U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended JUNE 30, 2001
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- or -
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to
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Commission File Number: 0-25191
WILLOW GROVE BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
UNITED STATES OF AMERICA 23-2986192
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(State or other jurisdiction of (IRS Employee
incorporation or organization) Identification No.)
WELSH AND NORRISTOWN ROADS
MAPLE GLEN, PENNSYLVANIA 19002
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(Address of Principal Executive Offices)
Registrant's telephone number: (including area code) (215) 646-5405
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on September 20, 2001 was $27,932,129 (1,756,738 shares at $15.90 per
share).
As of September 20, 2001 there were 4,937,387 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
1. Portions of the Definitive Proxy Statement for the 2001 Annual Meeting
of Stockholders. (Part III)
PART I
ITEM 1. BUSINESS
GENERAL. Willow Grove Bancorp, Inc. (the "Company") is a federal corporation
that completed its initial public offering ("IPO") in December 1998 in the
reorganization of Willow Grove Bank (the "Bank") from a federally chartered
mutual savings bank into a federally chartered stock savings bank in the mutual
holding company form of ownership. Willow Grove Bank is the subsidiary of Willow
Grove Bancorp, Inc., which is the majority-owned subsidiary of Willow Grove
Mutual Holding Company (the "MHC"). Willow Grove Bank was originally organized
in 1909, and is primarily engaged in attracting deposits from the general public
and using those funds to invest in loans and securities. At the present time,
the business of the Company is primarily the business of the Bank. In September
2000, Willow Grove Investment Corporation ("WGIC"), a Delaware corporation, was
formed as a wholly owned subsidiary of the Bank to hold and manage certain
securities investments of the Bank.
References in this document to "we," "our" or "us" refer to Willow
Grove Bancorp, Inc. together with its subsidiary, Willow Grove Bank, unless the
context otherwise requires.
In recent years, we have concentrated our business plans on three
primary goals, changing operations to a full-service community bank, continuing
steady growth and maintaining a high level of asset quality.
Our principal sources of funds are deposits, repayments of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and funds borrowed from outside sources
such as the Federal Home Loan Bank ("FHLB") of Pittsburgh. These funds are
primarily used for the origination of various loan types including,
single-family residential, commercial real estate and multi-family residential
mortgage loans, home equity loans, consumer loans and commercial business loans.
Our major source of income is the interest payments received on our loan and
securities portfolios, while our major expense is interest paid on deposit
accounts.
The Office of Thrift Supervision ("OTS") is our chartering authority
and primary regulator. We are also regulated by the Federal Deposit Insurance
Corporation ("FDIC"), the administrator for the Savings Association Insurance
Fund ("SAIF"). We are also subject to reserve requirements established by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or
"FRB"), and we are a member of the FHLB of Pittsburgh, one of the regional banks
comprising the FHLB System.
The executive offices for Willow Grove Mutual Holding Company, Willow
Grove Bancorp, Inc. and Willow Grove Bank are all at Welsh and Norristown Roads,
Maple Glen, Pennsylvania, and our telephone number is (215) 646-5405.
This Form 10-K contains certain forward-looking statements and
information based upon our beliefs as well as assumptions we have made. In
addition, to those and other portions of this document, the words "anticipate",
"believe", "estimate", "expect", "intend", "should", and similar expressions, or
the negative thereof, as they relate to us are intended to identify
forward-looking statements. Such statements reflect our current view with
respect to future looking events and are subject to certain risks,
uncertainties, and assumptions. Factors that could cause future results to vary
from current management expectations include, but are not limited to, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and fees. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended. We do not intend to update these forward-looking
statements.
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MARKET AREA AND COMPETITION
Our main office is in Montgomery County, Pennsylvania, approximately 20
miles north of downtown Philadelphia. The primary market areas that we serve
are: Montgomery County, Bucks County, and the northeast section of Philadelphia
that borders these counties. To a lesser extent, we provide services to areas of
Chester and Delaware counties, the remainder of the City of Philadelphia, and
central and southern New Jersey.
We face significant competition in originating loans and attracting
deposits. This competition stems primarily from commercial banks, other savings
banks and savings associations and mortgage-banking companies. Within our market
area, we estimate that we compete with more than 45 other banks and savings
institutions. We face additional competition for deposits from short-term money
market funds and other corporate and government securities funds, mutual funds
and from other non-depository financial institutions such as brokerage firms and
insurance companies.
LENDING ACTIVITIES
GENERAL. At June 30, 2001 our net loan portfolio totaled $454.2 million
or 72.66 % of our total assets. Historically, our primary emphasis has been the
origination of loans secured by first liens on single-family (one-to four-units)
residences. In recent years, we have changed the focus of our lending to place
more emphasis on home equity loans, commercial real estate and multi-family real
estate loans and commercial business loans. At June 30, 2001, commercial and
multi-family residential real estate loans amounted to $128.6 million, or 28.0%
of our total loan portfolio. As of that date, commercial business loans totaled
$19.9 million or 4.34% of the total loan portfolio. Loans secured by liens on
single-family residential properties include first mortgage loans totaling
$198.3 million or 43.17% of the loan portfolio; and $75.1 million of home equity
loans and lines of credit, which accounted for 16.34 % of the loan portfolio.
The types of loans that we originate are subject to federal and state
laws and regulations. Interest rates and fees charged on these loans are
affected primarily by the demand for loans by borrowers and the supply of funds
available for lending purposes and rates and fees charged by our competitors.
Local, national, and international economic conditions and their effect on the
monetary policies of the Federal Reserve Board, legislative and tax policies,
and budgetary matters of local, state, and federal governmental bodies affect
the supply of funds available and the demand for loans.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the loan portfolio at the dates indicated. This data does not
include single family loans classified as available for sale which amounted to
$2.6 million, $35.8 million, $zero, 12.1 million, and $6.2 million at June
30,2001, 2000, 1999, 1998, and 1997, respectively.
June 30, 2001 June 30, 2000 June 30, 1999
-------------------- -------------------- ---------------------
Percent Percent Percent
(Dollars in Thousands) Amount of total Amount of total Amount of total
-------------------------------- -------- ---------- -------- ---------- -------- ----------
Mortgage loans:
Single-family $ 198,310 43.17 % $ 206,340 48.04 % $ 231,498 61.16 %
Multifamily & non-residential 128,613 28.00 102,513 23.87 65,707 17.36
Construction 27,724 6.04 14,973 3.49 7,773 2.05
Home equity 75,060 16.34 72,217 16.81 54,090 14.29
--------- --------- --------- --------- --------- ----------
Total mortgage loans 429,707 93.55 396,043 92.20 359,068 94.86
Consumer loans 9,688 2.11 7,818 1.82 6,431 1.70
Commercial business loans 19,925 4.34 25,683 5.98 13,023 3.44
--------- --------- --------- --------- --------- ----------
Total loans receivable 459,320 100.00 % 429,544 100.00 % 378,522 100.00 %
========= ========= ==========
Allowance for loan losses (4,313) (3,905) (3,138)
Deferred loan fees (808) (699) (800)
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Loans receivable, net $ 454,199 $ 424,940 $ 374,584
========= ========= =========
June 30, 1998 June 30, 1997
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Percent Percent
(Dollars in Thousands) Amount of total Amount of total
-------------------------------- -------- ---------- -------- ----------
Mortgage loans:
Single-family $ 230,979 72.30 % $ 230,659 80.16
Multifamily & non-residential 31,978 10.01 23,141 8.04
Construction 4,772 1.49 3,776 1.31
Home equity 41,366 12.95 25,553 8.88
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Total mortgage loans 309,095 96.75 283,129 98.39
Consumer loans 4,930 1.54 2,924 1.02
Commercial business loans 5,437 1.70 1,698 0.59
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Total loans receivable 319,462 100.00 % 287,751 100.00
========== =========
Allowance for loan losses (2,665) (1,678)
Deferred loan fees (1,092) (1,477)
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Loans receivable, net $ 315,705 $ 284,596
========= ==========
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth scheduled contractual amortization of the loan portfolio at
June 30, 2001, as well as the dollar amount of such loans 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, 2001 the amount due within
At June 30, 2001 the amount due within
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More than More than More than More than
1 year 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
(Dollars in thousands) or less years years years years years Total
------------------------ --------- ----------- ----------- ----------- ----------- --------- -------
Mortgage loans:
Single-family & $ 1,204 $ 5,818 $ 13,987 $ 26,656 $ 97,807 $ 127,898 $ 273,370
home equity
Multifamily & 2,994 5,312 4,580 19,789 87,457 8,481 128,613
nonresidential
Construction 18,148 6,976 231 - 1,015 1,354 27,724
Consumer loans 3,246 2,721 1,623 2,020 55 23 9,688
Commercial business loans 10,967 1,384 2,531 3,985 1,058 - 19,925
--------- ----------- ----------- ----------- ----------- --------- ---------
Total $ 36,559 $ 22,211 $ 22,952 $ 52,450 $ 187,392 $ 137,756 $ 459,320
========= =========== =========== =========== =========== ========= =========
Of the $422.8million of loan principal repayments due after June 30,
2002, $364.4million have fixed rates of interest and $58.4million have
adjustable rates of interest.
LENDING ACTIVITY. Our lending activities are subject to underwriting
standards and origination procedures which have been approved by our Board of
Directors. In mid-1996, we determined that based upon the significant amount of
standardization in the single-family residential underwriting and documentation
processes, it was more cost effective for us to purchase single-family
residential mortgage loans. Since that time, we have developed a network of
approximately 33 active mortgage brokers and mortgage bankers. These
correspondents identify, process and close loans on our behalf based upon rates
and terms that we provide to them on a regular basis. Depending upon the various
programs we have with the correspondents, loans will be classified as either
purchased or originated. When the correspondent advances funds for the closing
of a loan we have committed to purchase, it is classified as "purchased". When
we provide the funds for the closing of the loan, it is classified as
"originated". In either case, we may retain the loan in our portfolio or sell it
(on either a servicing released or retained basis) in the secondary market. The
correspondents forward completed loan applications for our review. Based upon
our assessment of our demand for the type of loan, we will determine whether to
reject the loan or acquire the loan for our portfolio or for sale into the
secondary market. The loans generally are required to be underwritten in
accordance with Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") guidelines (this facilitates resale into
the secondary market). We also acquire loans that do not conform to FHLMC/FNMA
guidelines ("non-conforming" loans) for the portfolio. Non-conforming loans that
we place in the portfolio include, but are not limited to, sub-prime, investor
loans and non-FNMA "A" paper. Non-conforming loans are underwritten according to
the Company's alternative underwriting guidelines. We believe that the Company's
underwriting guidelines are consistent with industry standards. These
non-conforming loans account for approximately one-quarter of our single-family
loan portfolio.
Our loan underwriting function is managed at our main office. All
conforming loans are underwritten by any one of five contracted third party
companies to ensure saleability in the secondary market. We require a current
appraisal prepared by an independent appraiser on all new mortgage loans. We
also require title insurance on all loans secured by real estate, except home
equity loans.
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Hazard insurance is required on all real estate loans. Flood insurance is also
required for all loans secured by properties located in a designated flood area.
Our loan policy authorizes certain officers to approve loans up to
certain designated amounts, not exceeding $1,000,000 individually and $2,000,000
collectively in the case of the President and Chief Lending Officer. Loans
exceeding individual limits must be approved by: the Management Loan Committee
consisting of the President, the three other executive officers, and a
Vice-President Credit Manager; the Director's Loan Committee, consisting of
three outside directors, the President, and the Chief Lending Officer; or the
full Board of Directors. The Director's Loan Committee and the full Board of
Directors are also provided with summaries of new loan activity on a routine
basis.
As a federal savings bank, we are limited in the amount of loans we
make to any one borrower. This amount is equal to 15% of the Bank's unimpaired
capital and surplus (in our case, this amount would be approximately $8.4
million at June 30, 2001), although there are provisions that would allow us to
lend an additional 10% of unimpaired capital and surplus if the loans are
secured by readily marketable securities. Our aggregate loans to any one
borrower have been within these limits. At June 30, 2001, our three largest
credit relationships with an individual borrower and related entities amounted
to $7.1 million, $6.4 million, and $6.2 million; all the loans included in these
relationships were performing in accordance with their terms and conditions.
SINGLE-FAMILY RESIDENTIAL LOANS. We utilize a network of mortgage
brokers and bankers to originate and buy conventional single-family
(one-tofour-units) mortgage loans. Conventional loans are loans that are neither
insured by the Federal Housing Administration ("FHA") nor partially guaranteed
by the Department of Veterans Affairs ("VA"). The majority of our single-family
mortgage loans are secured by properties located in our primary lending area
which includes Montgomery, Bucks and Philadelphia Counties, Pennsylvania. Our
residential lending areas have expanded to include northeastern Pennsylvania and
central and southern New Jersey. At June 30, 2001, single-family mortgage loans
amounted to $198.3million, or 43.17% of our total loan portfolio. Due to our
strategic plan to diversify the loan portfolio, the single-family portion of our
loan portfolio has decreased during the past five years and we expect this trend
to continue.
Single-family residential mortgage, loans which we purchase or
originate for sale, generally are underwritten with terms conforming to
FHLMC/FNMA guidelines. Loans purchased or originated for our portfolio, may
conform to these guidelines, may exceed the conforming loan amount for those
agencies, or may otherwise not comply with the underwriting standards of the
agencies for a variety of reasons, including credit risk. Recently we have been
more active in selling conforming loans, in excess of our portfolio needs, in
the secondary market. We have formed relationships with five national investors
who purchase our loans primarily on a best efforts, servicing released basis.
This arrangement, although not eliminating all risks associated with secondary
market activity, can provide an additional source of non-interest income. As of
June 30, 2001, $2.6 million of our single-family residential mortgage loans were
classified as available-for-sale. During the year ended June 30, 2001, we sold
an aggregate of $92.4 million of single-family residential mortgage loans at a
gain of $381,000. We had no loan sales in fiscal 2000 and $15.0 million of loan
sales in fiscal 1999. Although we anticipate a continued effort in secondary
market activity, there can be no assurance that this activity will continue as
currently structured or result in the realization of non-interest income and in
fact could result in negative operating results.
Interest rates on our single-family residential mortgage loans either
are fixed for the life of the loan ("fixed-rate") or are subject to adjustment
at certain pre-determined dates throughout the life of the loan ("ARM"). Our
fixed-rate loans generally mature in 10, 15, 20 or 30 years, and have equal
monthly payments to repay the loan with interest by the end of the loan term. At
June 30, 2001, the fixed-rate portion of our residential mortgage loan portfolio
which includes single-family real estate loans and home equity loans, totaled
$273.4 million which was 59.5% of the total single-family residential loans
outstanding at that date.
We offer a variety of ARM loans. These loans have a pre-determined
interest rate for a specified period of time ranging from one to ten years.
After this initial period, the interest rate will adjust on a
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periodic basis in accordance with a designated index such as the one-year US
Treasury yield adjusted to a constant maturity ("CMT") plus a stipulated margin.
Also, ARM loans generally carry an annual limit for rate changes of 1% or 2%,
and a maximum amount the rate can increase or decrease from the initial rate of
4% to 6% during the life of the loan. From time to time, we offer ARM loans with
an initial rate less than the fully-indexed rate (the index at the time of
origination plus the stipulated margin). These loans are underwritten based upon
the borrower making payments calculated at the fully-indexed rate. Our ARM loans
require that any payment adjustment caused by a change in the interest rate
result in full amortization of the loan by the end of the original loan term,
and no portion of the payment increase is permitted to be added to the principal
balance of the loan, so-called negative amortization. At June 30, 2001, $25.3
million or 10.8% of our residential mortgage loan portfolio, which includes
single-family real estate loans and home equity loans, were adjustable rate.
ARM loans decrease some of the risks associated with changing interest
rates. However, increases in the amount of a borrower's payment due to interest
rate increases may affect the borrower's ability to repay the loan increasing
the potential for default. To date, we have not experienced a material impact as
a result of this additional credit risk associated with ARM loans, and believe
that this risk is less than the interest rate risk of holding fixed-rate loans
in a rising interest rate environment.
Such factors as consumer preferences, the general level of interest
rates, competition, and the availability of funds affect the amount of ARM loans
we originate. Although we anticipate that we will continue to offer ARM loans,
there can be no assurance that we can originate a sufficient amount of loans to
increase or maintain the percentage of loans in our portfolio.
Generally the largest single-family mortgage loan we originate or
purchase does not exceed $400,000. In addition, our maximum loan-to-value ratio
(the rate of the loan amount to the lesser of the appraised value or sales price
- "LTV") is 95%, provided that private mortgage insurance is obtained for the
portion of the loan in excess of 80% of the appraised value.
HOME EQUITY LOANS. In recent years, we have increased our emphasis on
the origination of home equity loans and lines of credit, due to their shorter
maturities (the maximum term of our home equity loans is 20 years with the
exception of purchase money second mortgage loans whose maximum term may be up
to 30 years) and higher interest rates. A home equity loan is a fixed-rate loan
where the borrower receives the total loan amount at a closing and makes monthly
payments to repay the loan within a specific time period. Home equity lines of
credit are a revolving line of credit with a variable rate and no stated
maturity date. The borrower may draw on this account (up to the maximum credit
amount) and repay this line at any time. At June 30, 2001 we had $75.1 million
or 16.34% of the total loan portfolio in home equity loans and lines of credit
outstanding. This compares to $72.2 million outstanding at June 30, 2000. Of the
$75.1 million outstanding at June 30, 2001, $17.5 million were in lines of
credit. The unused portion of equity lines of credit was $10.4 million at that
date.
Home equity loans and lines of credit are secured by the borrower's
residence, and we generally obtain a second mortgage position on these loans. We
offer home equity programs in amounts, when combined with the first mortgage, up
to 100% of the value of the property securing the loan. In addition to
originating home equity loans through our branch offices, we purchase these
loans from a network of correspondents.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS.
At June 30, 2001 commercial and multi-family real estate loans amounted to
$128.6 million or 28.00% of the total loan portfolio. This compares to $102.5
million or 23.87% at June 30, 2000.
Our commercial real estate and residential multi-family real estate
loan portfolio consists primarily of loans secured by office buildings, retail
and industrial use buildings, strip shopping centers, residential properties
with five or more units and other properties used for commercial and
multi-family purposes located in our market area. Our commercial and
multi-family real estate loans tend to be originated in an amount less than $3
million but will occasionally exceed that amount. At June 30, 2001, the average
commercial and multi-family real estate loan size was $467,000. The five largest
commercial real estate
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and multi-family real estate loans outstanding were $4.2 million, $3.5 million,
$2.8 million, $2.7 million and $2.6 million, and all of such loans were
performing in accordance with all their terms. During the year ended June 30,
2001, our commercial real estate and multi-family loan portfolio grew as the
result of originations, purchases and the conversion of loans from construction
to permanent status, by $26.1 million, or 25.5%. During the past several years,
we have hired commercial lenders, who we believe are experienced in this area,
in our effort to increase the size of this portfolio.
Although terms for commercial real estate and multi-family loans vary,
our underwriting standards generally allow for terms up to 20 years with monthly
amortization over the life of the loan and LTV ratios of not more than 80%.
Interest rates are either fixed or adjustable, based upon designated market
indices such as the 5-year Treasury CMT plus a margin, and fees ranging from
0.5% to 1.50% are charged to the borrower at the origination of the loan.
Prepayment fees are charged on most loans in the event of early repayment.
Generally we obtain personal guarantees of the principals as additional
collateral for commercial real estate and multi-family real estate loans.
Commercial real estate and multi-family real estate lending involves
different risks than single-family residential lending. These risks include
larger loans to individual borrowers and loan payments that are dependent upon
the successful operation of the project or the borrower's business. These risks
can be affected by supply and demand conditions in the project's market area of
rental housing units, office and retail space, warehouses, and other commercial
space. We attempt to minimize these risks by limiting our loans to proven
businesses, only considering properties with existing operating performance
which can be analyzed, using conservative debt coverage ratios in our
underwriting, and periodically monitoring the operation of the business or
project and the physical condition of the property. As of June 30, 2001,
$675,000, or 0.52% of our commercial real estate and multi-family residential
mortgage loans were on non-accrual status compared to $140,000 at June 30, 2000.
The increase was specifically related to one non-residential mortgage loan
representing the entire non-accrual amount. the Company believes that all past
due obligations will be recovered with respect to this loan. As of June 30,
2001, $1.5 million, or 33.7% of the Company's allowance for loan losses was
allocated to commercial real estate and multi-family residential mortgage loans.
Charge-offs of commercial real estate and multi-family residential mortgage
loans during the year ended June 30, 2001, amounted to zero.
Various aspects of a commercial and multi-family loan transaction are
evaluated in our effort to mitigate the additional risk in these types of loans.
In our underwriting procedures, consideration is given to the stability of the
property's cash flow history, future operating projections, current and
projected occupancy levels, location and physical condition. Generally we impose
a debt service ratio (the ratio of net cash flows from operations before the
payment of debt service to debt service) of not less than 115%. We also evaluate
the credit and financial condition of the borrower, and if applicable, the
guarantor. Appraisal reports prepared by independent appraisers are obtained on
each loan to substantiate the property's market value, and are reviewed by us
prior to the closing of the loan.
CONSTRUCTION LOANS. We originate construction loans for residential and
commercial uses within our market area. We generally limit construction loans to
builders and developers with whom we have an established relationship, or who
are otherwise known to officers of the Bank. At June 30, 2001, we had $ 27.7
million, or 6.04% of total loans, in outstanding construction loans.
Construction loans outstanding at June 30, 2000 were $15.0 million.
Our construction loans generally have variable rates of interest, a
maximum term to maturity of three years, and LTV ratios less than 80%.
Residential construction loans to developers are made on either a pre-sold or
speculative (unsold) basis. Limits are placed on the number of units that can be
built on a speculative basis based upon the reputation and financial position of
the builder, his/her present obligations, the location of the property and prior
sales in the development and the surrounding area. Generally a limit of two to
six model homes is placed per project.
Prior to committing to a construction loan, we require that an
independent appraiser prepare an appraisal of the property. We also review and
inspect each project at its inception and prior to every
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disbursement of loan proceeds. Disbursements are made after inspections based
upon a percentage of project completion. Monthly payment of interest is required
on all construction loans.
We also make construction loans for the acquisition and development of
land for sale (i.e. roads, sewer and water lines. We make these loans only in
conjunction with a commitment for a construction loan for the units to be built
on the site. These loans are secured by a lien on the property and are limited
to a LTV ratio of 75% of the appraised value. The loans have a variable rate of
interest and require monthly payments of interest. The principal of the loan is
repaid as units are sold and released. All of our loans of this type are in our
market area and are to developers with whom we have established relationships.
In most cases, we also obtain personal guarantees from the borrowers.
Construction and land loans generally are considered to involve a
higher level of risk than single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effect of economic conditions on developers, builders and projects. Additional
risk is also associated with construction lending because of the inherent
difficulty in estimating both a property's value at completion and the estimated
cost (including interest) to complete a project. The nature of these loans is
such that they are more difficult to evaluate and monitor. In addition,
speculative construction loans to a builder are not pre-sold and thus pose a
greater potential risk than construction loans to individuals on their personal
residences.
In order to mitigate some of the risks inherent to construction
lending, we inspect properties under construction, review construction progress
prior to advancing funds, work with builders who have established relationships,
and obtain personal guarantees from the principals.
COMMERCIAL BUSINESS LOANS. At June 30, 2001, we had $19.9 million in
business loans (4.34% of gross loans outstanding) compared to $25.7 million at
June 30, 2000, a decrease of $5.8 million or 22.4%. The primary reason for the
decrease in the amount outstanding under commercial business loans was $7.4
million of charge-offs during the year ended June 30, 2001. We began originating
loans to small-to-mid-sized businesses in our market area in May 1997. Since
that time, we have hired four commercial lenders between May 1997 and March
2000, who we believe are experienced in this area, to actively solicit
commercial business loans as well as commercial real estate and multi-family
real estate loans. As a result of these efforts, we anticipate growth in this
portion of the loan portfolio will remain an important part of our overall loan
diversification plan. We believe that these types of loans assist in our
asset/liability management since they generally provide shorter maturities
and/or adjustable rates of interest in addition to generally having higher rates
of return which are designed to compensate for the additional credit risk
associated with these loans.
The commercial business loans which we originate may be either a
revolving line of credit or for a fixed term of generally ten years or less.
Interest rates are either adjustable, indexed to a published prime rate of
interest, or fixed. Generally, equipment, machinery, real property or other
corporate assets secure the loans. Personal guarantees from the business
principals are generally obtained as additional collateral. We also provide
loans up to 75% of a business' accounts receivable and up to 50% of its
inventory. As of June 30, 2001, the Company's five largest commercial business
loans were $2.0 million, $1.5 million, $1.4 million, $1.1 million, and $ 794,000
and all such loans were performing in accordance with their terms. At such date
the average balance of the Company's commercial business loans was $89,000.
Generally, commercial business loans have been characterized as having
higher risks associated with them than single-family loans. This area of lending
is relatively new to us and we have recently experienced significant losses with
respect to two commercial business loans which were placed on non-accrual status
during the year ended June 30, 2001. See, "Asset Quality - Allowance for Loan
Losses". We have hired individuals, who we believe are experienced in this type
of lending, and have implemented policies and procedures that we deem to be
prudent. As of June 30, 2001, the Company had $966,000 of non-accrual commercial
business loans compared to $250,000 at June 30, 2000. At such date $656,000 of
the Company's allowance for loan losses was allocated to commercial business
loans. As previously indicated, the Company had $7.4 million of charge-offs with
respect to commercial business loans during
8
the year ended June 30, 2001. Such charge-offs were due primarily to $7.2
million of charge-offs with respect to two commercial business loan
relationships which have been written down to an aggregate carrying value of
$638,000 at June 30, 2001 and which was included in non-accrual commercial
business loans.
OTHER CONSUMER LENDING ACTIVITIES. In our efforts to provide a full
range of financial services to our customers, we offer various types of consumer
loans such as student loans, loans secured by deposit accounts, automobile
loans, and unsecured personal loans. These loans are originated primarily
through existing and walk-in customers and direct advertising. At June 30, 2001,
$9.7 million, or 2.11% of our total loan portfolio consisted of these types of
loans. This compares to $7.8 million of consumer loans, or 1.82% of the total
loan portfolio at June 30, 2000.
Consumer loans generally have higher interest rates and shorter terms
than residential loans, however they have additional credit risk due to the type
of collateral securing the loan or in some cases the absence of collateral. In
the fiscal year ended June 30, 2001, charge-offs related to other consumer loans
amounted to $73,000.
ASSET QUALITY
GENERAL. As a part of our efforts to maintain asset quality, we have
developed and implemented an asset classification system. All of our
interest-earning assets are subject to this classification system. Loans are
periodically reviewed internally, by credit administration, and externally,
through contracted independent third party sources. These classifications are
reviewed at least quarterly by the Asset Quality Committee of the Board of
Directors.
When a borrower fails to make a scheduled payment, we attempt to cure
the deficiency by making personal contact with the borrower. Initial contacts
are generally made 16 days after the date the payment is due. In most cases,
deficiencies are promptly resolved. If the delinquency continues, late charges
are assessed and additional efforts are made to collect the deficiency. We
generally work with borrowers to resolve such problems, however, when the
account becomes 90 days delinquent, we institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
On loans which we consider the collection of principal or interest
payments doubtful, we cease the accrual of interest income ("non-accrual"
loans). On loans more than 90 days past due, as to principal and interest
payments, it is our policy to discontinue accruing additional interest and
reverse any interest currently accrued (unless we determine that the loan
principal and interest are fully secured and in the process of collection). On
occasion, we may take this action earlier if the financial condition of the
borrower raises significant concern with regard to his/her ability to service
the debt in accordance with the terms of the loan. Interest income is not
accrued on these loans until the borrower's financial condition and payment
record demonstrate an ability to service the debt.
Real estate which we acquire as a result of foreclosure or deed-in-lieu
of foreclosure is classified as real estate owned until sold. Real estate owned
is recorded at the lower of cost or fair value less estimated selling cost.
Costs associated with acquiring and improving a foreclosed property are usually
capitalized to the extent that the carrying value does not exceed fair value
less estimated selling costs. Holding costs are charged to expense. Gains and
losses on the sale of real estate owned are charged to operations, as incurred.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated. The amounts presented represent the
total outstanding principal balances of the related loans rather than the actual
payment amounts that are past due.
9
June 30, 2001 June 30, 2000
------------------------- -------------------------
30 to 60 to 30 to 60 to
(Dollars in thousands) 59 Days 89 Days 59 Days 89 Days
------------------------ ----------- ---------- ----------- -----------
Mortgage loans:
Single-family $ 3,529 $ 894 $ 2,289 $ 747
Multifamily & nonresidential 51 162 1,195 1,194
Construction - - 1,432 -
Home equity 50 23 111 202
Consumer loans 3 4 37 12
Commercial business loans 86 - 1,570 300
----------- ---------- ----------- -----------
Total $ 3,719 $ 1,083 $ 6,634 $ 2,455
=========== ========== =======-=== ===========
Loans delinquent 30 to 89 days amounted to $4.8 million at June 30, 2001
compared $9.1 million at June 30, 2000. This decrease of $4.3 million or 47.3%,
is primarily attributed to the collection and workout efforts in the
multi-family, non-residential and construction mortgage loans and a troubled
debt restructuring in the commercial business loans. Management continues to
regularly monitor all delinquent loan activity. Management does not consider the
current level of delinquencies to be of significant concern as, based upon past
experience, most of such loans will be returning to fully performing status
without going to non-accrual status. In any event, management believes that
these loans are adequately collateralized.
10
NON-PERFORMING ASSETS. The following table sets forth information with
respect to non-performing assets we have identified, including non-accrual loans
and other real estate owned.
At June 30,
--------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
------------------------ ---- ---- ---- ---- ----
Accruing loans 90 or more days past due:
Real estate $ 42 $ 9 $ 4 $ 142 $ 124
Other 49 - - - -
---------- ---------- ---------- ----------- ---------
Total 91 9 4 142 124
---------- ---------- ---------- ----------- ---------
Non-accrual loans
Mortgage loans:
Single-family 1,485 828 1,006 1,249 374
Multifamily & nonresidential 675 140 - - 54
Construction - - - - -
Home equity 278 10 37 - -
Consumer loans 151 19 8 2 17
Commercial business loans 966 250 13 96 1,346
---------- ---------- ---------- ----------- ---------
Total 3,555 1,247 1,064 1,347 1,791
---------- ---------- ---------- ----------- ---------
Performing troubled debt restructurings 1,535 - - - -
---------- ---------- ---------- ----------- ---------
Total non-performing loans 5,181 1,256 1,068 1,489 1,915
Other real estate owned, net - - - - -
---------- ---------- ---------- ----------- ---------
Total non-performing assets $ 5,181 $ 1,256 $ 1,068 $ 1,489 $ 1,915
========== ========== ========== =========== =========
Non-performing loans to total loans 1.13% 0.29% 0.28% 0.45% 0.65%
Non-performing assets to total assets 0.83% 0.22% 0.23% 0.37% 0.54%
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
weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of current
existing facts, conditions, and values, questionable, and there is a high
probability of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Federal regulations also require another unclassified category
designated "special mention" to be established and maintained for assets that do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful, or loss. At June 30, 2001 we
had $5.2 million in assets classified as substandard, $101,000 classified as
doubtful, and no assets were classified as a loss.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained
at a level we believe adequate to absorb known and inherent losses in the
portfolio. Our determination of the adequacy of the allowance is based upon an
evaluation of the portfolio, loss experience, current economic conditions,
volume, growth, composition of the portfolio, and other relevant factors. Prior
to 1998, the majority of emphasis in our methodology was placed on our past loss
experience as well as the other factors previously mentioned. With the expansion
of our lending activities into commercial real estate, business,
11
and other consumer loans, we are now including industry-wide loss experience in
our process to determine the adequacy of the allowance for loan losses. We
believe that due to the changing mix of our loan portfolio and our relative lack
of loss experience with these types of loans, considering loan loss data from
other banking institutions with loan portfolios similar to ours and in a similar
geographic setting will provide us with a more representative approach to
evaluating the credit risks in our loan portfolio. During the year ended June
30, 2001, based upon a more detailed stratification of the loan portfolio, we
modified the formulas we use to calculate the allowance on various loan types.
In some cases, such as business lending and home equity lending where the
combined LTV exceeds 80%, the percentage used to calculate the allowance was
increased. In other cases, such as single-family first mortgage lending with
LTVs below 60%, the percentage used was decreased. The overall effect of this
modification did not materially impact the amount of the allowance for loan
loss. The allowance is increased by provisions for loan losses which are charges
against income. As shown in the table below, at June 30, 2001, our allowance for
loan losses amounted to $4.3 million or 83.25% and 0.94% of our non-performing
loans and total loans receivable, respectively. During fiscal 2001, we
experienced material loan losses for the first time since the expansion of
lending activities as part of our overall diversification plan. We incurred
charges of $7.4 million during the year of which $7.2 related specifically to
two commercial business loans. During the second quarter of the fiscal year, a
commercial business loan totaling $6.7 million and originated in January 2000,
became impaired as a result of unexpected severe cash flow difficulties . The
loan was made to a local business with a history of solid financial performance
and was partially secured by real-estate, inventory, equity securities and fixed
assets. The borrower subsequently filed for bankruptcy protection and we are
pursuing recovery efforts. Over the course of the year, a total of $5.3 million
was charged-off related to this loan and at June 30, 2001, $545,000, secured by
certain interests in real estate, remain as a non-accrual loan in the portfolio.
During the third quarter of the fiscal year, a commercial business loan totaling
$2.0 million and originated in September 1997, became impaired as a result of
extensive fraud in the borrower's operations. The chief executive officer of the
borrower was arrested and charged with embezzlement in his financial capacity at
a related not for profit organization and his alleged illegal activities
extended to our loan The loan was made to a local business which builds-out
ambulances. As a result of the fraud, $1.9 million was charged-off related to
this loan and, at June 30, 2001, $93,000, secured by equity securities, remained
as a non-accrual loan in the Company's portfolio. Additionally, a slight
increase in certain other non-performing loans and a $1.5 million troubled debt
restructured credit caused an increase in the ratio of non-performing loans to
total loans to 1.13% compared to 0.29%, at June 30, 2001 and June 30, 2000,
respectively. Although our allowance for loan losses increased to $4.3 million
at June 30, 2001 from $3.9 million at June 30, 2000, the ratio of loan loss
reserves to non-performing loans declined to 83.25% from 310.91%, respectively.
For fiscal year 2000 the increase in the allowance for loan losses was primarily
due to the growth of our loan portfolio, the diversification of the loan
portfolio and recoveries in the amount $146,000 related to charge-offs from
prior periods. We assess our allowance for loan losses at least quarterly, and
make any necessary provision for losses needed to maintain our allowance for
losses at a level deemed adequate. We believe that the allowance for losses was
adequate at June 30, 2001 based upon the facts and circumstances known to us at
that date.
Effective December 21, 1993, the OTS in conjunction with the
Comptroller of the Currency, the FDIC and the Federal Reserve Board issued a
Policy Statement regarding a financial institution's allowance for loan and
lease losses. The Policy Statement, which reflects the position of the
regulatory agencies and does not necessarily constitute generally accepted
accounting principles, includes guidance (i) on our responsibilities for the
assessment and establishment of an adequate allowance; and (ii) for the
agencies' examiners to use in evaluating the adequacy of such allowance and the
policies used to determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets classified
substandard and doubtful and with respect to the remaining portion of the
institution's portfolio. Specifically, the Policy Statement sets forth the
following quantitative measures which examiners may use to determine the
reasonableness of an allowance: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio classified substandard; and (iii) for the
portions of the portfolio that have not been classified (including loans
designated special mention), estimated credit losses over the upcoming twelve
months based on facts and circumstances available as of the evaluation date.
While the Policy Statement sets forth this quantitative measure, such guidance
is not intended as a "floor" or "ceiling". Our policy for establishing loan
losses is consistent with the Policy Statement. In July
12
2001, the Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 102, SELECTED LOAN LOSS ALLOWANCE METHODOLOGY AND
DOCUMENTATION ISSUES. The guidance contained in the SAB is effective immediately
and focuses on the documentation the SEC staff normally expects registrants to
prepare and maintain in support of the allowance for loan and lease losses.
Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies,
represented by the Federal Financial Institutions Examination Council (FFIEC),
issued an interagency policy statement entitled ALLOWANCE FOR LOAN AND LEASE
LOSSES METHODOLOGIES AND DOCUMENTATION FOR BANKS AND SAVINGS INSTITUTIONS
(Policy Statement). The SAB and Policy Statement were the result of an agreement
between the SEC and the federal banking agencies in March 1999 to provide
guidance on allowance for loan and lease losses methodologies and supporting
documentation. There is no expected impact on earnings, financial condition, or
stockholders' equity upon implementation of the SAB or FFIEC pronouncement.
Management believes to the best of its knowledge, that the Company's
documentation relating to the allowance for loan loss is consistent with the SAB
and FFIEC pronouncement.
The following table sets forth the activity in our allowance for loan
losses for periods indicated.
Year ended June 30,
--------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
---------------------------------------------------- ---- ---- ---- ---- ----
Allowance for loan losses
Balance at the beginning of period $ 3,905 $ 3,138 $ 2,665 $ 1,678 $ 1,938
Plus: Provision for loan losses 7,856 706 531 993 185
Less: Charge-offs for
Mortgage loans 18 51 32 - -
Consumer loans 72 31 23 6 5
Commercial business loans 7,359 3 3 - 440
----------- --------- --------- --------- ---------
Total charge-offs 7,449 85 58 6 445
Plus: Recoveries 1 146 - - -
----------- --------- --------- --------- ---------
Balance at the end of period $ 4,313 $ 3,905 $ 3,138 $ 2,665 $ 1,678
=========== ========= ========= ========= =========
Allowance for loan loss to total
non-performing loans at the end
of the period 83.25% 310.91% 293.82% 178.98% 87.62%
Charge-offs to average loans 1.65% 0.02% 0.02% (1) 0.16%
(1) less than 0.01%
13
We consider the entire allowance for loan losses to be adequate,
however to comply with regulatory reporting requirements, we have allocated the
allowance for loan losses as shown in the table below into components by loan
types at year end. Through such allocations, we do not intend to imply that
actual future charge-offs will necessarily follow the same pattern or that any
portion of the allowance is restricted.
June 30, 2001 June 30, 2000 June 30, 1999
------------------------- ------------------------- -------------------------
Percent of Percent of Percent of
loan type to loan type to loan type to
(Dollars in thousands) Amount total loans Amount total loans Amount total loans
------------------------ ---------- ------------ ---------- ------------ ---------- ------------
Mortgage loans:
Single-family $ 239 43.17 % $ 591 48.04 % $ 598 61.16 %
Multifamily
& nonresidential 1,454 28.00 1,230 23.87 695 17.36
Construction 554 6.04 299 3.49 346 2.05
Home equity 437 16.34 482 16.81 359 14.29
---------- ------------ ---------- ------------ ---------- ------------
Total mortgage loans 2,684 93.55 2,602 92.20 1,998 94.86
Consumer loans 86 2.11 38 1.82 29 1.70
Comm. business loans 656 4.34 382 5.98 186 3.44
Unallocated 887 883 925
---------- ------------ ------------ ---------- ------------
Total $ 4,313 100.00 % $ 3,905 100.00 % $ 3,138 100.00 %
========== ============ ========== ============ ========== ============
June 30, 1998 June 30, 1997
------------------------- --------------------------
Percent of Percent of
loan type to loan type to
(Dollars in thousands) Amount total loans Amount total loans
----------------------- ---------- ------------ ---------- ------------
Mortgage loans:
Single-family $ 630 72.30 % $ 253 80.16 %
Multifamily
& nonresidential 371 10.01 121 8.04
Construction 361 1.49 188 1.31
Home equity 324 12.95 128 8.88
---------- ------------ ---------- ------------
Total mortgage loans 1,686 96.75 690 98.39
Consumer loans 28 1.55 25 1.02
Comm. business loans 124 1.70 138 0.59
Unallocated 827 825
---------- ------------ ---------- ------------
Total $ 2,665 100.00 % $ 1,678 100.00 %
========== ============ ========== ============
14
SECURITIES ACTIVITIES
GENERAL. Our investment policy is designed, among other things, to
assist us in our asset/liability management policy. It emphasizes, principal
preservation, favorable returns, maintaining liquidity and flexibility and
minimizing credit risk. The policy permits investments in US Government and
agency securities, investment grade corporate bonds and commercial paper,
municipal bonds, various types of mortgage-backed securities, certificates of
deposit and federal funds sold to financial institutions approved by our Board
of Directors, equity investments in the FHLB of Pittsburgh, the FNMA, and the
FHLMC, and mutual funds with investments in the above described investments.
Currently, we are not participating in hedging programs, interest rate
swaps, caps, collars or other activities involving the use of off-balance sheet
financial derivatives. Also, we do not purchase mortgage-backed derivative
instruments that would be characterized "high-risk" under OTS regulations at the
time of purchase, nor do we purchase corporate obligations which are not rated
investment grade.
In order to achieve the maximum flexibility with our investment
securities, all of our investment securities were classified as Available For
Sale ("AFS") for more than the past three fiscal years pursuant to Statement of
Financial Accounting Standards No. 115. This accounting pronouncement requires
us to classify a security as AFS, Held to Maturity ("HTM"), or trading, at the
time of acquisition. Securities being classified as HTM must be purchased with
the intent and ability to hold that security until its final maturity, and can
be sold prior to maturity only under rare circumstances. HTM securities are
accounted for based upon the historical cost of the security. AFS securities can
be sold at any time based upon our needs or judgment as to market changes. AFS
securities are accounted for at fair value, unrealized gains and losses on these
securities, net of income tax provisions, are reflected in the stockholders'
equity section of our Statement of Financial Condition.
At June 30, 2001, our investment securities amounted to $130.4 million,
or 20.85% of total assets. This includes a $29,000 unrealized loss, net of
income tax, due to their classification as available for sale. The portfolio
consists primarily of US government agency securities, most with callable
features and agency mortgage-backed pass-through securities. Other investments
include municipal bonds, equity investments in the FHLB of Pittsburgh, equity
securities acquired through a loan default, and a mutual fund consisting of
adjustable-rate mortgage-backed securities.
The following table sets forth information on the carrying value and
the amortized cost of our securities classified as available for sale at the
dates indicated:
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 1999
-------------------------- ------------------------ ------------------------
AMORTIZED CARRYING AMORTIZED CARRYING AMORTIZED CARRYING
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE COST VALUE
------------------------------ -------------- ----------- ------------- ---------- ------------- ----------
Equity securities $ 7,876 $ 7,838 $ 7,528 $ 7,451 $ 11,068 $ 11,052
US gov't agency securities 43,722 43,798 33,000 31,025 35,000 33,877
Mortgage-backed securities 75,905 75,834 31,162 29,626 34,229 33,236
Municipal bonds 2,903 2,888 2,601 2,475 1,999 1,890
-------------- ----------- ------------- ---------- ------------- -----------
Total $ 130,406 $ 130,358 $ 74,291 $ 70,577 $ 82,296 $ 80,055
============== =========== ============= ========== ============= ===========
MORTGAGE-BACKED SECURITIES. At June 30, 2001, we had mortgage-backed
securities totaling $75.8 million. Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgages.
Mortgages are sold by various originators to intermediaries (generally agencies
of the US Government and government sponsored enterprises) that pool and
repackage the mortgages
15
and sell participation interests in the pools to investors. The servicer of the
mortgage loan collects the principal and interest payments and passes those
payments through to the intermediary who then remits the payment to the
investor. The US Government agencies and government sponsored enterprises,
primarily the Government National Mortgage Association ("GNMA"), FNMA and FHLMC,
guarantee the timely payment of principal and interest on these securities.
Mortgage-backed securities are issued in stated principal amounts and
are backed by mortgage loans within a specific interest rate range, but may have
varying maturity dates. The underlying pool of mortgages may be comprised of
either fixed-rate or adjustable-rate mortgage loans. Each mortgage-backed
security pool will also differ based upon the actual level of prepayment
experienced by the underlying mortgage loans.
At June 30, 2001, the weighted average life of our mortgage-backed
securities was approximately 4.1 years, based upon assumptions related to the
future prepayments of the underlying mortgages. Prepayments that are greater
than those projected will shorten the remaining term of the security, while a
decrease in the amount of prepayments will lengthen the amount of time until the
security matures. Prepayments depend on many factors, including the type of
mortgage, the coupon rate, the geographic region, and the general level of
market interest rates. During periods of rising interest rates, if the coupon
rates of the underlying mortgages are less than prevailing market rates offered
on mortgages, refinancings will decrease and prepayments of the underlying
mortgages and the security will also decline. Conversely, when market interest
rates are falling, and the coupon rate on the underlying mortgage exceeds the
prevailing market interest rate for mortgages offered, refinancings tend to
increase which will increase the amount of prepayments of the underlying
mortgages and the security.
Our average yield on these securities was 6.58% at June 30, 2001. This
yield is computed by decreasing/increasing the amount of interest income
collected on the security by the amortization/accretion of the premium/discount
associated with the acquisition of the security. In accordance with generally
accepted accounting principles, premiums/discounts are amortized/accreted over
the estimated remaining life of the security. The yield on the security may vary
if the prepayment assumptions used to determine the remaining life differ from
actual prepayment experiences. These assumptions are reviewed on a periodic
basis to reflect actual prepayments.
US GOVERNMENT AGENCY SECURITIES AND MUNICIPAL BONDS. At June 30, 2001,
we had $43.8 million, which includes approximately $76,000 in unrealized gains,
in securities issued by US government agencies, primarily the FHLB, FNMA, FHLMC,
and the Federal Farm Credit Bank. Most of these securities have call features
that allow the issuer to redeem these securities at par value prior to their
stated maturity. Generally, if the prevailing market interest rate on new issue
callable agency securities with similar maturities exceeds the coupon rate of
the security with the call feature, the call will not be exercised. Conversely,
if the prevailing market interest rate for new issue agency callable securities
with similar maturities is below the coupon rate of the security with the call
feature, the call will be exercised and the bond will be redeemed. When calls
are exercised and bonds redeemed prior to their maturity, we face the risk of
re-investing those proceeds into other investments with lower yields or longer
terms.
Municipal bonds held at June 30, 2001 had a carrying value of $2.9
million, and a net unrealized loss of $15,000. These municipal bonds include
issues from various townships and school districts located in Pennsylvania.
16
The following table sets forth certain information regarding the contractual
maturities (without regard to any call provisions) of the carrying value of our
US government agency securities and municipal bonds at June 30, 2001. The yields
on tax-exempt bonds have not been adjusted to taxable equivalent yield.
Carrying Average
(Dollars in thousands) value yield
---------------------------- ----------- -----------
Maturing in:
One year or less $ 900 4.40 %
One to five years 14,245 6.65
Five to ten years 19,455 6.46
Over ten years 12,086 6.48
-----------
Total $ 46,686 6.49 %
===========
OTHER INVESTMENTS. Other than mortgage-backed securities, US Government
agency securities and municipal securities, we have investments in various
equity securities and mutual funds. These investments totaled $3.8 million and
$4.0 million, respectively. The equity securities include stock in the FHLB and
equity securities of several publicly traded companies which were assigned to
the Bank as a result of a loan default. FHLB stock at June 30, 2001 was $3.4
million and the other equity investments amounted to $400,000. The Company plans
to liquidate the equity securities obtained through the default in an orderly
manner. The mutual fund investment includes investments in adjustable-rate
mortgage-backed securities.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of funds for our lending and
investment activities. In addition to deposits, we obtain funds from the
amortization and prepayments on our loan and mortgage-backed security portfolio,
maturities of investments, and borrowings. Scheduled loan amortization is a
relatively stable source of funds. However, competition and the general level of
interest rates and market conditions significantly influence deposit inflows and
outflows. Borrowings may be used on a short-term basis to compensate for
reductions in other funding sources. On a longer-term basis, borrowings may be
used for general business purposes.
DEPOSITS
The following table sets forth by various interest rate categories, the
amount of certificates of deposit at the dates indicated.
(Dollars in thousands) June 30, 2001 June 30, 2000 June 30, 1999
------------------------ ------------- ------------- -------------
0.00% to 2.99% $ 42 $ 28 $ 32
3.00% to 3.99% 15,546 16,399 21,817
4.00% to 4.99% 82,563 45,623 67,875
5.00% to 6.99% 212,384 219,471 153,259
7.00% and over 10,823 11,791 8,174
------------- ------------- -------------
$ 321,358 $ 293,312 $ 251,157
============= ============= =============
17
At June 30, 2001 the total amount of outstanding certificates of
deposit in amounts greater than or equal to $100,000 was $56.9 million. The
following table provides information regarding the maturity of these
certificates of deposit.
At June 30, 2001
Amounts maturing in
------------------------------------------------------
More than More than
3 MONTHS 3 TO 6 6 TO 12 OVER 12
(DOLLARS IN THOUSANDS) OR LESS MONTHS MONTHS MONTHS TOTAL
------------------------ ----------- ---------- ---------- ---------- ---------
$ 12,921 17,331 18,119 8,529 $ 56,900
BORROWINGS.
We use outside borrowings to supplement our lending needs. We also use
borrowings in a revenue enhancement program that allows us to take advantage of
arbitrage opportunities when investment returns exceed the cost of borrowings.
At June 30, 2001 we had $59.9 million in borrowings outstanding, all of which
were from the FHLB of Pittsburgh. Advances from the FHLB of Pittsburgh are
secured by our investment in FHLB Stock and a portion of our residential
mortgage loan portfolio. The FHLB of Pittsburgh provides an array of borrowing
programs which include: fixed or variable rate programs; various fixed terms
ranging from overnight to 20 years; and other programs that have callable or
putable features attached to them. We intend to utilize borrowings in the future
as an alternative source of funds.
The following table sets forth certain information regarding our
outside borrowings for the periods indicated.
As of or for the year ended June 30,
----------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
----------------------------------------------- ---- ---- ----
FHLB Advances:
Average balances outstanding $ 60,201 $ 38,820 $ 14,198
Maximum amount outstanding at any month end 74,196 61,696 19,000
Balance outstanding at the end of the period 59,885 37,517 14,986
Average interest rate for the period 6.38% 6.06% 5.44%
Interest rate at the end of the period 5.85% 6.61% 5.33%
At June 30, 2001 the maturity terms of the FHLB advances ranged from 18
months to 10 years. At June 30, 2001 $40.0 million of FHLB advances were
callable at the direction of the FHLB within certain parameters, of which $22.0
million could be called within one year.
SUBSIDIARIES. Willow Grove Bank is the wholly owned subsidiary of Willow Grove
Bancorp, Inc. Willow Grove Bancorp, Inc. is the majority owned subsidiary of
Willow Grove Mutual Holding Company. Willow Grove Investment Corporation is a
wholly owned subsidiary of the Bank.
EMPLOYEES. At June 30, 2001, we had 140 full-time employees, and 71 part-time
employees. None of our employees are represented by a collective bargaining
group, and we believe that our relationship with our employees is good.
18
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 is prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Such regulation and
supervision primarily is intended for the protection of depositors and not for
the purpose of protecting shareholders.
The OTS regularly examines the Bank and prepares reports for
consideration by 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.
WILLOW GROVE BANCORP, INC.
We are a registered savings and loan holding company within the meaning
of Section 10 of the Home Owners' Loan Act ("HOLA") and are 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 us and with
other persons affiliated with the Bank.
Pursuant to regulations of the OTS and the terms of our federal stock
charter, our purpose and powers are 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; (vii) 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.
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The HOLA prohibits a savings and loan holding company, such as us,
directly or indirectly, from (1) acquiring control (as defined) of a savings
institution (or holding company thereof) without prior 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 of 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.
THE MUTUAL HOLDING COMPANY
The MHC as a federal mutual holding company within the meaning of
Section 10(o) of the HOLA, is 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 we are subject. See " --Willow Grove Bancorp,
Inc."
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.
20
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 3.0% 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.
Under the risk-based capital requirement, a savings bank must maintain
total capital (which is defined as core capital plus supplementary capital)
equal to at least 8.0% of risk-weighted assets. A savings bank must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors, which range from 0% for cash and securities issued by the
United States Government or its agencies to 100% for repossessed assets or loans
more than 90 days past due. Qualifying one-to-four family residential real
estate loans and qualifying multi-family residential real estate loans (not more
than 90 days delinquent and having an 80% or lower loan-to-value ratio), which
at June 30, 2001, represented 58.3% 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
21
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, 2001, 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 a
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 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, the OTS has continuously waived the
interest rate risk component, and recently proposed to eliminate it.
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, 2001, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 8.3%, 8.3%
and 15.0%, 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, a 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 requirements, including a
leverage limit, a risk-based capital requirement, and any other measure of
capital deemed appropriate by the federal banking regulator for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying management fees if the institution would thereafter fail
to satisfy the minimum levels for any of its capital requirements.
22
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 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, 2001, the Bank was in the "well capitalized" category for
purposes of the above regulations.
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 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.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution to make
capital distributions. Under new regulations effective April 1, 1999, a savings
institution must file an application for OTS approval of the capital
distribution if either (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company (as well as certain other institutions) must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
In addition, OTS regulations require the MHC to notify the OTS of any
proposed waiver of its 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 MHC's board of directors
determines that such waiver is consistent with such directors' fiduciary duties
to the MHC members; (ii) the waiver would not be detrimental to the safe and
sound operation of the Bank; (iii) for as long as the Company is controlled by
the MHC, the dollar amount of dividends waived by the MHC is considered as a
restriction
23
on the retained earnings of the Company, which restriction, if material, is
disclosed in the public financial statements of the Company as a note to the
financial statements; (iv) the amount of any dividend waived by the MHC is
available for declaration as a dividend solely to the MHC, and in accordance
with Statement of Financial Accounting Standards No. 5, when the Company
determines that the payment of such dividend to the MHC is probable, an
appropriate dollar amount is recorded as a liability; and (v) the amount of any
waived dividend is considered having been paid to the Company in evaluating any
proposed dividend under the OTS capital distribution regulations. Effective July
12, 2000, the OTS revised its policy that, in the event the MHC converts to
stock form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the MHC. Under the revised OTS policy, in the event the MHC converts to stock
form, the OTS will no longer require dilution for any dividends waived by the
MHC.
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"). 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 qualified thrift lender ("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).
24
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 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 Pittsburgh; 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, 2001, 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, 2001 the Bank had $59.9 million of FHLB advances.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of the members' aggregate amount of outstanding
advances. At June 30, 2001, the Bank had $3.4 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.
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, 2001, 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.
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.
AFFILIATE RESTRICTIONS. Section 11 of the 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
25
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 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
Our Common Stock is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and, under OTS regulations, generally may not be deregistered
for at least three years after the IPO. We are subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
TAXATION
FEDERAL TAXATION
GENERAL. We are subject to federal income taxation in the same general
manner as other corporations with some exceptions listed below. The following
discussion of federal taxation is only intended to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the
applicable tax rules. Our federal income tax returns have been closed without
audit by the Internal Revenue Service ("IRS") through 1995.
We will file a consolidated federal income tax return which includes
the Bank. Accordingly, it is anticipated that any cash distributions made by us
would be treated as cash dividends, and not as a non-taxable return of capital
to stockholders for federal and state tax purposes.
METHOD OF ACCOUNTING. For federal income tax purposes, we report our
income and expenses on the accrual method of accounting and file our federal
income tax return using a June 30 fiscal year end.
BAD DEBT RESERVES. The Small Business Protection Act of 1996 (the "1996
Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995. Prior to the 1996 Act, the Bank was permitted to establish a reserve for
bad debts and to make additions to the reserve. These additions could, within
specified formula limits, be deducted in arriving at taxable income. As a result
of the 1996 Act, savings associations must use the
26
specific charge-off method in computing their bad debt deduction beginning with
their 1996 federal tax return. In addition, federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
the Bank's reserve subject to recapture as of June 30, 2001 is approximately $
1.2 million.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income if the Bank failed to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or ceases to maintain a bank
charter.
At June 30, 2001, the Bank's total federal pre-1988 reserve was
approximately $6.2 million. The reserve reflects the cumulative effects of
federal tax deductions for which no federal income tax provisions have been
made.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. We have not
been subject to the AMT nor do we have any such amounts available as credits for
carryover.
NET OPERATING LOSS CARRYOVERS. We may carry back net operating losses
to the three preceding taxable years and forward to the succeeding 15 taxable
years. This provision applies to losses incurred in taxable years beginning
before August 6, 1997. For net operating losses in years beginning after August
5, 1997, such net operating losses can be carried back to the two preceding
taxable years and forward to the succeeding 20 taxable years. At June 30, 2001,
we had no net operating loss carry forwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. We may exclude from income 100%
of dividends received from a member of the same affiliated group of
corporations. The corporate dividends received deduction is 80% in the case of
dividends received from corporations which a corporate recipient owns less than
80%, but at least 20% of the distribution corporation. Corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received.
STATE AND LOCAL TAXATION
PENNSYLVANIA TAXATION. We are subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Corporation Net Income Tax
rate for 1998 is 9.99% and is imposed on unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of approximately 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 subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "MTIT"), as amended to include thrift institutions
having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT
exempts the Bank from other taxes imposed by the Commonwealth of Pennsylvania
for state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principles ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on state and federal
obligations, while disallowing a percentage of a thrift's interest expense
deduction in the proportion of interest income on those securities to the
overall interest income of the Bank. Net operating losses, if any, thereafter
can be carried forward three years for MTIT purposes.
27
ITEM 2. PROPERTIES
We operate from the following locations:
Owned Lease Net Book Deposits
(DOLLARS IN THOUSANDS) Or Expiration Value at At
---------------------- Leased Date June 30, 2001 June 30, 2001
------ ---- ------------- -------------
Location
--------
EXECUTIVE OFFICE:
Welsh & Norristown Roads(1) Owned N/a $1,795 $116,453
Maple Glen, PA 19002-8030
OPERATIONS CENTER:
100 Witmer Road Leased 08/2004 81
Horsham, PA
BRANCH OFFICES:
1555 West Street Road Leased 01/2006 1 51,021
Warminster, PA 18974-3103
1141 Ivyland Road Leased 06/2004 23 22,514
Warminster, PA 18974-2048
9 Easton Road Owned N/a 609 113,791
Willow Grove, PA 19090-0905
701 Twining Road Owned N/a 778 57,324
Dresher, PA 19025-1894
761 Huntingdon Pike Owned N/a 334 46,176
Huntingdon Valley, PA 19006-8399
2 N. York Road Leased 05/2002 52 27,960
Hatboro, PA 19040-3201
1331 Easton Road Leased 12/2004 41 9,335
Roslyn, PA 19001
11730 Bustleton Avenue Leased 02/2004 28 26,225
Philadelphia, PA 19116
122 North Main Street Leased 02/2010 107 8,043
North Wales, PA 19454
8200 Castor Avenue Leased 12/2009 164 16,832
Philadelphia, PA 19152
735 Davisville Road (2) Leased 05/2011 214 1,356
Southampton, PA 18966
In August, 2001, the Company acquired a parcel of land with an existing
structure, adjacent to its branch office at 9 Easton Road, Willow
Grove, Pennsylvania to be used for future expansion of this branch.
-------------------------------------
(1) Includes adjacent nine acre parcel that could be used for future
expansion
(2) Opened in May 2001
ITEM 3. LEGAL PROCEEDINGS
ATS PRODUCTS CORP. V. WILLOW GROVE BANK, (United States Bankruptcy Court,
Eastern District of Pennsylvania). On May 2, 2001, a lawsuit was filed against
the Bank alleging four causes of action related to a line of credit between the
Bank and the plaintiff. The causes of action are: breach of contract, fraud,
negligent misrepresentation and breach of fiduciary duty. The plaintiff seeks
compensatory damages in an amount in excess of $150,000, punitive damages,
attorney fees, costs and litigation expenses as well as other relief. The
plaintiff alleges that its actual damages may exceed $10 million. The Bank will
vigorously defend the claims made by the plaintiff and believes that those
claims are without merit.
28
Other than the above referenced litigation, the Company is involved in various
legal proceedings occurring in the ordinary course of business. Management of
the Company, based upon discussions with litigation counsel, believes that such
proceedings will not have a material adverse effect on the financial condition
or operation of the Company. There can be no assurance that any of the
outstanding legal proceedings to which the Company is a party will not be
decided adversely to the Company's interests and have a material adverse effect
on the financial condition and operation of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
29
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Willow Grove Bancorp's common stock is traded on the Nasdaq Stock Market
(NASDAQ) under the symbol WGBC. Local newspaper listings include WillowG and
WillGrvBcp. At September 20, 2001 there were 1,375 registered shareholders of
record, not including the number of persons or entities whose stock is held in
nominee or "street" name through various brokerage firms or banks. The following
table shows the quarterly high and low trading prices of our stock and the
amount of cash dividends declared per share for our past two fiscal years.
Stock Price Cash
High Low dividends per
---- --- Share
-----
Quarter ended:
September 30, 1999 $10.38 $9.13 $0.08
December 31, 1999 9.50 8.88 0.09
March 31, 2000 9.00 8.38 0.09
June 30, 2000 10.00 8.50 0.10
September 30, 2000 11.44 10.19 0.10
December 31, 2000 11.94 10.75 0.11
March 31, 2001 12.25 11.50 0.11
June 30, 2001 12.40 11.62 0.12
31
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Condition Data at June 30, 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
Total assets $ 625,148 $ 560,123 $ 472,039 $ 405,374 $ 354,679
Cash and cash equivalents 22,209 14,681 4,889 18,291 4,204
Investment securities held to maturity - - - - 3,999
Securities available for sale 130,358 70,577 80,055 48,111 45,766
Loans available for sale 2,644 35,753 - 12,152 6,173
Loans receivable, net 454,199 424,940 374,584 315,705 284,596
Deposits 497,030 452,857 390,681 340,793 309,729
Borrowings 59,885 37,517 14,986 21,000 6,500
Total stockholders' equity 60,357 60,643 58,442 35,945 33,122
Selected Operating Data for the 2001 2000 1999 1998 1997
Fiscal Year Ended June 30,
------------------------------------------------------------------------------------------------------------------
Interest income $ 44,285 $ 38,893 $ 32,015 $ 28,604 $ 25,423
Interest expense 24,216 19,369 16,164 15,097 13,817
Net interest income 20,069 19,524 15,851 13,507 11,606
Provision for loan losses 7,856 706 531 993 185
Net interest income after provision for loan losses 12,213 18,818 15,320 12,514 11,421
Non-interest income 1,787 1,102 1,009 760 786
Non-interest expense 13,875 12,076 10,652 9,462 8,284
Income before income taxes 125 7,844 5,677 3,812 3,923
Income tax (benefit) expense (32) 3,001 2,044 1,367 1,548
Net Income 157 4,843 3,633 2,445 2,375
Earnings per share - diluted (1) $ 0.03 $ 0.97 $ 0.46 n/a n/a
Earnings per share - basic (1) $ 0.03 $ 0.98 $ 0.46 n/a n/a
Cash dividends declared (per share) $ 0.44 $ 0.36 $ 0.08 n/a n/a
Dividend payout ratio (2)(3) n/m 36.66% 11.34% n/a n/a
Ratios at or for the Fiscal Year Ended June 30, 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
Return on average assets 0.03% 0.93% 0.84% 0.65% 0.71%
Return on average equity 0.25% 8.09% 7.63% 6.81% 7.54%
Average interest-earning assets to 120.93% 121.64% 120.64% 108.22% 108.06%
average interest-bearing liabilities
Interest rate spread (4) 2.59% 3.00% 2.97% 3.12% 3.21%
Net interest margin (5) 3.46% 3.83% 3.76% 3.71% 3.56%
Non-performing assets to total assets (6) 0.83% 0.22% 0.23% 0.37% 0.54%
Allowance for loan losses to 83.25% 310.91% 293.82% 178.98% 87.62%
nonperforming loans
Allowance for loan losses to total loans 0.94% 0.91% 0.83% 0.83% 0.58%
Average equity to average assets 10.64% 11.87% 11.02% 9.59% 9.39%
Tangible equity to end of period assets 8.25% 9.03% 9.80% 8.32% 8.70%
Total capital to risk-weighted assets (7) 14.99% 15.71% 18.10% 14.89% 15.87%
----------------------------------------------------------------------------
(1) Earnings per share data prior to January 1, 1999 is not applicable.
(2) Includes dividends waived by the Mutual Holding Company of $1.2 million,
$1.0 million and $225,000, respectively.
(3) Dividend payout ratio for fiscal 2001 is not meaningful.
(4) The weighted average yield on interest-earning assets less the weighted
average cost of interest -bearing liabilities.
(5) This represents net interest income as a percentage of average
interest-earning assets.
(6) Non-performing assets equals non-accrual loans, troubled debt
restructurings plus accruing loans 90 or more days past due.
(7) Bank only.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in understanding our
financial condition, and the results of operations for Willow Grove Bancorp,
Inc. (the "Company") and its subsidiary Willow Grove Bank (the "Bank") for the
fiscal years ended June 30, 2001, 2000, and 1999. The information in this
section should be read in conjunction with the Company's Financial Statements
and the accompanying Notes included elsewhere herein.
GENERAL
Our earnings are primarily based upon our net interest income, which is
the difference between the income earned on interest-earning assets and the
interest paid on interest-bearing liabilities and the relative amount of our
interest-earning assets to interest-bearing liabilities. Non-interest income and
expenses, the provision for loan losses, and income tax expense also affect our
results of operations.
CHANGES IN FINANCIAL CONDITION
GENERAL. Our total assets increased by $65.0 million, or 11.6%, to $625.1
million at June 30, 2001 compared to $560.1 million at June 30, 2000. This
increase was primarily due to increases in cash and cash equivalents, loans
receivable and securities available for sale. These increases were partially
offset by a decrease in loans available for sale. The increase in total assets
were funded primarily by increases of $44.2 million in deposits and $22.4
million in borrowings from the Federal Home Loan Bank ("FHLB") of Pittsburgh.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents, which consist of cash
on hand and in other banks in interest-earning and non-interest earning
accounts, amounted to $22.2 million and $14.7 million at June 30, 2001 and 2000,
respectively. The increase was primarily due to increases in cash on hand
resulting from the opening of two new banking offices and funds maintained in
interest-earning accounts resulting from increased loan and securities
repayments during the recent period of falling interest rates. These increased
balances are intended to be utilized to fund new loan originations as well as
purchases of investment securities in the future.
ASSETS AVAILABLE FOR SALE. At June 30, 2001, assets that were classified
available for sale ("AFS") consisted of securities totaling $130.4 million and
loans totaling $2.6 million. This compares to $70.6 million in AFS securities
and $35.8 million in AFS loans at June 30, 2000. Throughout the past four fiscal
years, all of our securities have been classified as available for sale. This
classification provides us with the flexibility to sell securities prior to
maturity, if, for example, we determine that our interest rate risk profile
should be modified, that a sale would be desirable to change our liquidity
position or for some other asset/liability management reasons. Securities
classified as AFS are accounted for at fair value with unrealized gains and
losses, net of tax, reflected as an adjustment to stockholders' equity with the
exception of unrealized losses considered other than temporary which are
reflected in the statement of income. As a result of a general decline in market
interest rates, at June 30, 2001, the Company had unrealized losses on AFS
securities of $48,000 compared to unrealized losses on AFS securities of $3.7
million at June 30, 2000. Mortgage loans originated or purchased with the
intention of being sold into the secondary market are classified as AFS and are
carried at the lower of cost or market value with any unrealized loss reflected
in the statements of income. At June 30, 2001, $2.6 million of fixed-rate,
single-family residential mortgage loans were classified as AFS compared to
$35.8 million in loans classified as AFS at June 30, 2000. All loans classified
as AFS at June 30, 2000 were sold in July 2000 as part of our effort to reduce
the Company's interest rate risk position. During fiscal 2001, the Company
became more active in the secondary market for residential mortgage loans in an
attempt to realize gains upon the sale of loans.
LOANS. Our net loan portfolio grew to $454.2 million at June 30, 2001 from
$424.9 million at June 30, 2000. This increase of $29.3 million, or 6.9%, was
due to relatively strong loan demand throughout our market area, and our desire
to continue to expand our lending efforts in the consumer, home equity,
business, construction and commercial real estate areas. During the year ended
June 30, 2001, total
33
mortgage loans increased by $33.7 million, or 8.5%, of which commercial real
estate and multi-family loans increased $26.1 million (25.4%), home equity loans
increased by $2.8 million (3.9%), and construction mortgage loans increased
$12.8 million (85.2%) which amounts were partially offset by a decrease in
single-family first mortgage loans of $8.0 million (3.9%). During fiscal 2001,
consumer loans increased $1.9 million (23.9%) while commercial business loans
decreased by $5.8 million (22.4%), in large part due to $7.2 million in
charge-offs related to two credits in that portfolio. Despite the charge-offs
the Company's allowance for loan losses amounted to $4.3 million at June 30,
2001 representing a net increase of $408,000 (10.4%) from the allowance of $3.9
million at June 30, 2000.
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 twelve-year life and goodwill is being amortized to expense over
a period of fifteen years. The carrying amount of intangible assets at June 30,
2001 and 2000 is net of accumulated amortization of $2.9 million and $2.6
million, respectively.
DEPOSITS. Total deposits increased by $44.2 million, or 9.8%, to $497.0
million at June 30, 2001 compared to $452.9 million at June 30, 2000. During the
year ended June 30, 2001, checking accounts grew by $5.5 million. This was an
increase of 7.2% from the June 30, 2000 balance of $76.8 million. Savings
accounts increased approximately $5.5 million, or 10.4% to $58.6 million at June
30, 2001 compared to $53.0 million at June 30, 2000. Money market accounts
increased $5.1 million or 17.1% to $34.8 million at June 30, 2001 compared to
$29.7 million at June 30, 2000. Certificates of deposit comprise the largest
component of our deposit portfolio, at June 30, 2001, these accounts totaled
$321.4 million. Certificates of deposit amounted to 64.7% and 64.8% of the
Company's total deposits at both June 30, 2001 and 2000, respectively.
FEDERAL HOME LOAN BANK ADVANCES. The Company uses advances from the FHLB of
Pittsburgh as an additional source of funds to meet our loan demand. At June 30,
2001, the outstanding amount of these borrowings was $59.9 million, which is a
$22.4 million increase from the $37.5 million outstanding at June 30, 2000. We
also use FHLB advances to fund certain investment strategies approved by our
Board of Directors. At June 30, 2001 and 2000, $19 million and $10 million,
respectively, in borrowings were outstanding to fund these strategies.
STOCKHOLDERS' EQUITY. At June 30, 2001, our total stockholders' equity
amounted to $60.4 million or 9.7% of assets compared to $60.6 million or 10.8%
of assets at June 30, 2000. This decrease of $286,000 or 0.5% is attributed to
the combination of $157,000 in net income during the fiscal year, which was
additionally enhanced by a decrease in net unrealized losses, net of taxes, of
$2.3 million, offset by dividends paid of $914,000 and repurchases of our common
stock for treasury amounting to $2.1 million. Net unrealized losses amounted to
$29,000 and $2.3 million at June 30, 2001 and June 30, 2000, respectively. The
Company paid cash dividends of $0.12, $0.11, $0.11 and $0.10 per share for the
respective quarters during the fiscal year ended June 30, 2001. During fiscal
2001, the Company purchased an additional 184,000 shares of its common stock for
treasury as part of the Company's Stock Repurchase Program. As of June 30, 2001,
206,500 shares have been purchased at an aggregate price of $2.4 million
resulting in an average per share price of $11.39. At June 30, 2000, the Company
held 22,500 shares of treasury stock. Unallocated shares held by the Company's
Employee Stock Ownership Plan ("ESOP") and Recognition and Retention Plan
("RRP") declined to $2.1 million at June 30, 2001 compared to $2.4 million at
June 30, 2000. This decrease of $305,000, or 12.6%, is a result of amortization
related to the ESOP loan over a life of 15 years as well as payments of RRP
shares pursuant to a five-year vesting schedule.
34
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table presents the average daily balances for various
categories of assets and liabilities, and income and expense related to those
assets and liabilities for the years ended June 30, 2001, 2000 and 1999. The
table also shows the average yields and costs on interest-earning assets and
interest-bearing liabilities for each of the fiscal years and at June 30, 2001.
The Company maintained average balances of tax exempt securities of $2.3
million, $656,000 and $36,000 for the years ended June 30, 2001, 2000 and 1999,
respectively. Loans receivable include non-accrual loans.
For the Year Ended
At --------------------------------------------------------------------------------
June 30, 2001 June 30, 2001 June 30, 2000
------------- ---------------------------------------- --------------------------------------
Average Average
Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Cost Balance Interest Cost Balance Interest Cost
---------------------- ------------- ------------- ------------ ----------- ------------ ------------ ----------
Interest Earning Assets:
Loans Receivable :
Mortgage loans 7.81% $ 417,547 $ 33,412 8.00% $ 400,267 $ 31,564 7.89%
Non-Mortgage consumer loans 8.58% 9,091 612 6.73% 7,463 552 7.40%
Commercial loans 7.93% 24,807 2,124 8.56% 18,667 1,857 9.95%
------------- ------------ ------------ ------------
Total Loans 7.83% 451,445 36,148 8.01% 426,397 33,973 7.97%
Securities 6.55% 117,756 7,854 6.74% 76,919 4,750 6.26%
Other interest-earning assets 2.55% 10,275 283 2.75% 7,006 170 2.43%
------------- ------------ ------------ ------------
Total interest-earning assets 7.41% 579,476 $ 44,285 7.64% 510,322 $ 38,893 7.62%
------------ ------------
Noninterest-earning assets 14,078 12,772
------------- ------------
Total assets $ 593,554 $ 523,094
============= ============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts 2.13% $ 62,292 $ 1,464 2.35% $ 59,182 $ 1,347 2.28%
Savings accounts 2.06% 53,472 1,102 2.06% 50,987 1,049 2.06%
Certificates of deposit 5.63% 300,064 17,806 5.93% 267,065 14,598 5.47%
------------- ------------ ------------ -----------
Total deposits 4.63% 415,828 20,372 4.90% 377,234 16,994 4.50%
Total borrowings 5.85% 60,201 3,825 6.35% 38,820 2,354 6.06%
Total escrow accounts 0.61% 3,151 19 0.60% 3,468 21 0.61%
------------- ------------ ------------ -----------
Total interest-bearing
liabilities 4.74% 479,180 $ 24,216 5.05% 419,522 $ 19,369 4.62%
------------ -----------
Noninterest bearing liabilities:
Non-interest checking 45,412 37,638
Other 5,750 3,836
------------- ------------
Total liabilities 530,342 460,996
Total equity 63,212 62,098
------------- ------------
Total liabilities and equity $ 593,554 $ 523,094
============= ============
Net interest-earning assets $ 100,296 $ 90,800
============= ============
Net interest income/interest rate spread $ 20,069 2.59% $ 19,524 3.00%
============ ---- =========== ----
Net interest margin 3.46% 3.83%
---- ----
Ratio of average interest-earning assets
to average interest-bearing liabilities 120.93% 121.64%
------ ------
For the Year Ended
-------------------------------------------
June 30, 1999
-------------------------------------------
Average
Average Yield/
Balance Interest Cost
(Dollars in thousands) ------------- -------------- ------------
----------------------
Interest Earning Assets:
Loans Receivable :
Mortgage loans $ 325,710 $ 26,141 8.03%
Non-Mortgage consumer loans 5,795 402 6.94%
Commercial loans 8,995 857 9.53%
------------- --------------
Total Loans 340,500 27,400 8.05%
Securities 63,593 3,860 6.10%
Other interest-earning assets 17,410 755 4.34%
------------- --------------
Total interest-earning assets 421,503 $ 32,015 7.60%
--------------
Noninterest-earning assets 10,456
-------------
Total assets $ 431,959
=============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 46,955 $ 1,111 2.37%
Savings accounts 43,032 896 2.08%
Certificates of deposit 241,795 13,359 5.52%
------------- --------------
Total deposits 331,782 15,366 4.63%
Total borrowings 14,198 772 5.44%
Total escrow accounts 3,423 26 0.76%
------------- --------------
Total interest-bearing liabilities 349,403 $ 16,164 4.63%
--------------
Noninterest bearing liabilities:
Non-interest checking 30,585
Other 4,278
-------------
Total liabilities 384,266
Total equity 47,693
-------------
Total liabilities and equity $ 431,959
=============
Net interest-earning assets $ 72,100
=============
Net interest income/interest rate spread $ 15,851 2.97%
============= ----
Net interest margin 3.76%
----
Ratio of average interest-earning assets
to average interest-bearing liabilities 120.64%
------
35
RATE/VOLUME ANALYSIS
The following table shows the effect of changing rates and volumes on
net interest income for the years ended June 30, 2001 and 2000, compared to the
prior fiscal year. Information provided shows the effect on net interest income
of (1) rates (change in rate multiplied times prior volume), (2) volume (changes
in volume times prior rate) and (3) rate/volume (change in rate times change in
volume).
Increase (decrease) in net interest income for the
year ended June 30, 2001 compared to the year
ended June 30, 2000 due to
---------------------------------------------------
Rate/ Increase/
(Dollars in Thousands) Rate Volume Volume (Decrease)
---------------------------------------------- ------- ---------- --------- -----------
Interest-earning assets
Loans receivable
Real estate loans $ 464 $ 1,363 $ 21 $ 1,848
Other consumer loans (49) 120 (11) 60
Business loans (259) 611 (85) 267
------- ---------- --------- -----------
Total loans 156 2,094 (75) 2,175
Securities 141 2,877 86 3,104
Other interest-earning assets 23 79 11 113
------- ---------- --------- -----------
Total net change in income on
interest-earning assets 320 5,050 22 5,392
------- ---------- --------- -----------
Interest-bearing liabilities
Deposits
NOW and money market 44 71 2 117
Savings accounts 2 51 - 53
Certificates of deposit 1,250 1,804 154 3,208
------- ---------- --------- -----------
Total deposits 1,296 1,926 156 3,378
Borrowings 112 1,297 62 1,471
Advance payments for taxes
and insurance - (2) - (2)
------- ---------- --------- -----------
Total net change in expense on
interest-bearing liabilities 1,408 3,221 218 4,847
------- ---------- --------- -----------
Change in net interest income $(1,088) $ 1,829 $ (196) $ 545
------- ---------- --------- -----------
Increase (decrease)in net interest income for the
year ended June 30, 2000 compared to the year
ended June 30, 1999 due to
---------------------------------------------------
Rate/ Increase/
(Dollars in Thousands) Rate Volume Volume (Decrease)
---------------------------------------------- ------- ---------- --------- -----------
Interest-earning assets
Loans receivable
Real estate loans $ (457) $ 5,984 $ (105) $ 5,422
Other consumer loans 27 115 8 150
Business loans 38 922 41 1,001
------- ---------- --------- -----------
Total loans (392) 7,021 (56) 6,573
Securities 250 601 39 890
Other interest-earning assets (333) (451) 199 (585)
------- ---------- --------- -----------
Total net change in income on
interest-earning assets (475) 7,171 182 6,878
------- ---------- --------- -----------
Interest-bearing liabilities
Deposits
NOW and money market (42) 289 (11) 236
Savings accounts (11) 166 (2) 153
Certificates of deposit (142) 1,396 (15) 1,239
------- ---------- --------- -----------
Total deposits (195) 1,851 (28) 1,628
Borrowings 89 1,339 154 1,582
Advance payments for taxes
and insurance (5) - - (5)
------- ---------- --------- -----------
Total net change in expense on
interest-bearing liabilities (111) 3,190 126 3,205
------- ---------- --------- -----------
Change in net interest income $ (364) $ 3,981 $ 56 $ 3,673
------- ---------- --------- -----------
36
RESULTS OF OPERATIONS
GENERAL. Net income for the year ended June 30, 2001 was $157,000
compared to $4.8 million and $3.6 million for the years ended June 30, 2000 and
1999, respectively. Fiscal 2001 operations were adversely affected by provisions
for loan losses aggregating $7.9 million, primarily related to two
non-performing commercial business loans, compared to provisions of $706,000 and
$531,000 for the years ended June 30, 2000 and 1999, respectively. In fiscal
2001, increases were recognized in net interest income, non-interest income and
non-interest expense compared to fiscal 2000. In fiscal 2000, the increase in
net interest income was the primary reason for the increase in net income
compared to fiscal 1999. In fiscal 1999, $896,000 of expense was incurred with
the establishment of the Willow Grove Foundation.
NET INTEREST INCOME. Net interest income is determined by our interest
rate spread (i.e., the difference between the yields earned on interest-earning
assets and the rates paid on interest-bearing liabilities) and also the amount
of interest-earning assets relative to interest-bearing liabilities. Our average
interest rate spread for the years ended June 30, 2001, 2000 and 1999 was 2.59%,
3.00% and 2.97%, respectively. Our net interest margin (i.e., net interest
income expressed as a percentage of average interest-earning assets) was 3.46%,
3.83%, and 3.76% for the same three fiscal years. The changes in our interest
spread have been due primarily to the fluctuations in market rates of interest
and the interrelationship of interest rates earned/paid on longer term financial
instruments, such as mortgage loans, and shorter term financial instruments,
such as deposits. A substantial portion of the proceeds received from our
various sources of funds were reinvested in new interest-earning assets with
yields that were closer to costs paid on interest-bearing liabilities causing a
decline in spread in fiscal 2001 compared to fiscal 2000. In fiscal 2000
compared to fiscal 1999, the increase in the average balance of our
interest-earning assets together with the growth in core deposits, reduced the
overall rate paid on deposits and positively affected our net interest margin
and spread. Our net interest margin declined 37 basis points in fiscal 2001
compared to fiscal 2000 due primarily to the increase in non-accrual loans and
charge-offs which resulted in the reduction in the ratio of average
interest-earning assets to average interest-bearing liabilities and also due to
the volatility of interest rates during the fiscal year. Our net interest margin
increased seven basis points in fiscal 2000 compared to fiscal 1999 primarily as
a result of an increase in the proportion of average interest-earning assets to
average interest-bearing liabilities resulting in part from the investment of
funds raised through our initial public offering completed in December 1998. The
ratio of average interest-earning assets to average interest-bearing liabilities
was 120.93%, 121.64% and 120.64% for the fiscal years 2001, 2000 and 1999,
respectively.
For the fiscal year ended June 30, 2001, net interest income totaled
$20.1 million compared to $19.5 million and $15.9 million in fiscal 2000 and
1999, respectively. The increases in fiscal 2001 of $545,000 or 2.79% and fiscal
2000 of $3.6 million or 23.17%, were primarily due to increases in average
balances of interest earning assets.
INTEREST INCOME. Interest income includes the interest earned on our
various loans and securities, as well as yield adjustments for the premiums,
discounts and deferred fees recorded in connection with the acquisition of these
assets. Our total interest income for the year ended June 30, 2001 was $44.3
million compared to $38.9 million and $32.0 million for fiscal 2000 and 1999,
respectively.
The increase in interest income in fiscal 2001 compared to 2000 was
$5.4 million, or 13.86%. Increases in the average balances of loans outstanding
($25.0 million) and an increase in the average balance of securities ($40.8
million) were the primary reasons for the increase in interest income. For
fiscal 2001, the yield on average interest-earning assets rose two basis points
to 7.64% from 7.62%. The major contributing factor for this increase was the
increase in the average yield on mortgage loans, which increased 11 basis points
from 7.89% to 8.00% and the average yield on securities which rose 49 basis
points from 6.18% to 6.67%. These increases were somewhat offset by a 139 basis
point decline in the average yield on commercial business loans which fell to
8.56% in fiscal 2001 from 9.95% primarily as a result of an increase in
non-performing loans during fiscal 2001 and also due to declines in market rates
during the second half of fiscal 2001.
37
The $6.9 million, or 21.48%, increase in interest income in fiscal 2000
compared to fiscal 1999 was due to a $6.6 million increase in interest on loans
and an $890,000 increase in interest on securities. This was primarily
attributable to a $85.9 million increase in the average balance of loans
outstanding and $13.3 million increase in average balances of securities during
fiscal 2000 compared to fiscal 1999.
INTEREST EXPENSE. Interest expense consists of the interest paid to our
depositors on their interest-bearing deposit accounts with us, and to a lesser
extent, interest paid on funds borrowed from the FHLB and interest paid on
certain escrow accounts. For the fiscal year ended June 30, 2001, our total
interest expense was $24.2 million. For the fiscal years ended June 30, 2000 and
1999, total interest expense was $19.4 million and $16.2 million, respectively.
For the fiscal year ended June 30, 2001, interest expense increased by
$4.8 million, or 25.02%. The increase in interest expense for fiscal 2001 was
primarily due to a $3.4 million increase in interest on deposits to $20.4
million and a $1.5 million increase in interest on borrowings to $3.8 million.
The increase in interest on deposits was due to a combination of a 10.2%
increase in the average balance of deposits outstanding, due primarily to
increases in certificates of deposit, and higher average rates paid on deposits,
which increased 40 basis points to 4.90% in fiscal 2001 compared to 4.50% in
fiscal 2000. Interest on borrowings also increased due to a combination of
higher average balances, which increased 55.1% in fiscal 2001 compared to fiscal
2000, and average rates paid increasing 29 basis points from 6.06% in fiscal
2000 to 6.35% during fiscal 2001.
The primary reason for the $3.2 million, or 19.83%, increase in
interest expense for the year ended June 30, 2000, compared to fiscal 1999, was
the increased cost associated with the larger average balances of deposits
outstanding, offset slightly by a reduction of the average rate paid on deposits
and larger average balances combined with larger average rates paid on
borrowings outstanding.
During fiscal year 2001, the average balance of certificates of deposit
("CDs") increased $33.0 million to $300.1 million, a 12.36% increase. At June
30, 2001 and June 30, 2000, CDs made up 64.7% and 64.8% of our deposits,
respectively. Our core deposit categories (interest and non-interest checking,
savings and money market accounts) increased $13.4 million or 9.1% to $161.2
million at June 30, 2001 compared to $147.8 million at June 30, 2000. Interest
rates on core deposits are typically significantly less than rates paid on CDs.
PROVISION FOR LOAN LOSSES. We establish provisions for loan losses, which
are charges to our operating results, in order to maintain a level of total
allowance for losses that we deem adequate to absorb known and inherent losses.
Our determination of the adequacy of the allowance is based upon an evaluation
of the portfolio, loss experience, current economic conditions, volume, growth,
composition of the loan portfolio and other relevant factors. The amount of our
allowance for loan losses is only an estimate, and actual losses may vary from
these estimates. We assess our allowance for loan losses at least quarterly, and
make any necessary provision for losses needed to maintain our allowance for
losses at a level deemed adequate. For the years ended June 30, 2001, 2000 and
1999, our provisions for losses were $7.9 million, $706,000 and $531,000,
respectively. During fiscal 2001, we incurred charge-offs of $5.3 million and
$1.9 million, which were specifically related to two commercial business loans
whose pre-impairment balances were $6.7 million and $2.0 million, respectively.
The loan which had a $6.7 million pre-impairment balance was made to a local
business with a history of solid financial performance and partially secured by
real estate, fixed assets, inventory and securities. The business experienced
severe unexpected cash flow difficulties and subsequently filed bankruptcy. The
other loan with the $2.0 million pre-impairment balance was charged-off as a
result of extensive fraud on behalf of the borrower. This loan was made to a
local business involved in the build-out of ambulances. (See Item I - "Business
- Asset Quality"). These two loans are measured for impairment quarterly and, at
June 30, 2001, have a remaining carrying value of $545,000 and $93,000,
respectively.
At June 30, 2001, the amount of our allowance for losses was $4.3
million compared to $3.9 million at June 30, 2000. Management believed that the
provision for loan losses in fiscal 2001 was appropriate given, among other
things, the continuing growth of our loan portfolio and the inherent credit
38
risk associated with loan portfolio diversification in other than single-family
residential loans. The percentage of the allowance for losses to total loans
increased to 0.94% at June 30, 2001 compared to 0.91% at June 30, 2000. However,
the allowance for loan losses to non-performing loans was 83.3% at June 30, 2001
compared to 310.9% at June 30, 2000.
We believe that the allowance for losses was adequate at June 30, 2001
based upon the facts and circumstances known to us at that date. No assurance
can be made that additional provisions may not be needed in future periods,
which could adversely affect our results of operations. Regulatory agencies, in
the course of their regular examinations, review the allowance for loss and
carrying value of non-performing assets. No assurance can be given that these
agencies might not require changes to the allowance for losses in the future.
NON-INTEREST INCOME. Non-interest income is comprised of service fees and
charges, loan servicing fees, and realized gains and losses on assets available
or held for sale. Total non-interest income for the years ended June 30, 2001,
2000, and 1999 was $1.8 million, $1.1 million, and $1.0 million, respectively.
The increase in non-interest income, of $685,000 or 62.2% for fiscal 2001, was
due primarily to realized gains on loans held for sale and increases in service
fees and charges. Gains on sale of loans of $381,000 were realized in fiscal
2001 as the Company took advantage of market opportunities The loss on AFS
securities was the result of $243,000 in gains on securities being more than
offset by a $258,000 write-down of certain securities acquired as collateral
upon the default of a commercial business loan. Such securities were deemed to
be other than temporarily impaired and, pursuant to SFAS 115, their carrying
value was adjusted accordingly to $209,000 at June 30, 2001. Service charges and
fees increased by $237,000 in fiscal 2001 compared to fiscal 2000 as a result of
increases in the number of accounts and account activity. In fiscal 2000, the
increase of $93,000 was due to increases in service fees and charges, slightly
offset by a reduction in net loan servicing income. General increases in service
fees and charges are primarily due to increases in the number of accounts,
particularly checking accounts.
NON-INTEREST EXPENSE. The primary components of non-interest expense are
compensation and employee benefits, occupancy expense, data processing, deposit
account services and a variety of other expenses. For the years ended June 30,
2001, 2000, and 1999, non-interest expense totaled $13.9 million, $12.1 million,
and $10.7 million, respectively. The primary reason for the increase in
non-interest expenses in fiscal 2001 was due to a $978,000 increase in
compensation and employee benefits, a $315,000 increase in occupancy and
equipment expense and an increase of $332,000 in professional fees. Included in
fiscal 1999 is an $896,000 expense for the establishment of and one-time
contribution of stock to the Willow Grove Foundation.
Compensation and benefits totaled $8.0 million, $7.0 million, and $5.5
million for the fiscal years ended June 30, 2001, 2000, and 1999, respectively.
The primary reasons for the increases in fiscal 2001 were the result of the
human resource costs necessary to service the continual expansion of products
offered, as well as increases in our branch office network from nine at June 30,
1999 to 11 at June 30, 2000 and to 12 at June 30, 2001. In addition in November,
1999 we opened a new operations center in Horsham, Pennsylvania. The number of
the Company's full time equivalent employees has increased from 136 at June 30,
1999, to 175 at June 30, 2001. Expenses of $138,000, $81,000 and $90,000
attributed to the ESOP are included in fiscal 2001, 2000 and 1999, respectively,
while $162,000 and $108,000 was incurred in fiscal years 2001 and 2000 for the
RRP, respectively.
Occupancy and furniture and equipment expenses were $1.8 million, $1.4
million, and $918,000 for the fiscal years ended June 30, 2001, 2000, and 1999,
respectively. The $315,000 increase in fiscal 2001 compared to fiscal 2000 as
aforementioned was primarily due to banking network expansion and the full-year
costs associated with the opening of the operations center. Federal deposit
insurance premiums were $88,000, $153,000, and $206,000 for fiscal 2001, 2000
and 1999, respectively. Amortization of intangible assets was $276,000,
$410,000 and $410,000, while advertising expense was $404,000, $370,000, and
$436,000 for the fiscal years ended June 30, 2001, 2000, and 1999, respectively.
For the fiscal years ended June 30, 2001, 2000, and 1999, data processing
expenses were $563,000, $525,000, and $426,000, respectively, while deposit
account service expenses were $675,000,
39
$593,000 and $441,000, respectively. Professional fees were $576,000, $244,000
and $285,000 for the fiscal years ended June 30, 2001, 2000, and 1999,
respectively. The increase in professional fees in fiscal 2001 was primarily
related to costs associated with workout, analysis and review of the two
previously mentioned non-performing commercial business loans. Other expenses,
which include miscellaneous operating items were $1.4 million, $1.2 million, and
$984,000, in fiscal 2001, 2000 and 1999, respectively, all increased primarily
due to our growth and diversification efforts. In accordance with our
reorganization plan and our commitment to our communities, in fiscal 1999, we
established the Willow Grove Foundation by issuing 89,635 shares of the
Company's conversion stock to the Foundation and incurring a one-time expense of
$896,000.
INCOME TAX (BENEFIT)/PROVISION. Income tax benefits amounted to $32,000 for
the year ended June 30, 2001. This compares to tax provisions of $3.0 million,
and $2.0 million for the years ended June 30, 2000 and 1999, respectively. A
significant reduction in pre-tax income associated with large provisions for
loan losses were primarily responsible for the reduction in income tax expense
in fiscal 2001. Increases in fiscal 2000 compared to 1999 were primarily
attributable to increases in pre-tax income. The effective tax rates for fiscal
2001, 2000 and 1999 were (26%), 38.26%, and 36.00%, respectively.
LIQUIDITY AND COMMITMENTS
Our primary sources of funds are from deposits, amortization of loans,
loan prepayments and the maturity of loans, mortgage-backed securities and other
investments, and other funds provided from operations. While scheduled payments
from the amortization of loans and mortgage-backed securities and maturing
investment securities are relatively predictable sources of funds, deposit flows
and loan prepayments can be greatly influenced by general interest rates,
economic conditions and competition. We also maintain excess funds in
short-term, interest-bearing assets that provide additional liquidity. We have
also utilized outside borrowings, primarily from the FHLB of Pittsburgh as an
additional funding source.
We use our liquidity resources to fund existing and future loan
commitments, to fund maturing certificates of deposit and demand deposit
withdrawals, to invest in other interest-earning assets, and to meet operating
expenses. At June 30, 2001, we had outstanding approved loan commitments
totaling $10.7 million and certificates of deposit maturing within the next
twelve months amounting to $253.9 million. Based upon historical experience, we
anticipate that a significant portion of the maturing certificates of deposit
will be reinvested in the Bank.
We anticipate that we will continue to have sufficient funds and
alternative funding sources to meet our current commitments.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements, accompanying notes, and related financial
data presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of our operations. Most of our assets and
liabilities are monetary in nature; therefore, the impact of interest rates has
a greater impact on our performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
Business Combinations
---------------------
In June 2001, the FASB issued Statement No. 141, "Business Combinations." The
Statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No.
38, Accounting for Preacquisition Contingencies
40
of Purchased Enterprises. All business combinations in the scope of the
Statement are to be accounted for using the purchase method.
The provisions of the Statement apply to all business combinations initiated
after June 30, 2001. The Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. There is no expected impact on earnings, financial
condition, or equity upon adoption of Statement No. 141.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets". It addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. SFAS No. 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
The provisions of the SFAS No. 142 are required to be applied starting with
fiscal years beginning after December 15, 2001, except that goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately to
the non-amortization and amortization provisions of the SFAS No. 142. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not
previously been issued. SFAS No. 142 is required to be applied at the beginning
of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date. The
Company adopted SFAS No. 142 on July 1, 2001.In connection with the adoption of
SFAS No. 142, the Company's recorded amount of goodwill of $848,000 will no
longer be subject to amortization but will instead be periodically measured for
impairment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK
The market value of assets and liabilities, as well as future earnings,
can be affected by interest rate risk. Market values of financial assets have an
inverse relationship to rates, i.e., when interest rates rise, the market value
of many of our assets decline, and when rates fall, the market value of many of
our assets rise. Our primary assets are loans to borrowers who often have the
ability to prepay their loan. Therefore, in a falling rate environment, the
increase in the market value of our assets is reduced by this option for the
borrower to prepay the loan.
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest spread that can be maintained during
fluctuations in prevailing interest rates. Interest rate sensitivity gap ("gap")
is a measure of the difference between interest-earning assets and
interest-bearing liabilities that either mature or re-price within a specified
time period. A gap is considered positive when the amount of interest-earning
assets exceeds the amount of interest-bearing liabilities, and is considered
negative when interest-bearing liabilities exceed interest-earning assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would generally result in an increase in net interest income, and a
positive gap would result in a decrease in net interest income. However,
interest rates on differing financial instruments will not always change at the
same time or to the same extent.
The following gap table shows the amount as of June 30, 2001 of assets
and liabilities projected to mature or re-price within various time periods.
41
0 to 3 3 to 12 1 to 3 3 to 5 Over 5
(Dollars in thousands) Note months months years years years Total
---------------------- ---- ------ ------- ------ ------ ------ -----
Interest-earning assets
Fixed rate loans (1) $ 15,314 $ 36,218 $ 82,982 $ 58,633 $ 108,821 $ 301,967
Adjustable rate loans (2) 38,866 47,290 41,469 27,250 - 154,876
Investments and other
interest-earning (3) (4)
assets 32,360 15,788 20,856 12,508 66,435 147,946
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets $ 86,540 $ 99,296 $ 145,307 $ 98,391 $ 175,255 $ 604,789
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities
Certificates of deposits 77,227 176,654 62,456 5,021 - 321,358
Other deposits (5) (6) 1,054 3,163 8,013 7,169 156,273 175,672
Borrowings (7) 3,744 7,976 10,934 12,433 24,798 59,885
Escrow accounts 2,909 970 - - - 3,879
Total interest-bearing $ 84,934 $ 188,763 $ 81,403 $ 24,623 $ 181,071 $ 560,794
--------- --------- --------- --------- --------- ---------
Excess (deficiency) of
interest bearing assets
over interest-earning
liabilities $ 1,607 $ (89,467) $ 63,904 $ 73,767 $ (5,815) $ 43,995
Cumulative excess
(deficiency) of interest
-earning assets over
interest-bearing
liabilities $ 1,607 $ (87,860) $ (23,956) $ 49,811 $ 43,996
Cumulative excess
(deficiency) of interest
-bearing assets to
interest-earning
liabilities as a
percent of total assets 0.26% (14.05%) (3.83%) 7.97% 7.04%
Ratio of interest-earning
assets to interest-bearing
liabilities 101.89% 52.60% 178.50% 399.58% 96.79% 107.85%
-------------------------------
(1) Loan prepayments are based upon estimates given the level of interest rates
at June 30, 2001.
(2) Included in the period in which the rate is expected to change adjusted for
estimated prepayments.
(3) Amounts stated are at fair value.
(4) Re-pricing or maturity of callable securities is estimated based upon the
interest rate environment at June 30, 2001.
(5) Includes non interest-bearing checking accounts.
(6) Includes estimates for the re-pricing of non-maturity deposits.
(7) Re-pricing or maturity of callable advances is estimated based upon the
interest rate environment at June 30, 2001.
At June 30, 2001, the Company's cumulative one-year gap to total assets
ratio was negative 14.05%. The amounts shown are based upon certain assumptions
concerning the amount of loan prepayments and the re-pricing of non-maturity
deposits.
Asset/liability management policies, designed to measure and monitor
the maturities and re-pricing of our interest-earning assets and
interest-bearing liabilities, have been adopted by the Company . These interest
rate risk and asset/liability management actions are taken under the guidance of
42
the Asset/Liability Management Committee ("ALCO"). The ALCO's purpose is to
communicate, coordinate, and control asset/liability management consistent with
our business plan and Board approved policies. The objective of the ALCO is to
manage asset generation and funding sources to produce results that are
consistent with liquidity, capital adequacy, growth, risk and profitability
goals. The ALCO meets at least quarterly and monitors the volume and mix of
assets and funding sources taking into account the relative costs and spreads,
the interest rate sensitivity gap and liquidity needs. The ALCO also reviews
economic conditions and interest rate projections, current and projected
liquidity needs and capital positions, anticipated changes in the mix of assets
and liabilities, and interest rate exposure limits versus current projections
pursuant to gap analysis and interest income simulations. At each meeting, the
ALCO will recommend changes in strategy as appropriate. Interest rate risk
issues are also discussed by the Board of Directors on a regular basis.
Management meets weekly to monitor progress in achieving asset liability targets
approved by the Board, particularly the type and rate of asset generation and
sources of funding.
In order to reduce our interest rate risk exposure, emphasis has been
placed on the origination of assets with shorter maturities or adjustable rates
such as commercial and multi-family real estate loans, construction loans,
commercial business loans and home equity loans. At the same time, other actions
include attempts to increase our core deposits and to extend the estimated
duration of our liabilities through the use of FHLB Advances. In an effort to,
among other things, reduce its interest rate risk exposure, the Company
classifies a portion of the long-term fixed rate mortgage loans it originates as
available for sale ("AFS) mortgages. During the year ended June 30, 2001, the
Company sold an aggregate of $92.4 million of AFS mortgage loans. In addition to
attempting to increase its originations of shorter term and/or adjustable rate
loans, in recent periods the Company has increased its purchases and sales of
adjustable rate mortgage backed securities to modify its interest rate
risk position. During fiscal 2001, the Company purchased and sold adjustable
rate mortgage backed securities amounting to $45.9 million and $28.3 million,
respectively.
The ALCO regularly reviews interest rate risk by, among other things,
examining the impact of alternative interest rate environments on net interest
income and net portfolio value ("NPV"), and the change in NPV. NPV is the
difference between the market value of assets and the market value of
liabilities and off-balance sheet items under various interest rate scenarios.
Sensitivity is the difference (measured in basis points) between the NPV to
assets ratio at market rate and the NPV to assets ratio determined under each
rate scenario. The ALCO monitors both the NPV and sensitivity according to
guidelines established by the Office of Thrift Supervision ("OTS") in Thrift
Bulletin 13A "Management of Interest Rate Risk, Investment Securities and
Derivative Activities," and Board approved limitations.
Presented below, as of June 30, 2001 and 2000, is an analysis of the
interest rate risk position as measured by NPV and sensitivity based upon
various rate scenarios. These values have been obtained from data submitted by
the Bank to the OTS. The OTS performs scenario analysis to estimate current or
base case economic value and estimates NPV that would result from instantaneous,
parallel shifts of the yield curve of plus and minus 100, 200 and 300 basis
points. The model does not value new business activities. It only provides an
estimate of economic value at a point in time and the economic value of the same
portfolio under the above referenced interest rate scenarios.
43
Estimated change in NPV and Sensitivity
At June 30, 2001
Net Portfolio Value Sensitivity
----------------------------------------- -------------
Amount Percent To
(Dollars in thousands) of change Change Assets
---------------------------------------------- --------------- ------------ -----------
Hypothetical change in interest rates
up 300 basis points $ (36,730) (54)% 5.23 % (534)bp
up 200 basis points (24,791) (36) 7.05 (352)
up 100 basis points (12,319) (18) 8.86 (171)
no change - base case - 10.56
down 100 basis points 8,602 13 11.70 113
down 200 basis points 14,365 21 12.43 186
down 300 basis points 20,473 30 13.19 263
At June 30, 2000
Net Portfolio Value Sensitivity
----------------------------------------- -------------
Amount Percent To
(Dollars in thousands) of change Change Assets
---------------------------------------------- --------------- ------------ -----------
Hypothetical change in interest rates
up 300 basis points $ (31,638) (58)% 4.43 % (531)bp
up 200 basis points (21,461) (39) 6.23 (351)
up 100 basis points (10,700) (20) 8.03 (170)
no change - base case - 9.74
down 100 basis points 8,959 16 11.08 135
down 200 basis points 12,978 24 11.63 189
down 300 basis points 16,067 29 12.01 227
The change in the NPV ratio at market levels between June 30, 2001 and
2000 is the result of (1) the change in the amount and diversification of our
assets and liabilities at June 30, 2001 compared to June 30, 2000 and (2)
changes in the market level of interest rates. The change in sensitivity, in the
up 200 basis point scenario, from 351 basis points to 352 basis points indicates
that our balance sheet has not materially changed in this measurement of
interest rate risk..
NPV is more sensitive and may be more negatively impacted by rising
interest rates than by declining rates. This occurs primarily because as rates
rise, the market value of long-term fixed rate assets, like fixed rate mortgage
loans, declines due to both the rate increase and slowing prepayments. When
rates decline, these assets do not experience a similar appreciation in value
due to the increases in prepayments. The value of deposits and borrowings tend
to change in approximately the same proportions in rising and falling rate
environments.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Willow Grove Bancorp, Inc.
Management's Responsibility for Financial Reporting
The management of Willow Grove Bancorp, Inc. (the "Company") is responsible for
the preparation, integrity and fair presentation of published Financial
Statements. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and include amounts based upon management's best judgment where
necessary.
Management maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the integrity and reliability of financial
records and the protection of assets. There are inherent limitations in the
effectiveness of any internal control system, including, but not limited to the
possibility of human error or overriding of controls. Accordingly, even an
effective internal control structure can only provide reasonable assurance with
respect to financial statement presentation. Further, because of changes in
conditions, the degree of effectiveness of an internal control structure may
vary over time.
Management has assessed the Company's internal controls over financial reporting
in conformity with accounting principles generally accepted in the United State
of America and believes that the Company has maintained effective internal
controls over financial data presented in accordance with accounting principles
generally accepted in the United States of America. This assessment was based on
criteria for effective control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
organizations of the Treadway Commission.
Management also is responsible for compliance with Office of Thrift Supervision
and Federal Deposit Insurance Corporation safety and soundness laws and
regulations. Management has assessed its compliance with the designated laws and
regulations and believes that it has complied, in all material respects, with
the designated laws and regulations relating to safety and soundness for the
year ended June 30, 2001.
/s/ Frederick A. Marcell Jr. /s/ Christopher E. Bell
---------------------------- --------------------------
Frederick A. Marcell Jr. Christopher E. Bell
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
47
Independent Auditors' Report
To the Board of Directors and Stockholders of
Willow Grove Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Willow Grove Bancorp, Inc. and subsidiary as of June 30, 2001 and 2000, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Willow Grove
Bancorp, Inc. and subsidiary as of June 30, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
-------------------------------------------
Philadelphia, Pennsylvania
July 23, 2001, except as to Note 17, which
is as of September 7, 2001
48
Willow Grove Bancorp, Inc.
Consolidated Statements of Financial Condition
At June 30,
---------------------------------
(Dollars in thousands, except share data) 2001 2000
----------------------------------------------------------------------------------------------- ----------------
Assets
Cash and cash equivalents
Cash on hand and non-interest-bearing deposits $ 4,621 $ 4,442
Interest-bearing deposits 17,588 10,239
--------------- ----------------
Total cash and cash equivalents $ 22,209 $ 14,681
Assets available for sale:
Securities (amortized cost of $130,406 and $74,291 respectively) 130,358 70,577
Loans 2,644 35,753
Loans (net of allowance for loan losses 454,199 424,940
of $4,313 and $3,905 respectively)
Accrued income receivable 3,667 2,795
Property and equipment, net 6,188 6,232
Intangible assets 1,263 1,540
Other assets 4,620 3,605
--------------- ----------------
Total assets $ 625,148 $ 560,123
=============== ================
Liabilities and Stockholders' Equity
Deposits $ 497,030 $ 452,857
Federal Home Loan Bank advances 59,885 37,517
Advance payments from borrowers for taxes 3,879 4,725
Accrued interest payable 1,146 1,474
Other liabilities 2,851 2,907
--------------- ----------------
Total Liabilities 564,791 499,480
--------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; (25,000,000 authorized; 51 51
5,143,487 issued at June 30, 2001 and 2000)
Additional paid-in capital 22,265 22,270
Retained earnings - substantially restricted 42,534 43,291
Accumulated other comprehensive income (loss) (29) (2,340)
Treasury stock at cost, 206,500 and 22,500 shares respectively (2,351) (211)
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP) (1,494) (1,613)
Recognition and Retention Plan Trust (RRP) (619) (805)
--------------- ----------------
Total stockholders' equity 60,357 60,643
--------------- ----------------
Total liabilities and stockholders' equity $ 625,148 $ 560,123
=============== ================
See accompanying notes to consolidated financial statements.
49
Willow Grove Bancorp, Inc.
Consolidated Statements of Income
For the year ended June 30,
-----------------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999
---------------------------------------------------------------------------------- --------------- ---------------
Interest and dividend income:
Loans $ 36,148 $ 33,973 $ 27,400
Securities, primarily taxable 8,137 4,920 4,615
--------------- --------------- ---------------
Total interest income 44,285 38,893 32,015
--------------- --------------- ---------------
Interest expense:
Deposits 20,372 16,994 15,366
Borrowings 3,825 2,354 772
Advanced payments from borrowers for taxes 19 21 26
--------------- --------------- ---------------
Total interest expense 24,216 19,369 16,164
--------------- --------------- ---------------
Net interest income 20,069 19,524 15,851
Provision for loan losses 7,856 706 531
--------------- --------------- ---------------
Net interest income after provisions for loan losses 12,213 18,818 15,320
--------------- --------------- ---------------
Non-interest income:
Service charges and fees 1,340 1,103 846
Realized loss on securities available for sale (15) (46) -
Realized gain on sale of loans available for sale 381 - 10
Loan servicing income, net 81 45 153
--------------- --------------- ---------------
Total non-interest income 1,787 1,102 1,009
--------------- --------------- ---------------
Non-interest expense:
Compensation and employee benefits 8,004 7,026 5,475
Occupancy 1,087 935 599
Furniture and equipment 670 507 319
Federal insurance premiums 88 153 206
Amortization of intangible assets 276 410 410
Data processing 563 525 426
Advertising 404 370 436
Foundation expense - - 896
Community enrichment 150 150 175
Deposit account services 675 593 441
Professional fees 576 244 285
Other expenses 1,382 1,163 984
--------------- --------------- ---------------
Total non-interest expense 13,875 12,076 10,652
--------------- --------------- ---------------
Income before income taxes 125 7,844 5,677
Income tax (benefit) expense (32) 3,001 2,044
--------------- --------------- ---------------
Net income $ 157 $ 4,843 $ 3,633
=============== =============== ===============
Earnings per share: (1)
Basic $ 0.03 $ 0.98 $ 0.46
Diluted $ 0.03 $ 0.97 $ 0.46
--------------------------------------------------------------------------
(1) Earnings per share is presented in the 1999 financial statements from
January 1, 1999 to June 30, 1999.
See accompanying notes to consolidated financial statements.
50
Willow Grove Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
(Dollars in thousands, except per share data) STOCK CAPITAL EARNINGS INCOME(LOSS)
--------------------------------------------------------------- ----------- ----------- ------------ ----------------
Balance - June 30, 1998 $ - $ - $ 35,865 $ 80
Net income - - 3,633 -
Other comprehensive loss - - - (1,492)
Issuance of 5,143,487 $.01 par shares of common stock 51 22,295 - -
Capitalization of Mutual Holding Company - - (100) -
Common stock (179,270 shares) acquired by ESOP - - - -
ESOP shares committed to be released - - - -
Cash dividends paid - ($0.08 per share) - - (187) -
----------- ----------- ------------ ----------------
Balance - June 30, 1999 51 22,295 39,211 (1,412)
Net income - - 4,843 -
Other comprehensive loss - - - (928)
Common stock (89,635 shares) acquired by RRP - - - -
ESOP shares committed to be released - (9) - -
Amortization of RRP shares - (16) - -
Treasury stock acquired (22,500 shares at cost) - - - -
Cash dividends paid - ($0.36 per share) - - (763) -
----------- ----------- ------------ ----------------
Balance - June 30, 2000 $ 51 22,270 43,291 (2,340)
Net income - - 157 -
Other comprehensive income - - - 2,311
ESOP shares committed to be released - 18 - -
Amortization of RRP shares - (23) - -
Treasury stock acquired (184,000 shares at cost) - - - -
Cash dividends paid - ($0.44 per share) - - (914) -
----------- ----------- ------------ ----------------
Balance - June 30, 2001 $ 51 $ 22,265 $ 42,534 $ (29)
=========== =========== ============ ================
COMMON STOCK
TREASURY ACQUIRED BY TOTAL
(Dollars in thousands, except per share data) STOCK BENEFIT PLANS EQUITY
--------------------------------------------------------------- ------------ --------------- -----------
Balance - June 30, 1998 $ - $ - $ 35,945
Net income - - 3,633
Other comprehensive loss - - (1,492)
Issuance of 5,143,487 $.01 par shares of common stock - - 22,346
Capitalization of Mutual Holding Company - - (100)
Common stock (179,270 shares) acquired by ESOP - (1,793) (1,793)
ESOP shares committed to be released - 90 90
Cash dividends paid - ($0.08 per share) - - (187)
------------ --------------- -----------
Balance - June 30, 1999 - (1,703) 58,442
Net income - - 4,843
Other comprehensive loss - - (928)
Common stock (89,635 shares) acquired by RRP - (929) (929)
ESOP shares committed to be released - 90 81
Amortization of RRP shares - 124 108
Treasury stock acquired (22,500 shares at cost) (211) - (211)
Cash dividends paid - ($0.36 per share) - - (763)
------------ --------------- -----------
Balance - June 30, 2000 (211) (2,418) $ 60,643
Net income - - 157
Other comprehensive income - - 2,311
ESOP shares committed to be released - 119 137
Amortization of RRP shares - 186 163
Treasury stock acquired (184,000 shares at cost) (2,140) - (2,140)
Cash dividends paid - ($0.44 per share) - - (914)
------------ --------------- -----------
Balance - June 30, 2001 $ (2,351) $ (2,113) $ 60,357
============ =============== ===========
FOR THE YEAR ENDED JUNE 30,
--------------------------------------------
2001 2000 1999
---- ---- ----
Net unrealized gains (losses) on securities available for sale
arising during the period $ 2,320 $ (957) $ (1,492)
Less: reclassification adjustment for net gains (losses)
included in net income (9) (29) -
------------ ------------- -------------
Other comprehensive income (loss) 2,311 (928) (1,492)
Net income 157 4,843 3,633
------------ ------------- -------------
Comprehensive income $ 2,468 $ 3,915 $ 2,141
============ ============= =============
See accompanying Notes to consolidated financial statements.
51
Willow Grove Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended June 30,
--------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
-------------------------------------------------------- ---- ---- ----
Net cash flows from operating activities:
Net income $ 157 $ 4,843 $ 3,633
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 723 575 409
Amortization of premium and accretion (283) 12 94
of discount, net
Amortization of intangible assets 277 410 410
Foundation contribution expense - - 896
Provision for loan losses 7,856 706 531
Gain on sale of loans available for sale (381) - (10)
(Gain) Loss on securities available for sale 15 46 -
Decrease in deferred loan fees (109) (101) (292)
Increase in accrued income receivable (872) (276) (410)
Decrease (increase) in other assets (2,355) (153) 325
(Decrease) increase in accrued interest payable (328) 768 317
Deferred income tax benefit - (327) (446)
(Decrease) increase in other liabilities (56) 86 (45)
Expense of ESOP & RRP 300 189 90
Originations and purchases of (59,477) (35,753) (2,865)
loans available for sale
Proceeds from sale of loans available for sale 92,967 - 15,027
----------- ---------- -----------
Net cash provided by (used in) operating activities 38,434 (28,975) 17,664
----------- ---------- -----------
Cash flows from investing activities:
Net increase in loans (37,168) (50,915) (59,153)
Purchase of securities available for sale (112,926) (7,098) (83,581)
Proceeds from sales, calls and maturities 42,705 11,477 38,100
of securities available for sale
Principal repayments of securities 14,374 3,568 11,075
available for sale
Proceeds from sale of other 147 281 -
real estate owned
Purchase of property and equipment, net of depreciation (679) (1,672) (772)
----------- ---------- -----------
Net cash used in investing activities (93,547) (44,359) (94,331)
----------- ---------- -----------
See accompanying notes to consolidated financial statements.
52
Willow Grove Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For the year ended June 30,
---------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
----------------------------------------------------------- ---- ---- ----
Cash flows from financing activities:
Net increase in deposits 44,173 62,176 49,888
Net increase (decrease) in FHLB advances 3,000 (2,000) 4,000
with original maturity less than 90 days
Increase in FHLB advances with 51,000 53,000 1,000
original maturity greater than 90 days
Repayment of FHLB advances with (31,632) (28,469) (11,014)
original maturity greater than 90 days
Net increase (decrease) in advance (846) 322 (78)
payments from borrowers for taxes
Dividends paid (914) (763) (187)
Acquisition of stock for Recognition - (929) -
and Retention Plan
Purchase of treasury stock (2,140) (211) -
Proceeds from stock issuance, net - - 19,656
---------- ---------- ----------
Net cash provided by financing activities 62,641 83,126 63,265
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 7,528 9,792 (13,402)
Cash and cash equivalents:
Beginning of year 14,681 4,889 18,291
---------- ---------- ----------
End of year $ 22,209 $ 14,681 $ 4,889
========== ========== ==========
Supplemental disclosures of cash and cash flow information
Interest paid $ 24,544 $ 18,601 $ 15,847
Income taxes paid $ 2,275 $ 2,909 $ 2,085
Noncash items:
Change in unrealized gain (loss) on securities
available for sale (net of taxes of ($1,355), $545
and $912 in 2001, 2000 and 1999, respectively) 2,311 (928) (1,492)
Loans transferred to other real estate owned 147 281 -
See accompanying notes to consolidated financial statements.
53
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Willow Grove Bancorp, Inc. (the "Company") provides a full range of banking
services through its wholly-owned subsidiary, Willow Grove Bank (the "Bank" or
"Willow Grove") which has 12 branches in Dresher, Willow Grove, Maple Glen,
Warminster (2), Hatboro, Huntington Valley, Roslyn, Philadelphia (2 - Somerton
and Rhawnhurst), North Wales and Southampton. All of the branches are
full-service and offer commercial and retail banking products and services.
These products include checking accounts (interest and non-interest bearing),
savings accounts, certificates of deposit, business loans, real estate loans,
and home equity loans. The Company is subject to competition from other
financial institutions and other companies that provide financial services. The
Company is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
On December 23, 1998 the Company completed the reorganization of the Bank into
the federal mutual holding company form of ownership, whereby the Bank converted
into a federally chartered stock savings bank as a wholly owned subsidiary of
the Company, and the Company became a majority-owned subsidiary of Willow Grove
Mutual Holding Company (the "MHC"), a federally chartered mutual holding company
(collectively, the "Reorganization"). In connection with the Reorganization, the
Company sold 2,240,878 shares of Company common stock, par value $0.01 per
share, at $10.00 per share which, net of issuance costs, generated proceeds of
$21.4 million, including shares issued to the employee stock ownership plan
("ESOP"). The Company also issued 2,812,974 shares of Company common stock to
the MHC. As an integral part of the Reorganization and in furtherance of Willow
Grove's commitment to the communities it serves, Willow Grove and the Company
established a charitable foundation known as the Willow Grove Foundation (the
"Foundation") and contributed 89,635 shares to the Foundation. Earnings per
share is presented in the 1999 financial statements from January 1, 1999 to June
30, 1999. Earnings per share presentation for periods prior to January 1, 1999
is not meaningful.
In September 2000, Willow Grove Investment Corporation ("WGIC"), a Delaware
corporation was formed as a wholly owned subsidiary of the Bank to hold and
manage certain investment securities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Company has prepared its accompanying consolidated financial statements in
accordance with generally accepted accounting principles ("GAAP") in the United
States of America as applicable to the banking industry. Certain amounts in
prior years are reclassified for comparability to current year's presentation.
Such reclassifications, when applicable had no effect on previously reported net
income. The consolidated financial statements include the balances of the
Company and its wholly owned subsidiary. All material inter-company balances and
transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenue
and expense for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term include the determination of the allowance for loan
losses.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or re-price at different speeds, or on a different basis from
its interest-earning assets. The Company's primary credit risk is the risk of
default on the Company's loan portfolio that results from the borrower's
inability or unwillingness to make contractually required payments. The
Company's lending activities are concentrated in Pennsylvania. The largest
concentration of the Company's loan portfolio is located in Eastern
Pennsylvania. The ability of the Company's borrowers to repay amounts owed is
dependent on
54
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
several factors, including the economic conditions in the borrower's geographic
region and the borrower's financial condition. Market risk reflects changes in
the value of collateral underlying loans, the valuation of real estate held by
the Company, the valuation of loans held for sale, securities available for sale
and mortgage servicing assets. The Company is subject to certain regulations as
further described herein and in note 12. Compliance with regulations causes the
Company to incur significant costs. In addition, the possibility of future
changes to such regulations presents the risk that future costs will be incurred
which may impact the Company.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents include
cash and interest bearing deposits with original maturities of three months or
less.
The Company is required to maintain certain daily balances in accordance with
Federal Reserve Bank requirements. The reserve balances maintained in accordance
with such requirements at June 30, 2001 and 2000 were $4.5 million and $4.0
million, respectively. Such reserve requirements are satisfied through vault
cash balances.
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 income. 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.
SECURITIES
The Company divides its securities portfolio into two segments: (a) held to
maturity and (b) available for sale. Securities in the held to maturity category
are carried at cost, adjusted for amortization of premiums and accretion of
discounts, using the level yield method, based on the Company's intent and
ability to hold the securities until maturity. Marketable securities included in
the available for sale category are carried at fair value, with unrealized gains
or losses which are temporary in nature, net of taxes, reflected as an
adjustment to equity. Unrealized losses which are other than temporary in nature
are reflected in the statement of income. 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. Premiums and discounts on securities are
amortized/accreted using the interest method.
At the time of purchase, the Company makes a determination of whether or not it
will hold the securities to maturity, based upon an evaluation of the
probability of future events. Securities, which the Company believes may be
involved in interest rate risk, liquidity or other asset/liability decisions,
which might reasonably result in such securities not being held to maturity, are
classified as available for sale. If such securities are sold, a gain or loss is
determined by the specific identification method and is reflected in the
operating results in the period the trade occurs.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management considers
adequate to provide for 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 Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgment of information available to them at the time
of their examination.
55
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company excludes large groups of
smaller balance homogeneous loans, primarily consisting of residential real
estate and consumer loans, as well as commercial loans with balances of less
than $100,000. Such loans are evaluated collectively for impairment. Interest
income recognition on impaired loans is the same as interest income recognition
on non-accrual loans as described below. Cash receipts on impaired loans are
generally applied to principal. A valuation allowance is established against
impaired loans when the Company determines that the fair value of the loan or
its related collateral is less than the recorded investment of the impaired
loan.
MORTGAGE SERVICING RIGHTS
The Company recognizes mortgage servicing rights as assets, regardless of how
such assets were acquired.
Impairment of mortgage servicing rights is assessed based upon a fair market
valuation of those rights on a disaggregated basis. Impairment, if any, is
recognized in the statement of income. There was no impairment in the mortgage
servicing rights at June 30, 2001 and 2000.
LOANS, LOAN ORIGINATION FEES, AND UNCOLLECTED INTEREST
Loans are recorded at cost, net of unearned discounts, deferred fees and
allowances. Discounts or premiums on purchased loans are amortized using the
interest method over the remaining contractual life of the portfolio, adjusted
for actual prepayments. Loan origination fees and certain direct origination
costs are deferred and amortized over the contractual life of the related loans
using the level yield method.
Interest receivable on loans is accrued to income as earned. Non-accrual loans
are loans on which the accrual of interest has ceased because the collection of
principal or interest payments is determined to be doubtful by management. It is
the policy of the Company to discontinue the accrual of interest and reverse any
accrued interest when principal or interest payments are delinquent more than 90
days (unless the loan principal and interest are determined by management to be
fully secured and in the process of collection), or earlier if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the terms of the loan.
Interest income on such loans is not accrued until the financial condition and
payment record of the borrower demonstrates the ability to service the debt.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. The Company computes depreciation and amortization using the
straight-line method over the estimated useful lives of the assets which range
from 4 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
twelve-year life and goodwill is being amortized to expense over a period of
fifteen years. The carrying amount of intangible assets at June 30, 2001 and
2000 is net of accumulated amortization of $2.9 million and $2.6 million,
respectively.
56
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER SHARE
Earnings per share ("EPS") consists of two separate components, basic EPS and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents ("CSE"). CSE
consist of dilutive stock options granted through the Company's stock option
plan and unvested common stock awards. Common stock equivalents which are
considered antidilutive are not included for the purposes of this
calculation.During 2001, 2000 and 1999, there were no antidilutive CSEs with the
exception of the quarter ended March 31, 2000 where 89,635 options were
considered antidilutive CSE's.
STOCK OPTIONS
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, as permitted by statement No.
123, "Accounting for Stock-Based Compensation". As such, compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. Statement No. 123 requires entities which
continue to apply the provisions of APB Opinion No. 25 to provide pro-forma
earnings per share disclosures for stock option grants made in 1995 and
subsequent years as if the fair value based method defined in Statement No. 123
had been applied.
RECENT ACCOUNTING PRONOUNCEMENTS
BUSINESS COMBINATIONS
In June 2001, the FASB issued Statement No. 141, "Business Combinations" ("SFAS
No. 141"). The Statement addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, Business Combinations,
and FASB Statement No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of SFAS No. 141
are to be accounted for using the purchase method.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. SFAS No. 141 also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. There is no expected impact on earnings, financial
condition, or equity upon adoption of SFAS No. 141.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets". It addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. SFAS No. 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
57
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provisions of the SFAS No. 142 are required to be applied starting with
fiscal years beginning after December 15, 2001, except that goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately to
the nonamortization and amortization provisions of the SFAS No. 142. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not
previously been issued. SFAS No. 142 is required to be applied at the beginning
of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date. The
Company adopted SFAS No. 142 on July 1, 2001.In connection with the adoption of
SFAS No. 142, the Company's recorded amount of goodwill of $848,000 will no
longer be subject to amortization but will instead be periodically measured for
impairment.
(2) Earnings Per Share
For the years ended June 30, 2001 and 2000, earnings per share, basic and
diluted, were $0.03 and $0.03, and $0.98 and $0.97, respectively.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations.
For the six-month period
Year Ended June 30, January 1 to June 30,
---------------------------------------------------- ------------------------
2001 2000 1999
----- ----- -----
(Dollars in thousands,
except share data)
Basic Diluted Basic Diluted Basic Diluted
------------- ------------- ------------ ----------- ---------- ------------
Net income $ 157 $ 157 $ 4,843 $ 4,843 $ 2,261 $ 2,261
Dividends on unvested common
stock awards
(33) (33) (25) (25) - -
------------- ------------- ----------- ----------- ---------- -----------
Income available to
common stock holders $ 124 $ 124 $ 4,818 $ 4,818 $ 2,261 2,261
Weighted average shares outstanding 4,812,146 4,812,146 4,899,955 4,899,955 4,968,699 4,968,699
Effect of dilutive securities:
Options - 27,886 - 1,825 - -
Unvested common stock awards - 70,056 - 61,226 - -
------------- ------------- ----------- ----------- ---------- -----------
Adjusted weighted average shares
used in earnings per
share calculation 4,812,146 4,910,088 4,899,955 4,963,006 4,968,699 4,968,699
------------- ------------- ----------- ----------- ---------- -----------
Earnings per share $ 0.03 $ 0.03 $ 0.98 $ 0.97 $ 0.46 $ 0.46
============= ============= =========== =========== ========== ===========
(3) Securities Available for Sale
Securities available for sale at June 30, 2001 and 2000 consisted of the
following:
58
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
------------------------------------------- ------------- -------------- --------------- ---------------
Equity securities $ 7,876 $ - $ (38) $ 7,838
US Government agency securities 43,722 391 (315) 43,798
Mortgage-backed securities 75,905 344 (415) 75,834
Municipal securities 2,903 6 (21) 2,888
------------- -------------- --------------- ---------------
Total $ 130,406 $ 741 $ (789) $ 130,358
============= ============== =============== ===============
June 30, 2000
------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
------------------------------------------- ------------- -------------- --------------- ---------------
Equity securities $ 7,528 $ - $ (77) $ 7,451
US Government agency securities 33,000 - (1,975) 31,025
Mortgage-backed securities 31,162 - (1,536) 29,626
Municipal securities 2,601 - (126) 2,475
------------- -------------- --------------- ---------------
Total $ 74,291 $ - $ (3,714) $ 70,577
============= ============== =============== ===============
Proceeds from the sales of securities available for sale for the years ended
June 30, 2001, 2000 and 1999 were $30.1, $9.5 million, and $0, respectively.
Gross gains on securities available for sale of $260,000, $57,000 and $0 were
realized in fiscal 2001, 2000 and 1999, respectively. There were gross losses of
$17,000 $103,000, and $0, in fiscal 2001, 2000 and 1999, respectively.
Additionally, we recognized a loss of $258,000 resulting from other than
temporary declining values of certain equity securites,
Accrued interest receivable on securities amounted to $1.3 million and $530,000
at June 30, 2001 and 2000, respectively.
The amortized cost and estimated fair value of securities available for sale at
June 30, 2001, by contractual maturity, are shown below.
Amount of securities with stated maturities
---------------------------------------------------------------------
After
After After 10 years or
1 year 5 years with no
1 year but within but within stated
(Dollars in thousands) or less 5 years 10 years maturity TOTAL
------------------------------------------ ----------- ---------- ----------- ------------ ----------
US Government agency securities $ - $ 14,245 $ 18,868 $ 10,685 $ 43,798
Municipal securities 900 - 587 1,401 2,888
----------- ---------- ----------- ------------ ----------
Sub-total 900 14,245 19,455 12,086 46,686
Mortgage-backed securities - - - 75,834 75,834
Equity securities - - - 7,838 7,838
----------- ---------- ----------- ------------ ----------
Total securities at fair value $ 900 $ 14,245 $ 19,455 $ 95,758 $ 130,358
Total securities at amortized cost $ 900 $ 13,999 $ 19,437 $ 96,070 $ 130,406
----------- ---------- ----------- ------------ ----------
59
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company must maintain stock as a member of the Federal Home Loan Bank of
Pittsburgh ("FHLB") of $3.4 million and $3.4 million as of June 30, 2001 and
2000, respectively.
For mortgage-backed securities, expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay the obligation
with or without call or prepayment penalties. Many of the Company's U.S.
Government agency securities are callable within one year.
As described in note 10, certain securities available for sale are maintained to
collateralize advances from the FHLB.
(4) Loans
Loans receivable as of June 30, 2001 and 2000 consisted of the following:
June 30,
---------------------------
(Dollars in thousands) 2001 2000
------------------------ ---- ----
Mortgage loans:
Single-family $ 198,310 $ 206,340
Multifamily & nonresidential 128,613 102,513
Construction 27,724 14,973
Home equity 75,060 72,217
------------ ------------
Total mortgage loans 429,707 396,043
Consumer loans 9,688 7,818
Business loans 19,925 25,683
------------ ------------
Total loans receivable 459,320 429,544
Allowance for loan losses (4,313) (3,905)
Deferred loan fees (808) (699)
------------ ------------
Loans receivable, net $ 454,199 $ 424,940
============ ============
As described in note 10, certain loans are maintained to collateralize advances
from the FHLB.
Included in loans receivable are loans on non-accrual status in the amounts of
$3.6 million and $1.2 million at June 30, 2001 and 2000, respectively. If
interest on all such loans had been recorded, net interest income would have
increased by $695,000 in 2001, $104,000 in 2000 and $143,000 in 1999.
As of June 30, 2001 and 2000, the Company had impaired loans with a total
recorded investment of $3.2 million and $390,000, respectively, and an average
recorded investment for the years ended June 30, 2001, 2000 and 1999 of $8.5
million, $107,000, and $37,000, respectively. Cash of $648,000, $24,000and
$83,000 was collected on these impaired loans during the years ended June 30,
2001, 2000 and 1999, respectively. Interest income of $366,000 and $22,000 was
recognized on such loans during the years ended June 30, 2001 and June 30, 2000,
no interest income was recognized on such loans for the year ended June 30,
1999. As of June 30, 2001 and 2000, there were no recorded investments in
impaired loans for which there was a related specific allowance for credit
losses.
The following is a summary of the activity in the allowance for loan losses for
the years ended June 30, 2001, 2000 and 1999:
60
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30,
-------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
------------------------ ---- ---- ----
Balance, beginning of year $ 3,905 $ 3,138 $ 2,665
Provision for loan losses 7,856 706 531
Charge-offs (7,449) (85) (58)
Recoveries 1 146 -
---------- --------- ---------
Balance, end of year $ 4,313 $ 3,905 $ 3,138
========== -======== =========
(5) Mortgage Servicing Activity
A summary of mortgage servicing rights activity follows:
Years Ended June 30,
-----------------------------------
(Dollars in thousands) 2001 2000 1999
------------------------ ---- ---- ----
Balance, beginning of year $ 127 $ 236 $ 251
Originated servicing rights 350 - 119
Amortization (137) (109) (134)
--------- --------- ---------
Balance, end of year $ 340 $ 127 $ 236
========= ========= =========
At June 30, 2001, 2000 and 1999, the Company serviced loans for others of $91.5
million, $64.3 million, and $67.0 million, respectively. Loans serviced by
others for the Company as of June 30, 2001, 2000 and 1999 were $6.9 million,
$3.9 million, and $2.8 million, respectively.
(6) Deposits
Deposit balances by type consisted of the following at June 30, 2001, and 2000:
June 30, 2001 June 30, 2000
------------------------- --------------------------
Percent Percent
(Dollars in thousands) Amount of total Amount of total
------------------------------------------------------- ----------- ------------ ----------- ------------
Savings accounts $ 58,566 11.8 % $ 53,042 11.7 %
(passbooks, statement, clubs)
Money market accounts 34,788 7.0 29,706 6.6
Certificates of deposit less than $100,000 264,458 53.2 246,030 54.4
Certificates of deposit greater than $100,000 * 56,900 11.4 47,282 10.4
Interest bearing checking accounts 31,825 6.4 31,420 6.9
Non-interest bearing checking accounts 50,493 10.2 45,377 10.0
----------- ------------ ----------- ------------
Total $ 497,030 100.0 % $ 452,857 100.0 %
=========== ============ =========== ============
* Deposit balances in excess of $100,000 are not federally insured.
While certificates of deposit are frequently renewed at maturity rather that
paid out, a summary of certificates of deposit by contractual maturity at June
30, 2001 is as follows:
61
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, (Dollars in thousands)
------------------------------ --------------------------------
2002 $ 253,881
2003 43,677
2004 18,778
2005 2,462
2006 1,178
2007 and thereafter 1,382
------------
$ 321,358
Interest expense on deposits for the years ended June 30, 2001, 2000 and 1999
consisted of the following:
(Dollars in thousands) 2001 2000 1999
------------------------ ---- ---- ----
Savings accounts $ 1,102 $ 1,049 $ 896
Checking accounts 1,464 1,347 1,111
Certificates of deposit 17,806 14,598 13,359
-------- ---------- ---------
Total $ 20,372 $ 16,994 $ 15,366
======== ========== =========
(7) Property and Equipment
Amounts charged to operating expense for depreciation for the years ended June
30, 2001, 2000 and 1999 amounted to $723,000, $575,000, and $409,000,
respectively.
June 30,
------------------------
(Dollars in thousands) Depreciable lives 2001 2000
------------------------ ------------------- ---- ----
Land $ 1,323 $ 1,323
Buildings 15 to 40 years 4,604 4,588
Furniture, fixtures, equipment 4 to 7 years 4,877 4,214
---------- ---------
Total 10,804 10,125
Accumulated depreciation (4,616) (3,893)
---------- ---------
Property and equipment, net $ 6,188 $ 6,232
========== =========
(8) Income Taxes
The Small Business Job Protection Act of 1996, enacted on August 20, 1996,
provides for the repeal of the tax bad debt deduction computed under the
percentage of taxable income method. Upon repeal, the Company is required to
recapture into income, over a six-year period, the portion of its tax bad debt
reserves that exceeds its base year reserves (i.e., tax reserves for tax years
beginning before 1988). The base year tax reserves, which may be subject to
recapture if the Company ceases to qualify as a bank for federal income tax
purposes, are restricted with respect to certain distributions. The Company's
total tax bad debt reserves at June 30, 2001 are approximately $7.4 million, of
which $6.2 million represents the base year amount and $1.2 million is subject
to recapture. The Company has previously recorded a deferred tax liability for
the amount to be recaptured; therefore, this recapture does not impact the
statement of income.
Income tax expense (benefit) for the years ended June 30, 2001, 2000 and 1999
consisted of the following:
62
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Current Deferred Total
--------------------------------------------------------- --------- ---------- -------
For the year ended June 30, 2001 Federal $ 203 $ (244) $ (41)
State 9 - 9
--------- ---------- -------
Total $ 212 $ (244) $ (32)
========= ========== =======
For the year ended June 30, 2000 Federal $ 2,849 $ (327) $ 2,522
State 479 - 479
--------- ---------- -------
Total $ 3,328 $ (327) $ 3,001
========= ========== =======
For the year ended June 30, 1999 Federal $ 2,311 $ (446) $ 1,865
State 179 - 179
--------- ---------- -------
Total $ 2,490 $ (446) $ 2,044
========= ========== =======
Income tax expense (benefit) differed from that computed at the statutory
federal corporate rate for the years ended June 30, 2001, 2000 and 1999 as
follows:
June 30, 2001 June 30, 2000 June 30, 1999
-------------------------- -------------------------- ------------------------
Percentage Percentage Percentage
of pretax of pretax of pretax
(Dollars in thousands) Amount income Amount income Amount income
----------------------------------- -------- ------------ --------- ------------- ---------- ------------
At federal statutory rate $ 42 34% $ 2,667 34% $ 1,930 34%
Adjustment resulting from:
State tax,
net of federal tax benefit 6 5% 316 4% 118 2%
Low income housing credits (29) (23%) (29) - (29) -
Other (51) (42%) 47 - 25 -
-------- ------------ --------- ------------ ---------- -----------
Income tax expense $ (32) (26%) $ 3,001 38% $ 2,044 36%
======== ============ ========= ============ ========== ===========
Significant deferred tax assets and liabilities of the Company as of June 30,
2001 and 2000 are as follows:
63
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
-------------------------
(Dollars in thousands) 2001 2000
----------------------------------------------------- ---- ----
Impairment reserves $ 60 $ -
Deferred loan fees 275 319
Retirement plan reserves 344 328
Employee benefits 205 198
Intangible asset amortization 341 335
Capital loss carryover 45 90
Charitable contributions 34 12
Uncollected interest 40 37
Book bad debt reserves 1,466 1,328
Unrealized loss on available for sale securities 11 1,351
Other, net 36 16
--------- ---------
Gross deferred tax assets 2,857 4,014
--------- ---------
Tax bad debt reserves - (21)
Tax bad debt reserves in excess of base year (413) (550)
Prepaid expenses (16) (16)
Originated mortgage servicing rights (116) (43)
Depreciation (70) (46)
--------- ---------
Gross deferred tax liabilities (615) (676)
--------- ---------
Net deferred tax asset $ 2,242 $ 3,338
========= =========
The realizability of deferred tax assets is dependent upon a variety of factors,
including the generation of future taxable income, the existence of taxes paid
and recoverable, the reversal of deferred tax liabilities and tax planning
strategies. Based upon these and other factors, management believes it is more
likely than not that the Company will realize the benefits of these deferred tax
assets.
(9) Benefit Plans
The Company has a money purchase pension plan to which the Company contributes
for all eligible employees 7.5% of their base salary. The expense of such plan
was $269,000, $222,000,and $193,000 for the years ended June 30, 2001, 2000 and
1999, respectively.
The Company also has a 401(k) plan which covers all eligible employees and
permits them to make certain contributions to the plan on a pretax basis.
Employees are permitted to contribute up to 10% of salary to this plan. The
Company matches fifty cents for every dollar contributed by employees to the
plan. The expense of such plan was $134,000, $110,000 and $89,000 for the years
ended June 30, 2001, 2000 and 1999, respectively.
Effective June 30, 1998, the Company adopted non-qualified supplemental
retirement plans for the Company's Board of Directors (the "Directors' Plan")
and for the Company's president (the "President's Plan"). The Directors' Plan
provides for fixed annual payments to qualified directors for a period of ten
years from retirement. Benefits to be paid accrue at the rate of 20% per year on
completion of six full years of service, with full benefit accrual at ten years
of service. At the time these plans were adopted credit was given for past
service. The President's Plan provides for payments for a period of ten years
beginning at retirement based on a percentage of annual compensation not to
exceed an established cap. Full benefits become accrued at age 68 with partial
vesting prior thereto. Both plans provide for full payments in the event of a
change in control of the Company. The costs of each of the Directors' Plan and
President's Plan were $60,000 and $18,000, respectively, for each of the three
years ended June 30, 2001, 2000 and 1999. The Directors' Plan and President's
Plan are intended to be and are unfunded.
The ESOP
64
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concurrent with the Reorganization, the Company adopted an ESOP. The ESOP
borrowed $1.8 million from the Company and used the funds to purchase 179,270
shares of the Company's stock issued in the Reorganization. The loan has an
interest rate of 7.75% and has an amortization schedule of 15 years. Shares
purchased are held in a suspense account for allocation among the participants
as the loan is repaid. Contributions to the ESOP and shares released from the
loan collateral will be in an amount proportional to repayment of the ESOP loan.
Shares are allocated to participants based on compensation as described in the
plan, in the year of allocation. At June 30, 2001, there were 23,903 ESOP shares
allocated and 155,367 shares unallocated to participants, representing a fair
value of $296,000 and $1.9 million, respectively. At June 30, 2001 there were
5,976 ESOP shares committed to be released. The Company recorded compensation
expense of $138,000, $81,000, and $90,000 for the ESOP for the years ended June
30, 2001, 2000 and 1999, respectively.
RRP
Pursuant to the 1999 Recognition and Retention Plan and Trust Agreement (the
"RRP"), the Company acquired 89,635 shares at a cost of $929,000. On October 26,
1999, 89,635 shares were awarded to directors and management from the RRP Trust.
As of June 30, 2001, 16,053 granted shares were vested pursuant to the terms of
the Plan.
At June 30, 2001, the deferred cost of unearned RRP shares totaled $619,000 and
is recorded as a charge against stockholders' equity. Compensation expense on
RRP shares granted is recognized ratably over the five year vesting period in an
amount which totals the market price of the Company's stock at the date of
grant. The Company recorded compensation expense of $163,000 and $108,000
related to the RRP for the years ended June 30, 2001 and 2000, respectively.
Stock Option Plan
The Company adopted a stock option plan in fiscal 2000 ("the Plan") for
officers, directors and certain employees of the Company or its subsidiaries.
Pursuant to the terms of the Plan, the number of common shares reserved for
issuance is 224,088 of which 56,988 options remain unawarded. All options have
been granted with an exercise price equal to fair market value at the date of
grant and expire in 10 years from the date of grant. All stock options granted
vest over a five year period from the date of grant.
A summary of the status of the Plan as of June 30, 2001 and changes during the
year is presented below:
Year ended June 30, 2001 Year ended June 30, 2000
------------------------------ -------------------------------
Number Weighted average Number Weighted average
of shares exercise price of shares exercise price
---------- ------------------ ----------- ------------------
Outstanding at beginning of year 167,100 $ 9.06 - -
Granted - 167,100 $ 9.06
Forfeited 23,400 $ 9.06 - $ -
Outstanding at end of year 143,700 $ 9.06 167,100 $ 9.06
Exercisable at end of year 28,740 $ 9.06 - $ -
The weighted-average fair value of each option using the Black-Scholes options
pricing model was $3.32 in 2000. Significant assumptions used in the model for
2000 included a weighted average risk-free rate of return of 5.8%; volatility of
26.07%; expected life of ten years; and expected dividend yield of 3.45% .
65
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No 123, "Accounting for Stock-based Compensation" encourages, but does not
require, the adoption of fair-value accounting for stock-based compensation to
employees. The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS 123, and has instead continued to apply APB
Opinion 25 and related interpretations in accounting for the Plan and to provide
the required pro-forma disclosures for SFAS No. 123. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the proforma amounts indicated below:
For the year ended June 30,
-----------------------------------------------
2001 2000
---- ----
(Dollars in thousands, except per share data) As reported Pro-forma As reported Pro-forma
---------------------------------------------- ----------- --------- ----------- ---------
Net income $ 157 $ 62 $ 4,843 $ 4,769
Diluted earnings per share $ 0.03 $ 0.01 $ 0.97 $ 0.96
The following table summarizes all stock options outstanding for the Plan as of
June 30, 2001, segmented by range of exercise prices:
Weighted average
Number of Weighted average remaining
Price shares excercise price contractual life
------ --------- ---------------- ----------------
$ 9.06 143,700 $ 9.06 8.33 years
(10) Federal Home Loan Bank Advances
Under terms of its collateral agreement with the FHLB, the Company maintains
otherwise unencumbered qualifying assets (principally qualifying 1-4 family
residential mortgage loans and U.S. Government agency, and mortgage-backed
securities) in an amount at least equal to its advances from the FHLB. The
Company's FHLB stock is also pledged to secure these advances.
At June 30, 2001, such advances had contractual maturities as follows:
Weighted Amount
(Dollars in thousands) average rate outstanding
------------------------------- ---------------- ---------------
Due by June 30,
2002 7.08% $ 8,000
2003 7.28% 5,000
2004 6.28% 1,959
2005 5.87% 10,000
2006 5.09% 4,926
Thereafter 5.38% 30,000
-------------
5.85% $ 59,885
=============
At June 30, 2001, $40.0 million of the above advances were callable at the
direction of the FHLB within certain parameters, of which $22.0 million could be
called within one year.
(11) Commitments and Contingencies
66
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2001 and 2000, the Company was committed to fund loans as follows:
June 30,
-----------------------
(Dollars in thousands) 2001 2000
---------------------------------------------- ---- ----
Loans with fixed rates of interest $ 3,474 $ 1,519
Loans with variable rates of interest 7,246 9,539
---------- ---------
Total commitments to fund loans $ 10,720 $ 11,058
========== =========
Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. At June 30, 2001, the Company was committed to the funding of first
mortgage loans of approximately $2.9 million, construction loans of
approximately $6.0 million and commercial business loans of approximately $1.8
million.
The Company uses the same credit policies in extending commitments as it does
for on-balance sheet instruments. The Company 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 Company may require collateral in extending commitments,
which may include cash, accounts receivable, securities, real or personal
property, or other assets. For those commitments which require collateral, the
value of the collateral generally equals or exceeds the amount of the
commitment.
Concentration of Credit Risk
The Company offers residential and construction real estate loans as well as
commercial and consumer loans. The Company's lending activities are concentrated
in Pennsylvania. The largest concentration of the Company's loan portfolio is to
borrowers or secured by properties located in Eastern Pennsylvania. The ability
of the Company's borrowers to repay amounts owed is dependent on several
factors, including the economic conditions in the borrower's geographic region
and the borrower's financial condition.
Legal Proceedings
On May 2, 2001, a lawsuit was filed against the Bank alleging four causes of
action related to a line of credit between the Bank and the plaintiff. The
causes of action are: breach of contract, fraud, negligent misrepresentation and
breach of fiduciary duty. The plaintiff seeks compensatory damages in an amount
in excess of $150,000, punitive damages, attorney's fees, costs and litigation
expenses as well as other relief. The plaintiff alleges that its actual damages
may exceed $10 million. The Bank will vigorously defend the claims made by the
plaintiff and believes that the claims are without merit.
Other than the above referenced litigation, the Company is involved in various
legal proceedings occurring in the ordinary course of business. Management of
the Company, based on discussions with litigation counsel, believes that such
proceedings will not have a material adverse effect on the financial condition
or operations of the Company. There can be no assurance that any of the
outstanding legal proceedings to which the Company is a party will not be
decided adversely to the Company's interests and have a material adverse effect
on the financial condition and operations of the Company.
Other Commitments
In connection with the operation of twelve of its banking offices, the Company
leases certain office space. The leases are classified as operating leases, with
rent expense of $485,000, $375,000,and $148,000 for the years ended June 30,
2001, 2000 and 1999, respectively. Minimum payments over the remainder of the
leases are summarized as follows:
67
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum
(Dollars in thousands) lease payments
---------------------------------- ----------------------
Year ended June 30,
2002 $ 516
2003 451
2004 407
2005 257
2006 and thereafter 241
-------
$ 1,872
=======
(12) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain certain minimum amounts and ratios (set forth in
the table below). Management believes that the Bank meets, as of June 30, 2001,
all capital adequacy requirements to which it is subject.
As of June 30, 2001, 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.
The Bank's actual capital amounts and ratios are presented in the following
table.
68
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Required to Be Well
Capitalized
under Prompt
Required for Capital Corrective Action
Actual Capital Adequacy Purposes Provision
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
-------------------------------------- -------- ------ -------- ------ -------- ------
As of June 30, 2001:
Tangible capital $ 51,428 8.3% $ 9,370 1.5% $ 12,495 2.0%
(to tangible assets)
Core capital 51,428 8.3% 24,938 4.0% 31,172 5.0%
(to adjusted tangible assets)
Tier 1 capital 51,428 13.8% N/A N/A 22,305 6.0%
(to risk-weighted assets)
Risk-based capital 55,741 15.0% 29,740 8.0% 37,175 10.0%
(to risk-weighted assets)
As of June 30, 2000:
Tangible capital $ 50,611 9.0% $ 8,399 1.5% $ 11,199 2.0%
(to tangible assets)
Core capital 50,611 9.0% 22,431 4.0% 28,039 5.0%
(to adjusted tangible assets)
Tier 1 capital 50,611 14.6% N/A N/A 20,815 6.0%
(to risk-weighted assets)
Risk-based capital 54,516 15.7% 27,753 8.0% 34,692 10.0%
(to risk-weighted assets)
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 Company's methods for determining the fair value of its financial
instruments as well as significant assumptions and limitations are set forth
below.
Limitations
Estimates of fair value are made at a specific point in time, based upon, where
available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic condition, perceived risks associated
with these financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only and, therefore,
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies is likely to result in significantly different fair
value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking or other businesses, existing
customer relationships, branch banking network, property, equipment, goodwill,
or certain tax implications related to the realization of unrealized gains or
losses. The fair value of non-interest-bearing demand deposits, savings and NOW
accounts, and money
69
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001 and 2000:
CASH AND CASH EQUIVALENTS, ACCRUED INTEREST RECEIVABLE, DEPOSITS WITH NO STATED
MATURITY AND ACCRUED INTEREST PAYABLE
These financial instruments have carrying values that approximate fair value.
SECURITIES AVAILABLE FOR SALE
Current quoted market prices were used to determine fair value.
LOANS
Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type and each loan category was
further segmented by fixed and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
based on estimated maturity and prepayment speeds using estimated market
discounted rates that reflected credit and interest risk inherent in the loans.
The estimate of the maturities and prepayment speeds was based on the Company's
historical experience. Cash flows were discounted using market rates adjusted
for portfolio differences.
LOANS AVAILABLE FOR SALE
The fair value of mortgage loans originated and intended for sale in the
secondary market is based on contractual cash flows using current market rates,
calculated on an aggregate basis.
CERTIFICATES OF DEPOSIT
Fair value was estimated by discounting the contractual cash flows using current
market rates offered in the Company's market area for deposits with comparable
terms and maturities.
FHLB ADVANCES
Fair value was estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rate for similar types of borrowing
arrangements.
COMMITMENTS TO EXTEND CREDIT
The majority of the Company's commitments to extend credit carry current
interest rates if converted to loans. Because commitments to extend credit are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates the
recorded deferred fee amounts.
The carrying amounts and estimated fair values of the Company's financial
instruments, including off-balance sheet financial instruments at June 30, 2001
and 2000 were:
70
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 June 30, 2000
------------------------- ------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
--------------------------------------------------- ------------ --------- ------------ ---------
Assets:
Cash and cash equivalents $ 22,209 $ 22,209 $ 14,681 $ 14,681
Securities available for sale 130,358 130,358 70,577 70,577
Loans available for sale 2,644 2,644 35,753 35,753
Loans, net 454,199 460,768 424,940 415,578
Accrued interest receivable 3,667 3,667 2,795 2,795
Liabilities:
Deposits with no stated maturities $ 175,672 $ 175,672 $ 159,545 $ 159,545
Certificates of deposits 321,358 325,302 293,312 290,476
FHLB Advances 59,885 59,402 37,517 37,458
Accrued interest payable 1,146 1,146 1,474 1,474
Contract Fair Contract Fair
Amount Value Amount Value
------------ --------- ------------ ---------
Off balance sheet financial instruments:
Commitments to extend credit $ (4,015) $ (51) $ 11,058 $ 6
(14) Other comprehensive income (loss)
The tax effects allocated to each component of "Other comprehensive income
(loss)" are as follows:
71
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended June 30, 2001
----------------------------------
Before Tax Tax After Tax
(Dollars in thousands) Amount Benefit Amount
----------------------------------------------------------------- ----------- ---------- -----------
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) during the period $ 3,682 $ (1,362) $ 2,320
Reclassification adjustment for gains (losses)
included in net income (15) 6 (9)
----------- ---------- -----------
Total other comprehensive income (loss) $ 3,667 $ (1,356) $ 2,311
=========== ========== ===========
Year ended June 30, 2001
----------------------------------
Before Tax Tax After Tax
(Dollars in thousands) Amount Benefit Amount
----------------------------------------------------------------- ----------- ---------- -----------
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) during the period $ (1,519) $ 562 $ (957)
Reclassification adjustment for gains (losses)
included in net income (46) 17 (29)
----------- ---------- -----------
Total other comprehensive loss $ (1,473) $ 545 $ (928)
=========== ========== ===========
Year ended June 30, 2001
----------------------------------
Before Tax Tax After Tax
(Dollars in thousands) Amount Benefit Amount
----------------------------------------------------------------- ----------- ---------- -----------
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) during the period $ (2,404) $ 912 $ (1,492)
Reclassification adjustment for gains (losses)
included in net income - - -
----------- ---------- -----------
Total other comprehensive loss $ (2,404) $ 912 $ (1,492)
=========== ========== ===========
(15) Dividend Policy
The Company's ability to pay dividends is dependent, in part, upon its ability
to obtain dividends from the Bank. The future dividend policy of the Company is
subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, financial conditions, cash needs,
and general business conditions. Holders of Company common stock will be
entitled to receive dividends as and when declared by the Board of Directors of
the Company out of funds legally available for that purpose. Such payment,
however, will be subject to the regulatory restrictions set forth by the OTS. In
addition, OTS regulations provide that, as a general rule, a financial
institution may not make a capital distribution if it would be undercapitalized
after making the capital distribution.
To date, the MHC has waived its receipt of cash dividends from the Company. The
dollar amount of dividends waived by the MHC are considered as a restriction on
the retained earnings of the Company. The amount of any dividend waived by the
MHC shall be available for declaration as a dividend solely to the MHC. At June
30, 2001, the cumulative amount of such waived dividend was approximately $2.5
million.
(16) Parent Company Financial Information (Willow Grove Bancorp, Inc.)
Condensed Statement of Financial Condition
72
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June
----------------------------
(Dollars in thousands) 2001 2000
------------------------------------------------- ---- ----
Assets:
Cash on deposit with subsidiary $ 572 $ 89
Note receivable from subsidiary 6,671 10,620
Investment in subsidiary 52,672 49,810
Securities (amortized cost of $432) 416 -
Other assets 381 267
------------ -----------
Total assets $ 60,712 $ 60,786
Liabilities and stockholders' equity:
Other liabilities $ 355 $ 143
------------ -----------
Total liabilites 355 143
Total stockholders' equity 60,357 60,643
------------ -----------
Total liabilities and stockholders' equity $ 60,712 $ 60,786
============ ===========
Condensed Statement of Income
For the year ended June 30,
------------------------------------------
Dollars in thousands) 2001 2000 1999
--------------------------------------------------------------------- ---- ---- ----
Interest income:
Interest income on note receivable $ 573 $ 412 $ 143
---------- ---------- -----------
Total interest income 573 412 143
Non-interest income:
Realized loss on equity securities (258) - -
---------- ---------- -----------
Total non-interest income: (258) - -
Equity in undistributed income of subsidiary 240 4,760 2,366
---------- ---------- -----------
Total income 555 5,172 2,509
---------- ---------- -----------
Expense:
Professional fees 233 166 125
Statimery and printing 38 45 31
Charitable foundation - - 896
Other 187 52 11
---------- ---------- -----------
Total expense 458 263 1,063
---------- ---------- -----------
Income before taxes 97 4,909 1,446
Income tax expense (benefit) (60) 66 (313)
---------- ---------- -----------
Net income $ 157 $ 4,843 $ 1,759
========== ========== ===========
73
Willow Grove Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statement of Cash Flows
For the year ended June 30,
-----------------------------------------
(Dollars in thousands) 2001 2000 1999
-------------------------------------------------------------------- ---- ---- ----
Cash flow from operating activities:
Net income: $ 157 $ 4,843 $ 1,759
Less items not affecting cash flows
Equity in undistributed income of subsidiary (240) (4,760) (2,366)
(Increase) decrease in accrued interest receivable - 142 (142)
Foundation contribution expense - - 896
Realized loss on securities available for sale 258 - -
(Increase) decrease in other assets (114) 188 (313)
Increase (decrease) in other liabilities 212 (23) 166
----------- ----------- ----------
Net cash provided by operating activities 273 390 -
----------- ----------- ----------
Cash flows from investing activities:
Capital investment in subsidiary bank - - (9,828)
Acqusition of securities from bank (727) - -
Proceeds from sale of securities available for sale 37 - -
Net repayment (issuance) of notes receivable 3,954 531 (11,293)
----------- ----------- ----------
Net cash provided by investing activities 3,264 531 (21,121)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from stock issuance - - 21,450
Treasury stock purchases (2,140) (212) -
Dividends paid (914) (762) (187)
----------- ----------- ----------
Net cash from financing activities (3,054) (974) 21,263
----------- ----------- ----------
Net increase in cash and cash equivalents 483 (53) 142
Cash and cash equivalents at beginning of period 89 142 -
----------- ----------- ----------
Cash and cash equivalents at end of period $ 572 $ 89 $ 142
=========== =========== ==========
(17) Subsequent Event
On September 7, 2001, the Boards of Directors of the Company, the Bank and the
MHC adopted a Plan of Conversion and Agreement and Plan of Reorganization which
would reorganize the current corporate structure from a two-tier mutual holding
company into a stock holding company. This proposed reorganization is subject to
the approval of the Company's shareholders, the members of the Mutual Holding
Company and OTS.
74
QUARTERLY FINANCIAL DATA
The following table presents selected quarterly operating data for the
fiscal years ended June 30, 2001 and 2000.
For the Quarter Ended
------------------------------------------------------------------------
(Dollars in Thousands, June 30, March 31, December 31, September 30,
Except Per Share data) 2001 2001 2000 2000
--------------------------------------- ------------ ------------- ------------ -------------
UNAUDITED
Total interest income $ 11,241 $ 11,050 $ 11,114 $ 10,880
Total interest expense 6,089 6,128 6,192 5,807
------------ ------------- ------------ -------------
Net interest income 5,152 4,922 4,922 5,073
Provision for loan loss 638 2,742 4,366 110
Total non-interest income 275 550 618 344
Total non-interest expense 3,573 3,550 3,383 3,369
Income tax expense 404 (312) (821) 697
------------ ------------- ------------ -------------
Net income(loss) $ 812 $ (508) $ (1,388) $ 1,241
============ ============= ============ =============
Earnigns per share
Basic $0.17 ($0.11) ($0.29) $0.25
Diluted $0.16 ($0.11) ($0.28) $0.25
For the Quarter Ended
------------------------------------------------------------------------
(Dollars in Thousands, June 30, March 31, December 31, September 30,
Except Per Share data) 2000 2000 1999 1999
--------------------------------------- ------------ ------------- ------------ -------------
UNAUDITED
Total interest income $ 10,602 $ 10,058 $ 9,335 $ 8,898
Total interest expense 5,416 5,084 4,603 4,266
------------ ------------- ------------ -------------
Net interest income 5,186 4,974 4,732 4,632
Provision for loan loss 20 195 221 270
Total non-interest income 286 279 275 262
Total non-interest expense 3,285 3,121 2,905 2,765
Income tax expense 929 755 665 652
------------ ------------- ------------ -------------
Net income $ 1,238 $ 1,182 $ 1,216 $ 1,207
============ ============= ============ =============
Per share net income
Basic $0.25 $0.24 $0.25 $0.24
Diluted $0.25 $0.24 $0.24 $0.24
75
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from pages
3 to 5 of the definitive proxy statement of the Company for the Annual Meeting
of Stockholders to be held on November 8, 2001, which will be filed within 120
days of June 30, 2001 ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages
8 to 11 of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages
12 to 13 of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page
7 of the Definitive Proxy Statement.
76
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report.
---------------------------------------
(1) The following consolidated financial statements are provided in
Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Financial Condition as of June 30, 2001
and 2000 Consolidated Statements of Income for the Years Ended
June 30, 2001, 2000 and 1999 Consolidated Statements of Changes in
Stockholders' Equity and
Comprehensive Income for the Years Ended June 30, 2001, 2000
and 1999
Consolidated Statements of Cash Flows for the Years ended June 30,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the
absence of conditions under which they are required or because the
required information is included in the consolidated financial
statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
Exhibit Index
-------------
2.1 *Plan of Reorganization
2.2 *Plan of Stock Issuance
2.3 Plan of Conversion of MHC and Agreement and
Plan of Reorganization between MHC, the
Company and the Bank.
3.1 *Federal Stock Charter of Willow Grove
Bancorp, Inc.
3.2 *Bylaws of Willow Grove Bancorp, Inc.
4.0 *Form of Stock Certificate of Willow Grove
Bancorp, Inc.
10.1 *Form of Employment Agreement entered into
between Willow Grove Bank and Frederick A.
Marcell Jr.
10.2 *Form of Employment Agreement entered into
between Willow Grove Bank and each of
Christopher E. Bell, Thomas M. Fewer and
John T. Powers
10.3 *Supplemental Executive Retirement Agreement
10.4 *Non-Employee Director's Retirement Plan
10.5 **1999 Stock Option Plan
10.6 **1999 Recognition and Retention Plan and
Trust Agreement
10.7 Incentive Compensation Plan
21.0 Subsidiaries of the Registrant - Reference
is made to "Item 1. Business" for the
required information
23.0 Consent of KPMG LLP
---------------------------------------------
* Incorporated by reference from the Company's
Registration Statement on Form S-1 filed on September
18, 1998, as amended, and declared effective on
November 12, 1998.
** Incorporated by reference from the Company's
Definitive Proxy Statement on Schedule 14A filed on
June 23, 1999.
(b) Reports on Form 8-K
-------------------
The Company filed a Form 8-K on April 25, 2001, including in
Item 5 a press release announcing third quarter results and
declaration of a dividend.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WILLOW GROVE BANCORP, INC.
By: /s/ Frederick A. Marcell Jr.
--------------------------------------------
Frederick A. Marcell Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Lewis W. Hull September 28, 2001
------------------------------------
Lewis W. Hull
Director
/s/ J. Ellwood Kirk September 28, 2001
------------------------------------
J. Ellwood Kirk
Director
/s/ Charles F. Kremp, 3rd September 28, 2001
------------------------------------
Charles F. Kremp 3rd
Director
/s/ William W. Langan September 28, 2001
------------------------------------
William W. Langan
Chairman of the Board
/s/ Rosemary C. Loring September 28, 2001
------------------------------------
Rosemary C. Loring
Director
/s/ Frederick A. Marcell Jr. September 28, 2001
------------------------------------
Frederick A. Marcell Jr.
Director, President and Chief Executive Officer
/s/ A. Brent O'Brien September 28, 2001
------------------------------------
A. Brent O'Brien
Director
/s/ Samuel H. Ramsey, III September 28, 2001
------------------------------------
Samuel H. Ramsey, III
Director
/s/ William B. Weihenmayer September 28, 2001
------------------------------------
William B. Weihenmayer
Director
/s/ Christopher E. Bell September 28, 2001
------------------------------------
Christopher E. Bell
Senior Vice President and Chief Financial Officer (principal financial officer)
78