------------------------
1998 1997
--------------------------------- ------------------------------
Percent Percent
Amount of Total Amount of Total
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Savings accounts (passbook, $40,225 11.8% $36,373 11.7%
statement, clubs)
Money market accounts 20,487 6.0 19,715 6.4
Certificates of deposit less than 193,533 56.8 181,845 58.7
$100,000
Certificates of deposit greater than 38,469 11.3 34,982 11.3
$100,000 (1)
NOW accounts 25,638 7.5 23,527 7.6
Non-interest bearing deposits 22,441 6.6 13,284 4.3
- ---------------------------------------------------------------------------------------------------------------
$340,793 100.0% $309,726 100.0%
- ---------------------------------------------------------------------------------------------------------------
(1) Deposit balances in excess of $100,000 are not federally insured.
While the certificates frequently are renewed at maturity rather than
paid out, a summary of certificates by contractual maturity at June 30,
1998 is as follows:
Years ended June 30,
-----------------------------------------------------------
(Dollars in thousands)
1999 $130,322
2000 50,945
2001 33,246
2002 4,633
2003 9,515
2004 and thereafter 3,341
-----------------------------------------------------------
$232,002
-----------------------------------------------------------
F-16
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(6) Continued
Interest on deposits for the years ended June 30, 1998, 1997, and 1996
consisted of the following:
1998 1997 1996
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
Savings accounts $787 $768 $745
NOW accounts 916 803 721
Certificates 12,833 11,653 10,132
- ----------------------------------------------------------------------------------------
Total $14,536 $13,224 $11,598
- ----------------------------------------------------------------------------------------
(7) Property and Equipment
- ----------------------------------------------------------------------------------------------------
Depreciable June 30,
-------------------------------------
Lives 1998 1997
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Land $1,323 $1,059
Buildings 15 to 40 yrs. $3,928 $3,191
Furniture, fixtures, and equipment 5 to 7 yrs. $2,430 $2,030
- ----------------------------------------------------------------------------------------------------
Total $7,681 $6,280
Less accumulated depreciation ($2,909) ($2,456)
- ----------------------------------------------------------------------------------------------------
Property and equipment, net $4,772 $3,824
- ----------------------------------------------------------------------------------------------------
Amounts charged to operating expense for depreciation for the years
ended June 30, 1998, 1997 and 1996 amounted to $453,000, $313,000 and
$266,000, respectively.
(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. The repeal of the use of
this method is effective for tax years beginning after December 31,
1995. Prior to the change in law, the Bank had qualified under the
provisions of the Internal Revenue Code which permitted it to deduct
from taxable income an allowance for bad debts based on 8% of taxable
income.
Upon repeal, the Bank is required to recapture into income, over a
six-year period, the portion of its tax bad debt reserves that exceed
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 Bank ceases to qualify as a bank for federal income
tax purposes, are restricted with respect to certain distributions. The
Bank's total tax bad debt reserves at June 30, 1998 are approximately
$8.6 million, of which $6.2 million represents the base year amount and
$2.4 million is subject to recapture. The Bank has previously recorded
a deferred tax liability for the amount to be recaptured; therefore,
this recapture did not impact the statement of operations.
F-17
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(8) Continued
Income tax expense (benefit) for the years ended June 30, 1998, 1997
and 1996 consisted of the following:
- --------------------------------------------------------------------------------------------
Current Deferred Total
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
1998:
Federal $1,873 ($738) $1,135
State 232 -- 232
- --------------------------------------------------------------------------------------------
$2,105 ($738) $1,367
- --------------------------------------------------------------------------------------------
1997:
Federal $1,279 $30 $1,309
State 239 - 239
- --------------------------------------------------------------------------------------------
$1,518 $30 $1,548
- --------------------------------------------------------------------------------------------
1996:
Federal $1,220 $199 $1,419
State 325 - 325
- --------------------------------------------------------------------------------------------
$1,545 $199 $1,744
- --------------------------------------------------------------------------------------------
The expense for income taxes differed from that computed at the
statutory federal corporate rate for the years ended June 30, 1998,
1997 and 1996 as follows:
- ---------------------------------------------------------------------------------------------------------------
1998 1996 1997
--------------------- -------------------- ---------------------
Percentage Percentage Percentage
of pretax of pretax of pretax
Amount income Amount income Amount income
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
At statutory rate $1,296 34.0% $1,334 34.0% $1,614 34.0%
Adjustment resulting from:
State tax, net of federal
tax benefit 152 4.0 158 4.0 214 4.5
Low income housing tax credits (29) (0.6) (11) (0.3) (18) (0.4)
Other (52) (1.5) 67 1.7 (66) (1.4)
- ---------------------------------------------------------------------------------------------------------------
Income tax expense per
statements of operations $1,367 35.9% $1,548 39.4% $1,744 36.7%
- ---------------------------------------------------------------------------------------------------------------
F-18
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(8) Continued
Significant deferred tax assets and liabilities of the Bank as of June
30, 1998 and 1997 are as follows:
1998 1997
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred loan fees $371 $502
Retirement plan reserves 271 -
Employee benefits 88 -
Other reserves 34 -
Intangible asset amortization 249 205
Capital loss carryover 85 -
Charitable contributions 107 33
Uncollected interest 45 41
Reserve for land held for investment - 77
Book bad debt reserves 906 571
Unrealized loss on securities available for sale - 189
- --------------------------------------------------------------------------------------
Gross deferred tax assets $2,156 $1,618
- --------------------------------------------------------------------------------------
Unrealized gain on securities available for sale ($51) -
Depreciation - (28)
Tax bad debt reserves in excess of base year (826) (826)
Investment in Joint Venture 4 6
Prepaid expenses (35) (32)
Originated mortgage servicing rights (85) (73)
- --------------------------------------------------------------------------------------
Gross deferred tax liabilities ($993) ($953)
- --------------------------------------------------------------------------------------
Net deferred tax asset $1,163 $665
- --------------------------------------------------------------------------------------
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 Bank
will realize the benefits of these deferred tax assets.
(9) Benefit Plans
The Bank has a money purchase pension plan to which the Bank
contributes for all eligible employees, 7.5% of their base salary. Such
contributions were $182,000, $138,000, and $124,000 for the years ended
June 30, 1998, 1997 and 1996, respectively.
The Bank 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. The Bank matches fifty cents for every dollar contributed by the
employees to this plan. Such contributions were $79,000, $66,000, and
$59,000 for the years ended June 30, 1998, 1997, and 1996,
respectively.
Effective June 30, 1998, the Bank adopted non-qualified supplemental
retirement plans for the Bank's Board of Directors (the Directors'
Plan) and for the Bank'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 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. Credit
is given for past service. The President's Plan provides for
F-19
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(9) Continued
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 payment in the event of a change
in control of the Bank. The costs of the Directors' Plan and
President's Plan were $566,000 and $234,000, respectively, for the year
ended June 30, 1998, which included the costs for past service required
under the plans.
(10) Federal Home Loan Bank Advances
Under terms of its collateral agreement with the Federal Home Loan Bank
of Pittsburgh ("FHLB"), the Bank maintains otherwise unencumbered
qualifying assets (principally qualifying 1-4 family residential
mortgage loans and U.S. Government and Agency mortgage-backed
securities, notes and bonds) in the amount of at least as much as its
advances from the FHLB. The Bank's FHLB stock is also pledged to secure
these advances.
At June 30, 1998 and 1997, such advances have contractual maturities as
follows:
- -----------------------------------------------------------------------------------------------------
Weighted
Average
Due by June 30, Rate June 30, 1998
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
1999 5.84% $11,000
2000 - -
2001 - -
2002 5.50% $6,000
2003 - -
Thereafter 5.21% $4,000
- -----------------------------------------------------------------------------------------------------
Total Federal Home Loan Bank advances 5.62% $21,000
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Weighted
Average
Due by June 30, Rate June 30, 1997
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
1998 - -
1999 - -
2000 - -
2001 - -
2002 5.50% $6,000
Thereafter - -
- -----------------------------------------------------------------------------------------------------
Total Federal Home Loan Bank advances 5.50% $6,000
- -----------------------------------------------------------------------------------------------------
Substantially all of the above advances with contractual maturities
beyond one year are callable by the FHLB within one year of the
respective balance sheet dates.
F-20
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(11) Commitments and Contingencies
At June 30, 1998 and 1997, the Bank was committed to fund loans as
follows:
- ----------------------------------------------------------------------------------------------------
June 30, 1998 1997
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans with fixed rates of interest $6,563 $19,144
Loans with variable rates of interest $8,299 $1,607
- ----------------------------------------------------------------------------------------------------
Total commitments to fund loans $14,862 $20,751
- ----------------------------------------------------------------------------------------------------
The balance of commitments as of June 30, 1998 includes loans with
fixed rates of interest which range from 6.375% to 12.5%.
Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Bank is a party to financial
instruments with off-balance sheet risk to meet the financing needs of
its customers. At June 30, 1998, the Bank is committed to the funding
of first mortgage loans of approximately $6.3 million, and construction
loans of approximately $7.6 million, and committed to commercial
business loans of approximately $877,000.
The Bank uses the same credit policies in extending commitments as it
does for on-balance sheet instruments. The Bank controls 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 Bank 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 Bank offers residential and construction real estate loans as well
as commercial and consumer loans. The Bank's lending activities are
concentrated in Pennsylvania. The largest concentration of the Bank's
loan portfolio is located in Eastern Pennsylvania. The ability of the
Bank'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
The Bank is involved in routine legal proceedings occuring in the
normal course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of the Bank.
F-21
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(11) Continued
Other Commitments
In connection with the operation of seven of its branches, the Bank
leases certain office space. The leases are classified as operating
leases, with rent expense of $205,000, $124,000 and $84,000 for the
years ended June 30, 1998, 1997 and 1996, respectively. Minimum
payments over the remainder of the leases are summarized as follows:
Minimum
Lease
Year ended June 30, Payments
----------------------------------------------------------
(Dollars in thousands)
1999 $114
2000 108
2001 114
2002 99
2003 and thereafter 76
----------------------------------------------------------
$511
----------------------------------------------------------
(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 classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain certain minimum amounts and
ratios (set forth in the table below). Management believes that the
Bank meets, as of June 30, 1998, all capital adequacy requirements to
which it is subject.
As of June 30, 1998, 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.
F-22
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(12) Continued
The Bank's actual capital amounts and ratios are presented in the
following table.
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual capital Purposes Action Provisions
---------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
As of June 30, 1998:
Tangible capital $33,505 8.3% $6,038 1.5% N/A N/A%
(to tangible assets)
Core capital 33,505 8.3 12,075 3.0 $20,126 5.0
(to adjusted
tangible assets)
Tier I Capital 33,505 13.8 9,719 4.0 14,578 6.0
(to risk-
weighted assets)
Risk-based capital 36,169 14.9 19,438 8.0 24,297 10.0
(to risk-
weighted assets)
As of June 30, 1997:
Tangible capital $30,649 8.7 $5,286 1.5 N/A N/A
(to tangible assets)
Core capital 30,649 8.7 10,572 3.0 17,621 5.0
(to adjusted
tangible assets)
Tier I Capital 30,649 15.0 8,150 4.0 12,224 6.0
(to risk-
weighted assets)
Risk-based capital 32,327 15.9 16,299 8.0 20,374 10.0
(to risk-
weighted assets)
- ---------------------------------------------------------------------------------------------------------------------
F-23
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(12) Continued
On September 30, 1996, federal legislation was enacted which included
provisions for recapitalizing the Savings Association Insurance Fund
(SAIF) and the eventual merger of this fund with the Bank Insurance
Fund. In accordance therewith, the FDIC billed the Bank, in fiscal
1997, for a special assessment of $1.5 million based on the amount of
SAIF assessable deposits at an estimated assessment rate of 65.7 basis
points per $100 of insured deposits.
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
The Bank'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
Bank's entire holdings of a particular financial instrument. For a
substantial portion of the Bank'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 conditions, 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 Bank'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
noninterest-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,
1998 and 1997:
Cash and Cash Equivalents
Current carrying amounts approximate estimated fair value.
Securities Held to Maturity and Available for Sale
Current quoted market prices were used to determine fair value.
F-24
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(13) Continued
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 discount rates that reflected
credit and interest risk inherent in the loans. The estimate of the
maturities and prepayment speeds was based on the Bank's historical
experience. Cash flows were discounted using market rates adjusted for
portfolio differences.
Accrued Income Receivable
Current carrying amounts approximate estimated fair value.
Deposits with No Stated Maturity (which consist of NOW, Money Market,
and Passbook Accounts)
Current carrying amounts approximate estimated fair value.
Certificates of Deposit
Fair value was estimated by discounting the contractual cash flows
using current market rates offered in the Bank's market area for
deposits with comparable terms and maturities.
Accrued Interest Payable
Current carrying amounts approximate estimated fair value.
Note Payable
Current carrying amount approximates estimated fair value.
FHLB Advances
Fair value was estimated using discounted cash flow analysis based on
the Bank's current incremental borrowing rate for similar types of
borrowing arrangements.
Commitments to Extend Credit
The majority of the Bank's commitments to extend credit carry current
market interest rates if converted to loans. Because commitments to
extend credit are generally unassignable by either the Bank or the
borrower, they only have value to the Bank and the borrower. The
estimated fair value approximates the recorded deferred fee amounts.
F-25
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(13) Continued
The carrying amounts and estimated fair values of the Bank's financial
instruments, including off-balance sheet financial instruments, were as
follows at June 30, 1998 and 1997 (dollars in thousands):
1998
-------------------------------------
Carrying Estimated
Assets Amount Fair Value
- -------------------------------------------------------------------------------------------
Cash and cash equivalents $18,291 $18,291
Securities available for sale $48,111 $48,111
Loans available for sale $12,152 $12,205
Loans, net $315,705 $320,168
Accrued income receivable $2,109 $2,109
- -------------------------------------------------------------------------------------------
Liabilities
- -------------------------------------------------------------------------------------------
Deposits with no stated maturity $108,791 $108,791
Certificates $232,002 $233,677
FHLB advances $21,000 $21,119
Accrued interest payable $389 $389
- -------------------------------------------------------------------------------------------
Off-Balance Sheet Financial Instruments:
Contract Estimated
Amount Fair Value
- -------------------------------------------------------------------------------------------
Commitments to extend credit $14,862 $178
- -------------------------------------------------------------------------------------------
F-26
(Continued}
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(13) Continued
1997
-------------------------------------
Carrying Estimated
Assets Amount Fair Value
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents $4,204 $4,204
Securities available for sale $45,766 $45,766
Securities held to maturity $3,999 $3,998
Loans available for sale $6,173 $6,173
Loans, net $284,596 $289,762
Accrued income receivable $1,937 $1,937
- ----------------------------------------------------------------------------------------------------
Liabilities
- ----------------------------------------------------------------------------------------------------
Deposits with no stated maturity $92,899 $92,899
Certificates of deposit $216,827 $218,839
FHLB advances $6,000 $5,998
Note payable $500 $500
Accrued interest payable $288 $288
- ----------------------------------------------------------------------------------------------------
Off Balance Sheet Financial Instruments:
Contract Estimated
Amount Fair Value
- ----------------------------------------------------------------------------------------------
Commitments to extend credit $20,752 $113
- ----------------------------------------------------------------------------------------------
(14) Subsequent Event
On July 28, 1998, the Board of Directors of the Bank adopted the Plan
of Reorganization (the "Plan") pursuant to which the Bank will
reorganize into the federal mutual holding company form of organization
as a wholly-owned subsidiary of a federal corporation (the "Company"),
which in turn, will be a majority-owned subsidiary of a federal mutual
holding company (collectively, the "Conversion"). Pursuant to the Plan,
the Company will offer stock to eligible account holders as of June 30,
1997 in an amount less than 50% of the to-be issued and outstanding
stock.
The Company plans to establish an ESOP for the benefit of eligible
employees, to become effective upon the Conversion. The ESOP intends to
purchase up to 8% of the Common Stock issued in the Conversion
utilizing proceeds of a loan from the Company or a third party lender.
The loan will be repaid over a period of 10 years and the collateral
for the loan will be the common stock purchased by the ESOP.
Pursuant to the Plan, the Company intends to establish a Charitable
Foundation ("Foundation") in connection with the Conversion. The Plan
provides that the Bank and the Company will create the Foundation and
donate an amount of the Company's common stock equal to 4% of the
common stock to
F-27
(Continued)
WILLOW GROVE BANK
Notes to Financial Statements
- -------------------------------------------------------------------------------
(14) Continued
be sold in the Conversion. The Foundation will be dedicated to
charitable purposes within the communities in which the Bank operates
and to complement the Bank's existing community activities.
Establishment of the Foundation is subject to the approval of the
Bank's depositors at the special meeting being held to vote upon the
Conversion.
The Foundation will submit a request to the Internal Revenue Service to
be recognized as a tax-exempt organization and would likely be
classified as a private foundation. A contribution of common stock to
the Foundation by the Company would be tax deductible, subject to a
limitation based on 10 percent of the Company's taxable income. The
Company, however, would be able to carry forward any unused portion of
the deduction for five years following the contribution. Upon funding
the Foundation, the Company will recognize an expense in the full
amount of the contribution, offset in part by the corresponding benefit
for the tax deduction, during the quarter in which the contribution is
made.
The Bank may provide support services to the Foundation including, but
not limited to, employee time, office space and accounting support. The
Bank expects to provide these services without compensation, however,
expenses incurred on behalf of the Foundation are not expected to be
significant to the operations of the Bank.
At the time of Conversion, the Bank will establish a liquidation
account in an amount equal to its equity as reflected in the latest
balance sheet used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders
and supplemental eligible account holders who continue to maintain
their accounts at the Bank after the Conversion. In the event of a
complete liquidation of the Bank, each eligible account holder and
supplemental eligible account holder will be entitled, so long as they
remain depositors of the Bank, to receive a distribution from the
liquidation account in an amount proportionate to their membership or
liquidation rights as of the date of the conversion, solely with
respect to the mutual holding company.
The costs associated with Conversion will be deferred and will be
deducted from the proceeds upon the sale and issuance of stock. In the
event the Conversion is not consummated, costs incurred will be charged
to expense. At June 30, 1998, there were no deferred conversion costs.
After the Conversion, the Bank may not declare or pay dividends on its
stock if such declaration and payment would violate statutory or
regulatory requirements.
F-28
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Company, the Bank or Charles Webb & Company. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any of the securities
offered hereby to any person in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or the Bank since any of the dates as of which
information is furnished herein or since the date hereof.
Table of Contents
Page
------
Prospectus Summary..............................
Selected Consolidated Financial Information
and Other Data................................
Risk Factors....................................
Willow Grove Bancorp, Inc.......................
Willow Grove Bank...............................
Willow Grove Mutual Holding Company.............
Use of Proceeds.................................
Dividend Policy.................................
Waiver of Dividends by the MHC..................
MHC Conversion to Stock Form....................
Market for the Common Stock.....................
Regulatory Capital.............................
Capitalization..................................
Pro Forma Data..................................
Comparison of Valuation and Pro Forma
Information with no Foundation................
Management's Discussion and Analysis of Financial
Condition and Results of Operations...........
Business of Willow Grove Bank...................
Regulation......................................
Taxation........................................
Management......................................
Proposed Management Purchases...................
Reorganization and Stock Issuance...............
Certain Restrictions on Acquisition of the
Company and the Bank..........................
Description of Capital Stock....................
Transfer Agent and Registrar....................
Experts.........................................
Legal and Tax Opinions..........................
Additional Information..........................
Index to Financial Statements...................
Until __________ ___, 199__ (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
Willow Grove Bancorp, Inc.
(Holding Company for
Willow Grove Bank)
Up to 2,664,838 Shares
Common Stock
---------------------------
PROSPECTUS
---------------------------
Charles Webb & Company
_______________, 1998
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution (1).
SEC filing fees...................................... $ 8,727
OTS filing fees...................................... 28,800
Nasdaq filing fees................................... 43,415
Printing, postage and mailing ....................... 200,000
Legal fees .......................................... 125,000
Blue Sky filing fees and expenses.................... 5,000
Accounting fees...................................... 175,000
Appraiser's fees..................................... 42,500
Conversion agent fees and expenses................... 20,000
Transfer agent fees and expenses..................... 20,000
Miscellaneous........................................ 56,558
--------
Total................................................ $725,000
========
----------------------
In addition to the foregoing expenses, Charles Webb & Company, a
Division of Keefe, Bruyette & Woods, Inc. will receive fees based on the number
of shares of Common Stock sold in the Reorganization and Stock Issuance, plus
expenses. Based upon the assumptions and the information set forth under "Pro
Forma Data" and the "Reorganization - Marketing Arrangements" in the Prospectus,
it is estimated that such fees will amount to $164,000, $199,000, $234,000 and
$274,000 in the event that 1,712,750 shares, 2,015,000 shares, 2,317,250 shares
and 2,664,838 shares of Common Stock are sold in the Reorganization and Stock
Issuance, respectively.
Item 14. Indemnification of Directors and Officers.
Federal Regulations define areas for indemnity coverage by Willow Grove
Bank (the "Bank") as follows:
(a) Any person against whom any action is brought or threatened because
that person is or was a director or officer of the Bank shall be indemnified by
the Bank, as the case may be, for:
(i) Any amount for which such person becomes liable under a judgment in
such action; and
(ii) Reasonable costs and expenses, including reasonable attorney's
fees, actually paid or incurred by such person in defending or settling such
action, or in enforcing his or her rights to indemnification if the person
attains a favorable judgment in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director only if the requirements of this subparagraph are met:
II-1
(i) The Bank shall make the indemnification provided by subparagraph
(a) in connection with any such action which results in a final judgment on the
merits in favor of such officer or director.
(ii) The Bank shall make the indemnification provided by subparagraph
(a) in case of settlement of such action, final judgment against such director
or officer or final judgment in favor of such director or officer other than on
the merits, if a majority of the disinterested directors of the Bank determines
that such a director or officer was acting in good faith within the scope of his
or her employment or authority as he or she could reasonably have rerceived it
under the circumstances and for a purpose which he or she could reasonably have
believed under the circumstances was in the best interest of the Bank or its
members.
(c) As used in this paragraph:
(i) "action" means any judicial or administrative proceeding, or
threatened proceeding, whether civil, criminal, or otherwise, including any
appeal or other proceeding for review;
(ii) "final judgment" means a judgment, decree, or order which is not
appealable and as to which the period for appeal has expired with no appeal
taken;
(iii) "settlement" includes the entry of a judgment by consent or by
confession or a plea of guilty or nolo contendere.
The Bank has a directors and officers liability policy providing for
insurance against certain liabilities incurred by directors and officers of the
Bank while serving in their capacities as such.
Item 15. Recent Sales of Unregistered Securities
Not applicable.
II-2
Item 16. Exhibits and Financial Statements Schedules
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 *Engagement Letter with Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc.
1.2 *Form of Agency Agreement with Charles Webb & Company, a Division of Keefe, Bruyette & Woods,
Inc.
2.1 *Plan of Reorganization
2.2 *Plan of Stock Issuance
3.1 *Federal Stock Charter of Willow Grove Bancorp, Inc.
3.2 Bylaws of Willow Grove Bancorp, Inc.
3.3 *Federal Stock Charter of Willow Grove Bank
3.4 *Bylaws of Willow Grove Bank
3.5 *Charter of Willow Grove Bank Mutual Holding Company
3.6 Bylaws of Willow Grove Mutual Holding Company
4.1 *Form of Stock Certificate of Willow Grove Bancorp, Inc.
5.0 *Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality
8.1 *Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: Federal tax matters
8.2 *Opinion of KPMG Peat Marwick
8.3 *Letter of RP Financial, LC. re: Subscription Rights
10.1 *Draft form of Employment Agreement to be entered into between Willow Grove Bank
and Frederick A. Marcell, Jr.
10.2 *Draft form of Employment Agreement to be entered into between Willow Grove Bank
and each of Thomas M. Fewer, John J. Foff, Jr. and John T. Powers.
10.3 *Supplemental Executive Retirement Agreement
10.4 *Non-Employee Director's Retirement Plan
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibits 5.0 and 8.1, respectively)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of RP Financial, LC.
24.0 Power of Attorney, included in signature pages.
27.0 *Financial Data Schedule
99.1 *Appraisal Report of RP Financial, LC.
99.2 Subscription Order Form and Instructions
99.3 *Additional Solicitation Material
99.4 *Proxy Statement and Form of Proxy
99.5 *Appraisal Report Update from RP Financial, LC, dated as of October 30, 1998
99.6 Appraisal Report Update from RP Financial, LC, dated as of November 11, 1998
99.7 Certificate of Willow Grove Mutual Holding Company, Willow Grove Bancorp, Inc. and Willow Grove Bank to Legal Counsel
- ----------------
* Previously filed.
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
II-3
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Form S-1 Registration Statement as amended to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Commonwealth of Pennsylvania on November 9, 1998.
Willow Grove Bancorp, Inc.
(In organization)
By: /s/ Frederick A. Marcell, Jr.
-------------------------------------
Frederick A. Marcell, Jr.
President and Chief Executive Officer
Name Title Date
- ----------------------------- ------------------------ -------------------
/s/ Frederick A. Marcell, Jr. President and Chief November 10, 1998
- ----------------------------- Executive Officer
Frederick A. Marcell, Jr.
/s/ John J. Foff, Jr. Senior Vice President and November 10, 1998
- ----------------------------- Chief Financial Officer
John J. Foff, Jr.
/s/ Lewis W. Hull* Director November 10, 1998
- -----------------------------
Lewis W. Hull
/s/ William W. Langan* Chairman of the Board November 10, 1998
- -----------------------------
William W. Langan
II-5
Name Title Date
- ----------------------------- ------------------------ -------------------
/s/ Stanley B. Kitzelman* Director November 10, 1998
- -----------------------------
Stanley B. Kitzelman
/s/ A. Brent O'Brien* Director November 10, 1998
- -----------------------------
A. Brent O'Brien
/s/ William W. Weihenmayer* Director November 10, 1998
- -----------------------------
William W. Weihenmayer
/s/ J. Ellwood Kirk* Director November 10, 1998
- -----------------------------
J. Ellwood Kirk
/s/ Charles F. Kremp, 3rd* Director November 10, 1998
- -----------------------------
Charles F. Kremp, 3rd
/s/ Samuel H. Ramsey, III* Director November 10, 1998
- -----------------------------
Samuel H. Ramsey, III
- -----------------
* By Frederick A. Marcell, Jr. pursuant to power of attorney.
II-6