UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number: 0-49706
Willow Grove Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 80-0034942
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002
(Address of principal executive offices)
(215) 646-5405
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The Registrant had 11,101,923 shares of common stock issued and outstanding
as of May 14, 2003.
1
WILLOW GROVE BANCORP, INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition at
March 31, 2003 and June 30, 2002......................................... 3
Consolidated Statements of Operations - For the Three and
Nine months ended March 31, 2003 and 2002 ............................... 4
Consolidated Statements of Cash Flows - For the Nine
Months ended March 31, 2003 and 2002..................................... 5
Notes to the Unaudited Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 21
Item 4. Controls and Procedures.................................................. 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings ....................................................... 22
Item 2. Changes in Securities and Use of Proceeds................................ 22
Item 3. Defaults upon Senior Securities.......................................... 22
Item 4. Submission of Matters to a Vote of Security Holders...................... 22
Item 5. Other Information ....................................................... 22
Item 6. Exhibits and Reports on Form 8-K......................................... 23
SIGNATURES ......................................................................... 24
CERTIFICATIONS ......................................................................... 25
2
Willow Grove Bancorp, Inc.
Consolidated Statements of Financial Condition
At At
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) March 31, 2003 June 30, 2002
- ---------------------------------------------------------------------------- --------------- ---------------
Assets
Cash and cash equivalents:
Cash on hand and non-interest-earning deposits $ 8,566 $ 5,710
Interest-earning deposits 45,504 26,276
--------------- ---------------
Total cash and cash equivalents 54,070 31,986
Securities
Available for sale (amortized cost of $269,740 and $251,651, respectively) 273,891 254,687
Held to maturity (fair value of $17,705 and $14,117, respectively) 17,322 13,973
Loans (net of allowance for loan losses of $5,108 and $4,626, respectively) 462,426 443,855
Loans held for sale 3,110 1,574
Accrued income receivable 3,971 4,138
Property and equipment, net 6,576 6,515
Intangible assets 1,048 1,126
Other assets 6,980 1,952
--------------- ---------------
Total assets $ 829,394 $ 759,806
=============== ===============
Liabilities and Stockholders' Equity
Deposits $ 565,417 $ 529,752
Federal Home Loan Bank advances 130,276 97,824
Advance payments from borrowers for taxes 2,893 3,605
Accrued interest payable 984 868
Other liabilities 3,500 3,388
--------------- ---------------
Total liabilities 703,070 635,437
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; (40,000,000 authorized; 11,335,659 and 113 113
11,284,966 issued at March 31, 2003 and June 30, 2002, respectively)
Additional paid-in capital 82,960 82,521
Retained earnings-substantially restricted 50,078 46,708
Accumulated other comprehensive income 2,555 1,881
Unallocated common stock held by
Employee Stock Ownership Plan (ESOP) (6,074) (6,420)
Recognition and Retention Plan Trust (RRP) (3,308) (434)
--------------- ---------------
Total stockholders' equity 126,324 124,369
--------------- ---------------
Total liabilities and stockholders' equity $ 829,394 $ 759,806
=============== ===============
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
Willow Grove Bancorp, Inc.
Consolidated Statements of Operations
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
-------------------------- -------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2003 2002
- ---------------------------------------------------------- ---- ---- ---- ----
Interest and dividend income:
Loans $ 8,351 $ 8,306 $ 25,409 $ 26,481
Securities, primarily taxable 3,133 2,343 10,363 6,700
----------- ----------- ----------- -----------
Total interest income 11,484 10,649 35,772 33,181
----------- ----------- ----------- -----------
Interest expense:
Deposits 3,027 3,944 9,853 13,605
Borrowings 1,494 965 4,521 2,868
Advance payments from borrowers for taxes 3 4 7 11
----------- ----------- ----------- -----------
Total interest expense 4,524 4,913 14,381 16,484
----------- ----------- ----------- -----------
Net interest income 6,960 5,736 21,391 16,697
Provision for loan losses 110 100 862 1,094
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,850 5,636 20,529 15,603
----------- ----------- ----------- -----------
Non-interest income:
Service charges and fees 435 413 1,352 1,164
Realized gain on sale of:
Loans held for sale 292 119 551 476
Securities available for sale 629 16 636 362
Loan servicing (loss) income, net (1) 13 (40) 52
----------- ----------- ----------- -----------
Total non-interest income 1,355 561 2,499 2,054
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 2,975 2,490 8,674 6,918
Occupancy 380 318 1,070 934
Furniture and equipment 274 225 757 662
Federal insurance premium 22 23 66 67
Amortization of intangible assets 27 45 77 82
Data processing 181 178 518 489
Advertising 104 104 371 390
Community enrichment 42 38 115 113
Deposit account services 212 190 618 595
Professional fees 125 141 389 408
Modification of debt expense 538 - 538 -
Other expense 445 402 1,355 1,173
----------- ----------- ----------- -----------
Total non-interest expense 5,325 4,154 14,548 11,831
----------- ----------- ----------- -----------
Income before income taxes 2,880 2,043 8,480 5,826
Income tax expense 943 655 2,804 1,917
----------- ----------- ----------- -----------
Net Income $ 1,937 $ 1,388 $ 5,676 $ 3,909
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.19 $ 0.13 $ 0.55 $ 0.36
Diluted $ 0.18 $ 0.12 $ 0.52 $ 0.35
Cash dividends declared per share $ 0.08 $ 0.06 $ 0.22 $ 0.17
Weighted average basic shares outstanding 10,222,816 10,832,786 10,189,791 10,816,330
Weighted average diluted shares outstanding 10,798,153 11,111,934 10,732,569 11,075,502
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
Willow Grove Bancorp, Inc.
Consolidated Statements of Cash Flows
For the Nine
Months Ended
March 31,
------------------------
(DOLLARS IN THOUSANDS) 2003 2002
- ------------------------------------------------------------------------------------------ ---- -----
Net cash flows from operating activities:
Net income $ 5,676 $ 3,909
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 708 647
Amortization of premium and accretion of discount, net 810 (138)
Amortization of intangible assets 77 82
Provision for loan losses 862 1,094
Gain on sale of loans available for sale (551) (476)
Gain on sale of securities available for sale (636) (362)
Increase in deferred loan fees 234 121
Decrease in accrued income receivable 167 162
Increase in other assets (5,462) (317)
Increase (decrease) in accrued interest payable 116 (342)
Increase (decrease) in other liabilities 112 (428)
Expense of ESOP and RRP 1,016 282
Modification of debt expense 538 -
Originations and purchases of loans held for sale (53,565) (17,955)
Proceeds from sale of loans held for sale 52,580 18,660
---------- ----------
Net cash provided by operating activities $ 2,682 $ 4,939
---------- ----------
Cash flows from investing activities:
Net (increase) decrease in loans (19,669) 32,466
Purchase of securities available for sale (175,412) (160,231)
Purchase of securities held to maturity (3,961) (405)
Proceeds from sales and calls of securities available for sale 104,702 72,689
Proceeds from sales and calls of securities held to maturity 600 -
Principal repayments of securities available for sale 52,459 24,576
Proceeds from sale of other real estate owned 85 19
Purchase of property and equipment (769) (875)
---------- ----------
Net cash provided by investing activities $ (41,965) $ (31,761)
---------- ----------
Cash flows from financing activities:
Net increase in deposits 35,665 26,600
Net increase in FHLB advances with original maturity less than 90 days - -
Increase in FHLB advances with original maturity greater than 90 days 43,250 19,000
Repayment of FHLB advances with original maturity greater than 90 days (11,336) (7,852)
Net decrease in advance payments from borrowers for taxes (712) (1,226)
Dividends paid (2,306) (750)
Acquisition of stock for Recognition and Retention Plan (3,194) -
Stock subscription orders - 78,391
Issuance of treasury stock - 104
---------- ----------
Net cash provided by financing activities $ 61,367 $ 114,267
---------- ----------
Net increase in cash and cash equivalents $ 22,084 $ 87,445
Cash and cash equivalents:
Beginning of period 31,986 22,209
---------- ----------
End of period $ 54,070 $ 109,654
---------- ----------
Supplemental disclosures of cash and cash flow information:
Interest paid 14,265 16,826
Income taxes paid 1,849 1,230
Non-cash items:
Change in unrealized gain on securities available for sale 674 (793)
(net of taxes of ($423) and ($150) in 2003 and 2002, respectively)
Loans transferred to other real estate owned 391 85
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
0 5
WILLOW GROVE BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Willow Grove Bancorp, Inc. (the "Company") provides a full range of banking
services through its wholly-owned subsidiary, Willow Grove Bank (the "Bank" or
"Willow Grove") which has 14 branches in Dresher, Willow Grove, Maple Glen,
Warminster (2), Hatboro, Huntington Valley, Roslyn, Philadelphia (3 - Somerton,
Rhawnhurst and Bustleton), North Wales, Southampton and Holland, Pennsylvania.
All of the branches are full-service and offer commercial and retail banking
products and services. These products include checking accounts (interest and
non-interest bearing), savings accounts, certificates of deposit, business
loans, real estate loans, and home equity loans. The Company is subject to
competition from other financial institutions and other companies that provide
financial services. The Company is subject to the regulations of certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
On April 3, 2002 Willow Grove Bank completed its reorganization from the
two-tier mutual holding company form of organization to the stock form of
organization (the "April 2002 Reorganization"). The former Willow Grove Bancorp,
Inc. was a federally chartered mid-tier holding company with approximately 56.9%
of its stock being held by Willow Grove Mutual Holding Company and the remaining
43.1% being held by public shareholders. As part of the April 2002
Reorganization, the former Willow Grove Bancorp, Inc., the federal corporation,
was merged into Willow Grove Bank and the current Willow Grove Bancorp Inc., a
Pennsylvania corporation, was incorporated by the Bank for the purpose of
becoming the holding company for the Bank. Willow Grove Bancorp, Inc., the new
Pennsylvania corporation, through a public subscription offering sold 6,414,125
shares of stock at $10.00 per share to subscribers and issued 4,869,375 shares
to the stockholders of Willow Grove Bancorp, Inc., the former federal
corporation which represented an exchange ratio of 2.28019 shares of common
stock for each share of the former company. Willow Grove Bank is now the
wholly-owned subsidiary of Willow Grove Bancorp, Inc., the Pennsylvania
corporation. All per share data and information prior to April 3, 2002 refers to
the former Willow Grove Bancorp, Inc., the federal corporation, and has been
restated to reflect the effect of the increased shares resulting from the share
issuance and exchange in the April 2002 Reorganization. For an interim period of
time after the completion of the April 2002 Reorganization, our stock traded
under the symbol "WGBCD", for all other periods the stock of both the former
federal corporation and the current Pennsylvania corporation traded under the
symbol "WGBC".
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.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. However, all
normal, recurring adjustments which, in the opinion of management, are necessary
for a fair presentation of these financial statements, have been included. These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto for the Company for the year ended June 30,
2002, which are included in the Company's Annual Report on Form 10-K for the
year ended June 30, 2002 (File No. 000-49706). The results for the interim
periods presented are not necessarily indicative of the results that may be
expected for the year ending June 30, 2003.
In preparing the financial statements, management is required to make
certain estimates and assumptions that affect the carrying values of certain
assets and liabilities, and revenues and expenses for the reporting periods
contained herein, in particular the allowance for loan losses. Actual results
could differ from such estimates.
The Company has two stock-based option plans, the first plan is described more
fully in Note 9 of the Company's audited consolidated financial statements
included in Exhibit 13 to the Company's Annual Report on Form 10-K for
6
the year ended June 30, 2002. The 2002 Stock Option Plan was recently adopted at
the Annual Meeting of Stockholders held November 8, 2002. The Company accounts
for both plans under the recognition and measurement principles of APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations.
No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the fair market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee compensation.
For the For the
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -----------------------
(DOLLARS IN THOUSANDS), EXCEPT PER SHARE DATA 2003 2002 2003 2002
- ---------------------------------------------------- ---- ---- ---- ----
Income available to common stockholders $ 1,910 $ 1,381 $ 5,631 $ 3,887
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (79) (23) (148) (53)
Pro forma net income $ 1,831 $ 1,358 $ 5,483 $ 3,834
Earnings per share:
Basic-as reported $ 0.19 $ 0.13 $ 0.55 $ 0.36
Basic- pro forma $ 0.18 $ 0.13 $ 0.54 $ 0.35
Diluted-as reported $ 0.18 $ 0.12 $ 0.52 $ 0.35
Diluted-pro forma $ 0.17 $ 0.12 $ 0.51 $ 0.35
3. EARNINGS PER SHARE
Earnings per share, basic and diluted, were $0.19 and $0.18 for the three
months ended March 31, 2003, respectively, compared to $0.12 and $0.12 for the
three months ended March 31, 2002, respectively. Earnings per share, basic and
diluted, were $0.55 and $0.52, for the nine months ended March 31, 2003,
respectively, compared to $0.35 and $0.35 for the nine months ended March 31,
2002, respectively.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations:
7
For the For the
Three Months Ended Nine Months Ended
March 31, 2003 March 31, 2003
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Basic Diluted Basic Diluted
----------- ----------- ------------ -----------
Net income $ 1,937 1,937 $ 5,676 5,676
Dividends on unvested common stock awards (27) (27) (45) (45)
----------- ----------- ------------ -----------
Income available to common stockholders $ 1,910 $ 1,910 $ 5,631 $ 5,631
=========== =========== =========== ===========
Weighted average shares outstanding 10,222,816 10,222,816 10,189,791 10,189,791
Effect of dilutive securities:
Options - 252,227 - 219,668
Unvested common stock awards - 323,110 - 323,110
----------- ----------- ------------ -----------
Adjusted weighted average shares used in
earnings per share computation 10,222,816 10,798,153 10,189,791 10,732,569
=========== =========== =========== ===========
Earnings per share $ 0.19 $ 0.18 $ 0.55 $ 0.52
=========== =========== =========== ===========
For the For the
Three Months Ended Nine Months Ended
March 31, 2002 March 31, 2002
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Basic Diluted Basic Diluted
----------- ----------- ------------ -----------
Net income $ 1,388 $ 1,388 $ 3,909 $ 3,909
Dividends on unvested common stock awards (7) (7) (22) (22)
----------- ----------- ------------ -----------
Income available to common stockholders $ 1,381 $ 1,381 $ 3,887 $ 3,887
=========== =========== =========== ===========
Weighted average shares outstanding 10,832,786 10,832,786 10,816,330 10,816,330
Effect of dilutive securities:
Options - 159,741 - 139,765
Unvested common stock awards - 119,407 - 119,407
----------- ----------- ------------ -----------
Adjusted weighted average shares used in
earnings per share computation 10,832,786 11,111,934 10,816,330 11,075,502
=========== =========== =========== ===========
Earnings per share $ 0.13 $ 0.12 $ 0.36 $ 0.35
=========== =========== ============ ===========
All options to acquire shares of common stock of the former Willow Grove
Bancorp, Inc. outstanding as of April 3, 2002 were exchanged, as adjusted for
the exchange ratio, for options to acquire common stock of the new company.
8
4. LOAN PORTFOLIO
Information about the Bank's loan portfolio is presented below as of the
dates indicated:
At At
March 31, 2003 June 30, 2002
-------------------------- -------------------------
Percentage of Percentage of
(DOLLARS IN THOUSANDS) Amount Total Amount Total
- --------------------------------------------------------- --------- --------------- --------- --------------
Mortgage loans:
Single-family residential $177,418 37.91 % $181,454 40.40 %
Commercial real estate and multi-family residential 154,742 33.06 134,294 29.90
Construction 29,017 6.20 29,306 6.52
Home Equity 75,443 16.12 75,016 16.70
-------- --------- -------- --------
Total mortgage loans 436,620 93.29 420,070 93.52
Consumer loans 10,112 2.16 10,081 2.24
Commercial business loans 21,305 4.55 19,067 4.24
Total loans receivable $468,037 100.00 % $449,218 100.00 %
======== ======== ======== ========
Allowance for loan losses (5,108) (4,626)
Deferred net loan origination fees (503) (737)
-------- --------
Loans receivable, net $462,426 $443,855
======== ========
The following is a summary of the activity in the allowance for loan losses
for the nine months ended March 31, 2003 and 2002:
For the Nine Months Ended
March 31,
-------------------------------
(DOLLARS IN THOUSANDS) 2003 2002
- ------------------------------------------------------ ---- ----
Balance at the beginning of period $ 4,626 $ 4,313
Plus: Provisions for loan losses 862 1,094
Less charge-offs for:
Mortgage loans 284 12
Consumer loans 4 165
Commercial business loans 93 769
--------- ---------
Total charge-offs 381 946
Plus: Recoveries 1 54
--------- ---------
Balance at the end of the period $ 5,108 $ 4,515
========= =========
9
5. SECURITIES
The amortized cost and estimated fair value of held to maturity and
available-for-sale securities at March 31, 2003 and June 30, 2002 are as
follows:
At March 31, 2003
---------------------------------------------------
Amortized Unrealized Unrealized Estimated
(DOLLARS IN THOUSANDS) Cost Gains Losses Fair Value
- ------------------------------------------ ---------- ---------- ---------- ----------
HELD TO MATURITY:
Municipal securities $ 17,322 $ 383 $ - $ 17,705
--------- --------- --------- ---------
Total securities held to maturity $ 17,322 $ 383 $ - $ 17,705
========= ========= ========= =========
AVAILABLE FOR SALE:
US government agency securities $ 70,979 $ 999 $ (1) $ 71,977
Mortgage backed securities:
FNMA 123,173 2,928 (147) 125,954
GNMA 16,970 317 - 17,287
FHLMC 44,969 538 (400) 45,107
FHLB Stock 9,172 - - 9,172
Equity securities 4,477 - (83) 4,394
--------- --------- --------- ---------
Total securities available for sale 269,740 4,782 (631) 273,891
--------- --------- --------- ---------
Total securities $ 287,062 $ 5,165 $ (631) $ 291,596
========= ========= ========= =========
At June 30, 2002
---------------------------------------------------
Amortized Unrealized Unrealized Estimated
(DOLLARS IN THOUSANDS) Cost Gains Losses Fair Value
- ------------------------------------------ ---------- ---------- ---------- ----------
HELD TO MATURITY:
Municipal securities $ 13,973 $ 147 $ (3) $ 14,117
---------- ---------- ---------- ----------
Total securities held to maturity $ 13,973 $ 147 $ (3) $ 14,117
========== ========== ========== ==========
AVAILABLE FOR SALE:
US government agency securities $ 75,692 $ 1,013 $ (12) $ 76,693
Mortgage backed securities:
FNMA 87,778 1,649 - 89,427
GNMA 37,847 495 (1) 38,341
FHLMC 40,820 303 (360) 40,763
FHLB Stock 5,042 - - 5,042
Equity securities 4,472 - (51) 4,421
---------- ---------- ---------- ----------
Total securities available for sale 251,651 3,460 (424) 254,687
---------- ---------- ---------- ----------
Total securities $ 265,624 $ 3,607 $ (427) $ 268,804
========== ========== ========== ==========
10
6. RECENT ACCOUNTING PRONOUNCEMENTS
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
This Statement amends FASB Statement No. 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies," and it applies to all entities.
It is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Earlier application is encouraged. There was no impact on
earnings, financial condition, or equity upon adoption of Statement No. 143.
RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, REPORTING GAINS AND
LOSSES FROM EXTINGUISHMENT OF DEBT, and an amendment of that Statement, FASB
Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND
REQUIREMENTS, along with rescinding FASB Statement No. 44, ACCOUNTING FOR
INTANGIBLE ASSETS OF MOTOR CARRIERS and amending FASB Statement No. 13,
ACCOUNTING FOR LEASES. This Statement (1) eliminates an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions, (2) eliminates the extraordinary item
treatment of reporting gains and losses from extinguishment of debt, and (3)
makes certain other technical corrections.
The provisions of this Statement related to the rescission of Statement 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions of
this Statement related to Statement 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall be
effective for financial statements issued on or after May 15, 2002. There was no
impact on earnings, financial condition, or equity upon adoption of Statement
No. 145.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. There is no expected impact on earnings, financial condition, or
equity upon adoption of Statement No. 146.
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
In October 2002, the FASB issued Statement No. 147, ACQUISITIONS OF CERTAIN
FINANCIAL INSTITUTIONS, which amends SFAS No. 72, ACCOUNTING FOR CERTAIN
ACQUISITIONS OF BANKING OR THRIFT INSTITUTIONS, SFAS No.144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions
11
from the scope of both Statement No. 72 and Interpretation 9 and requires that
those transactions be accounted for in accordance with FASB Statements No. 141,
BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Thus,
the requirement in paragraph 5 of Statement No. 72 to recognize any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions within the scope of this Statement. In addition,
this Statement amends Statement No. 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement No. 144 requires for other long-lived
assets that are held and used.
Effective September 30, 2002 the Company adopted Statement No. 147 with
retroactive application effective June 30, 2001. With the adoption of Statement
No. 147 an adjustment to fiscal 2002 statements is included to eliminate the
accumulated amortization associated with the retroactive adjustment. The results
of this adjustment is an increase in income, for an average of $23,000, net of
taxes, for each quarter and $92,000, net of taxes, for fiscal year ended June
30, 2002. At March 31, 2003 the Company had goodwill of $848,000, which was
recently assessed for impairment. The Company determined there was no impairment
to goodwill at this time and correspondingly no impact on earnings was required.
Prospectively, should an indication of impairment exist, the Company will
perform a second test under Statement No. 142 to measure and record the amount
of impairment, if any.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FASB Interpretation No. 45)
|X| elaborates on the disclosures to be made by a guarantor in its annual
financial statements about its obligations under certain guarantees
that its issued.
|X| effective for financial statements ending March 31, 2003
CONSOLIDATION OF VARIABLE INTEREST ENTITIES- AN INTERPRETATION OF ARB NO. 51
(FASB Interpretation No. 46)
|X| requires that an enterprise review its degree of involvement in a
variable interest entity to determine of it is the primary beneficiary
of that entity.
|X| effective for fiscal years beginning after June 30, 2003 to variable
interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123." This statement amends FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for fiscal years ending after December 15, 2002. This
Statement announces that "in the near future, the Board plans to consider
whether it should propose changes to the U.S. standards on accounting for
stock-based compensation."
12
7. COMPREHENSIVE INCOME
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only component of other comprehensive income is the change in the estimated
fair value of investment securities available for sale.
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -----------------------
(DOLLARS IN THOUSANDS) 2003 2002 2003 2002
- ---------------------------------------------------- ---- ---- ---- ----
Net income $ 1,937 $ 1,388 $ 5,676 $ 3,909
Other comprehensive income, net of tax
Unrealized gains on securities available
for sale, net of tax
Unrealized holding (loss)gain during the period (931) (1,103) 280 (1,010)
Reclassification adjustment for gains
included in net income 390 10 394 217
--------- --------- --------- ---------
Total other comprehensive (loss) income (541) (1,093) 674 (793)
--------- --------- --------- ---------
Comprehensive income $ 1,396 $ 295 $ 6,350 $ 3,116
========= ========= ========= =========
8. DIVIDENDS
On July 22, 2002, October 22, 2002 and January 29, 2003, the Company
declared a cash dividend on its common stock of $0.07, $0.07 and $0.08 per
share, respectively, payable on August 16, 2002, November 20, 2002 and February
17, 2003, respectively, to owners of record on August 2, 2002, November 8, 2002
and February 3, 2003, respectively. Additionally, on April 23, 2003, the
Company's Board of Directors declared a $0.08 per share cash dividend payable on
May 23, 2003 to shareholders of record on May 6, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q 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
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 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.
RESULTS OF OPERATIONS
GENERAL. Net income for the three-month period ended March 31, 2003 was
$1.9 million. This compares to net income of $1.4 million for the comparable
quarter in the prior year. Net income for the nine-month period ended March 31,
2003 was $5.7 million compared to net income of $3.9 million for the comparable
nine-month period ended March 31, 2002. The Company's net interest margin
decreased five basis points to 3.59% for the three months ended March 31, 2003
from 3.64% for the three months ended March 31, 2002. The net interest margin
13
increased 12 basis points to 3.68% for the nine months ended March 31, 2003 from
3.56% for the nine months ended March 31, 2002. The return on average assets for
the three-month and nine-month periods ended March 31, 2003 and 2002 were 0.97%
and 0.95%, respectively, and 0.85% and 0.80%, respectively. The return on
average equity for the same periods was 6.37% and 6.13%, respectively, and 8.85%
and 8.32%, respectively.
NET INTEREST INCOME. Net interest income is determined by our average
interest rate spread (i.e. the difference between the average yields on
interest-earning assets and the average rates paid on interest-bearing
liabilities) and also the average amount of interest-earning assets relative to
interest-bearing and non-interest-bearing deposit liabilities.
Net interest income for the three-month and nine-month periods ended March
31, 2003 was $7.0 million, and $21.4 million, respectively. This compares
favorably to $5.7 million and $16.7 million in net interest income for the
respective prior comparable periods. For the three-month and nine-month periods
ended March 31, 2003, net interest income increased $1.2 million or 21.3% and
$4.7 million or 28.1%, over the prior comparable three-month and nine-month
periods. The increases were primarily a result of the combination of increased
balances in average interest-earning assets and a reduction in average interest
rates paid on interest-bearing liabilities which more than offset a reduction in
average yield on interest-earning assets. For the three-month period ended March
31, 2003 the Company's interest rate spread decreased eight basis points to
2.93% from 3.01% for the three-month period ended March 31, 2002. The net
interest rate spread increased 13 basis points to 3.01% for the nine-month
period ended March 31, 2003 from 2.88% for the nine-month period ended March 31,
2002.
Average interest-earning assets increased $153.6 million and $154.3
million, or 23.8% and 24.5%, respectively, for the three-month and nine-month
periods ended March 31, 2003 compared to the respective prior year periods.
Average interest-bearing liabilities for the three-month and nine-month periods
ended March 31, 2003 increased $89.0 million and $87.9 million or 16.5% and
16.7%, respectively, over the comparable prior year periods. The primary reason
for the increases in interest-earning assets during these periods was the
deployment of net proceeds from the April 2002 Reorganization. The ratio of
average interest-earning assets to average interest-bearing liabilities
increased to 127.25% and 127.54%, respectively, for the three-month and
nine-month periods ended March 31, 2003 compared to an average 119.75% and
119.53%, respectively, for the corresponding three-month and nine-month periods
ended March 31, 2002. The Company's net interest margin decreased five basis
points to 3.59% for the three months ended March 31, 2003 compared to 3.64% for
the three months ended March 31, 2003. The decrease in net interest margin
primarily was a result of the reduction in average yield on interest-earning
assets. The net interest margin increased 12 basis points to 3.68% for the nine
months ended March 31, 2003 from 3.56% for the nine months ended March 31, 2002.
The increase in net interest margin in the nine month period was primarily a
result of an increase in net interest income.
The following tables present the average daily balances for various
categories of assets and liabilities, and income and expense related to those
assets and liabilities for the three-month and nine-month periods ended March
31, 2003 and 2002. The Company maintained tax-exempt securities for which the
yield has been adjusted to a taxable equivalent yield. Loans receivable include
non-accrual loans.
14
For The Three Months Ended
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) March 31, 2003 March 31, 2002
- --------------------------------------------- ----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- ----------
Interest-earning assets:
Loans receivable:
Mortgage loans $ 442,003 $ 7,881 7.19 % $ 405,042 $ 7,820 7.79 %
Consumer loans 10,487 126 4.87 10,368 125 4.89
Commercial business loans 20,749 344 6.72 20,191 361 7.25
--------- ------- --------- -------
Total loans 473,239 8,351 7.12 435,601 8,306 7.69
Securities - taxable 258,356 2,817 4.42 155,578 2,087 5.44
Securities - nontaxable - adjusted to a
taxable equivalent yield 17,829 302 6.87 8,379 153 7.41
Other interest-earning assets 48,398 107 0.90 44,699 156 1.42
--------- ------- --------- -------
Total interest-earning assets 797,822 11,577 5.86 644,257 10,702 6.71
Non-interest-earning assets 16,167 15,939
--------- ---------
Total assets $ 813,989 $ 660,196
========= =========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 105,230 $ 305 1.18 % $ 91,509 $ 340 1.51 %
Savings accounts 79,452 207 1.06 67,793 264 1.58
Certificates of deposit 307,876 2,515 3.31 306,342 3,340 4.42
--------- ------- --------- -------
Total deposits 492,558 3,027 2.49 465,644 3,944 3.44
Total borrowings 131,383 1,494 4.61 69,499 965 5.63
Total escrows 3,050 3 0.40 2,837 4 0.57
--------- ------- --------- -------
Total interest-bearing liabilities 626,991 4,524 2.93 537,980 4,913 3.70
Non-interest-bearing liabilities 63,643 58,649
--------- ---------
Total liabilities 690,634 596,629
Total stockholders' equity 123,355 63,567
--------- ---------
Total liabilities and stockholders' equity $ 813,989 $ 660,196
========= =========
Net interest-earning assets $ 170,831 $ 106,277
========= =========
Net interest income $ 7,053 $ 5,789
======= =======
Net interest rate spread 2.93% 3.01%
==== ====
Net interest margin 3.59% 3.64%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 127.25% 119.75%
====== ======
15
For The Nine Months Ended
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) March 31, 2003 March 31, 2002
- --------------------------------------------- ----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- ----------
Interest-earning assets:
Loans receivable:
Mortgage loans $ 436,954 $ 23,995 7.32 % $ 424,001 $ 24,904 7.83 %
Consumer loans 10,375 367 4.71 10,106 397 5.23
Commercial business loans 20,167 1,047 6.92 20,289 1,180 7.75
--------- -------- --------- --------
Total loans 467,496 25,409 7.24 454,396 26,481 7.77
Securities - taxable 270,072 9,560 4.72 140,341 6,123 5.81
Securities - nontaxable - adjusted to a
taxable equivalent yield 17,307 820 6.31 6,024 321 7.10
Other interest-earning assets 27,873 235 1.12 27,701 365 1.76
--------- -------- --------- --------
Total interest-earning assets 782,748 36,024 6.13 628,462 33,290 7.06
Non-interest-earning assets 16,644 15,662
--------- ---------
Total assets $ 799,392 $ 644,124
========= =========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 99,511 $ 999 1.34 % $ 78,292 $ 1,002 1.70 %
Savings accounts 76,583 702 1.22 63,254 898 1.89
Certificates of deposit 306,558 8,152 3.54 315,269 11,705 4.95
--------- -------- --------- --------
Total deposits 482,652 9,853 2.72 456,815 13,605 3.97
Total borrowings 128,481 4,521 4.69 66,377 2,868 5.76
Total escrows 2,590 7 0.36 2,582 11 0.57
--------- -------- --------- --------
Total interest-bearing liabilities 613,723 14,381 3.12 525,774 16,484 4.18
Non-interest-bearing liabilities 62,279 55,705
--------- ---------
Total liabilities 676,002 581,479
Total stockholders' equity 123,390 62,645
--------- ---------
Total liabilities and stockholders' equity $ 799,392 $ 644,124
========= =========
Net interest-earning assets $ 169,025 $ 102,688
========= =========
Net interest income $ 21,643 $ 16,806
======== ========
Net interest rate spread 3.01% 2.88%
==== ====
Net interest margin 3.68% 3.56%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 127.54% 119.53%
====== ======
INTEREST INCOME. Interest income on loans increased $45,000, or less than
1.0% for the three-month period ended March 31, 2003 compared to the three-month
period ended March 31, 2002. The increase in average balances was primarily the
reason for the increase in interest income. Interest income decreased $1.1
million or 4.0% for the nine-month period ended March 31, 2003 compared to the
nine-month period ended March 31, 2002. The overall increase in the average
balance of loans was more than offset by an overall decrease in the average
yields earned for the nine-month period ended March 31, 2003 which accounted for
the decline in interest income compared to the similar prior year period.
Interest income on securities increased $790,000 and $3.7 million or 33.7% and
54.7%, respectively (adjusting our tax-exempt securities to 6.87% and 6.31%,
respectively, on a tax equivalent basis), for the three-month and nine-month
16
periods ended March 31, 2003 compared to the three-month and nine-month periods
ended March 31, 2002. Overall increases in the average balance of securities
more than offset the overall decrease in average yields earned for the
three-month and nine-month periods ended March 31, 2003 compared to the
three-month and nine-month periods ended March 31, 2002.
INTEREST EXPENSE. Interest expense on deposit accounts decreased $917,000
and $3.8 million, or 23.3% and 27.6%, respectively, for the three-month and
nine-month periods ended March 31, 2003 compared to the similar prior year
periods. The increase in the average balances of deposits was more than offset
by the decrease in average rates paid on deposits. The decrease in average rates
paid was primarily responsible for the overall decrease in interest expense.
Interest expense on borrowings increased $529,000 and $1.7 million, or 54.8% and
57.6% for the three-month and nine-month periods ended March 31, 2003 compared
to the similar prior year period. The increase in average balances on
borrowings, primarily related to revenue enhancement strategies, more than
offset the decrease in average borrowing rates.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses for the
three months and nine months ended March 31, 2003 was $110,000 and $862,000,
respectively. This compares to $100,000 and $1.1 million, respectively, for the
corresponding prior fiscal year periods. The Company's allowance for loan losses
as a percentage of its loan portfolio increased to 1.09% at March 31, 2003
compared to 1.03% at June 30, 2002. The provisions for loan losses are based
primarily upon the Company's regular review of credit quality and is based upon,
but not limited to, the following factors: an evaluation of the portfolio, loss
experience, current economic conditions, volume, growth and composition of the
portfolio. Management believes, to the best of its knowledge, that the Company's
allowance represents all known and inherent losses in the portfolio that are
both probable and reasonably estimable at March 31, 2003, however, no assurance
can be given as to the amount or timing of additional provisions for loan losses
in the future as a result of potential increases in the amount of the Company's
non-performing loans in the remainder of the Company's loan portfolio.
Regulators, as part of their review, can add to or change the allowance for loan
losses.
NON-INTEREST INCOME. Non-interest income increased $794,000, or 141.5% to
$1.4 million for the three-month period ended March 31, 2003 compared to
$561,000 for the similar prior year period. Non-interest income increased
$445,000, or 21.7% to $2.5 million for the nine-month period ended March 31,
2003 compared to $2.1 million for the similar prior fiscal year period. The
increases were primarily a result of the Company's increase in gains on sale of
securities during the third quarter of fiscal 2003. As part of its ongoing
asset/liability management planning, during the third quarter of fiscal 2003,
the Company sold $20.1 million of investment securities at a gain of $650,000,
which were in management's opinion, subject to high prepayment risk and could
decrease in value as prepayment speeds and call provisions continued to
accelerate. The gain on sales of loans for the three and nine months ended March
31, 2003 was $292,000 and $551,000, respectively. The gain on sales of loans
increased $173,000 and $75,000, respectively, for the three-month and nine-month
periods ended March 31, 2003 compared to the similar prior year period.
Additionally, loan servicing income decreased $14,000 and $92,000, respectively
for the three-month and nine-month periods ended March 31, 2003 compared to the
similar periods in 2002. The decrease was related to an increase in the
amortization of capitalized loan servicing rights which reflect accelerated
mortgage loan prepayments as a result of single-family residential loan
re-financings. These decreases were partially offset by an increase of $22,000
and $188,000, respectively, for the three-month and nine-month periods ended
March 31, 2003 in general service charges and fees.
NON-INTEREST EXPENSE. Non-interest expense increased $1.2 million, or 28.2%
to $5.3 million for the three-month period ended March 31, 2003 compared to $4.2
million for the similar prior year period. Non-interest expense increased $2.7
million, or 23.0% to $14.5 million for the nine-month period ended March 31,
2003 compared to $11.8 million for the similar prior year period. The increases
were primarily a result of general increases in compensation and benefits, an
increase in our personnel costs due to the opening of our thirteenth and
fourteenth banking offices in April 2002 and January 2003, respectively,
increased Employee Stock Ownership Plan ("ESOP") and increased Recognition and
Retention Plan ("RRP") expense, and penalties associated with the prepayment of
longer term Federal Home Loan Bank ("FHLB") advances. ESOP expense increased
$282,000 and $549,000, or 464.3% and 343.1%, respectively, to $343,000 and
$709,000, respectively, for the three-month and nine-month periods ended March
31, 2003. This compares to $61,000 and $160,000, respectively for the
three-month and nine-month periods ended March 31, 2002. The increase in ESOP
expense was primarily the result of stock price appreciation and the expense
associated with the additional 513,130 shares acquired by the ESOP in the April
2002 Reorganization. The RRP expense increased $131,000 and $185,000, or 321.3%
or 151.6%, to $171,000 and $307,000, respectively for the three-month and nine-
month periods ended March 31, 2003. This compares to $41,000 and $122,000,
respectively, for the three-month and nine-month periods ended March 31, 2002.
The increase was exclusively related to shares allocated from the 2002 RRP
Trust. During the three and nine months ended March 31, 2003, the Company
incurred a prepayment penalty of $538,000 as a result of the payoff of $5.0
17
million in longer-term higher cost FHLB advances averaging 6.39% compared to no
penalties in the respective prior year periods. Increases in compensation
expense related to the operation of our thirteenth and fourteenth offices were
$132,000 and $217,000, respectively, for the three months and nine months ended
March 31, 2003. Increases in occupancy expense related to the operation of our
thirteenth and fourteenth banking offices were $57,000 and $118,000,
respectively, for the three months and nine months ended March 31, 2003.
Additionally, other expenses increased due to general increases in back office
operations.
INCOME TAX EXPENSE. The provision for income taxes for the three-month and
nine-month periods ended March 31, 2003 was $943,000 and $2.8 million,
respectively. This compares to a provision of $655,000 and $1.9 million for the
similar prior year three-month and nine-month periods. The increase in provision
for taxes for the three-month and nine-month periods ended March 31, 2003
primarily relates to an increase in pre-tax income. The effective tax rate for
the three-month and nine-month periods ended March 31, 2003 was 32.7% and 33.1%,
respectively.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets of the Company increased by $69.6 million, or 9.2% to
$829.4 million at March 31, 2003 compared to $759.8 million at June 30, 2002.
The increase in assets resulted from securities available for sale and held to
maturity increasing a combined $22.6 million, or 8.4% primarily as a result of
the investment of the net proceeds received in the Company's April 2002
Reorganization and certain leverage strategies funded by Federal Home Loan Bank
advances. Net loans increased $18.6 million, or 4.2% from $443.9 million at June
30, 2002 to $462.4 million at March 31, 2003 due to increases in our consumer,
home equity, commercial business and commercial and multi-family real estate
loan portfolios. Total liabilities amounted to $703.1 million at March 31, 2003,
an increase of $67.6 million, or 10.6% from June 30, 2002. Deposits increased
$35.7 million, or 6.7% to $565.4 million, with core deposits increasing $28.7
million, or 12.8%, to $252.6 million, while borrowings increased $32.5 million,
or 33.2% from June 30, 2002 to March 31, 2003. Total stockholders' equity
increased $2.0 million to $126.3 million at March 31, 2003. The change in
stockholders' equity was primarily the result of the combination of $5.7 million
in net income and accumulated other comprehensive income of $674,000, net of
taxes, which was partially offset by the purchase of shares in the open market
for the Company's 2002 RRP Plan totaling $3.2 million, which are recorded as a
contra-equity account, and dividend payments of $2.3 million during the nine
months ended March 31, 2003.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents amounted to $54.1
million and $32.0 million at March 31, 2003 and June 30, 2002, respectively.
Cash and cash equivalents increased during the period as a result of increased
cash flows from loans and mortgage-backed securities and increased deposit
balances.
ASSETS AVAILABLE OR HELD FOR SALE. At March 31, 2003, securities classified
as available-for-sale and loans classified as held-for-sale amounted to $273.9
million and $3.1 million, respectively. This compares to $254.7 million in
available for sale securities and $1.6 million in held for sale loans at June
30, 2002. The increase of $19.2 million, or 7.5%, in available-for-sale
securities was part of the Company's investment strategy to increase its
securities portfolio in its continuing efforts to increase net profits without
exposing the Company to unnecessary risk. At March 31, 2003, the Company had
unrealized gains on available for sale securities of $2.6 million, net of
unrealized losses, compared to unrealized gains on available for sale securities
of $1.9 million at June 30, 2002. The increase in unrealized gains was a result
of a decrease in the general level of interest rates. The increase of $1.5
million or 97.6% in held for sale loans was part of the Company's strategy to
sell single-family residential mortgage loans to generate non-interest income
and to reduce potential interest rate risk in the future.
LOANS. The net loan portfolio of the Company increased $18.6 million, or
4.2% from $443.9 million at June 30, 2002 to $462.4 million at March 31, 2003.
The increase in the Company's net loan portfolio was due to an increase in
consumer, home equity, commercial business and commercial and multi-family real
estate loan portfolios.
During the third quarter of fiscal 2003, the Company's commercial and
multi-family real estate loans increased $20.4 million, or 15.2%, and commercial
business loans increased $2.2 million, or 11.7%. Partially offsetting these
increases was a decline of $4.0 million, or 2.2% in single-family residential
mortgage loans. Recent changes in the mix of the Company's loan portfolio
reflect the Company's continuing efforts to diversify its loan portfolio and
increase its holdings in loans that generally have higher yields and shorter
terms to maturity and/or
18
repricing than single-family residential mortgage loans. However, commercial
real estate loans, multi-family residential mortgage loans, construction loans,
home equity loans and other consumer loans all generally are deemed to have
increased credit risk characteristics in comparison to single-family residential
mortgage loans.
The following table sets forth information with respect to non-performing
assets identified by the Company, including non-accrual loans and other real
estate owned.
(DOLLARS IN THOUSANDS) At March 31, 2003 At June 30, 2002
- ------------------------------------------------------------ ------------------- -------------------
Accruing loans past due 90 days or more:
Real estate $ 239 $ -
Commercial business loans - 200
---------- ----------
Total 239 200
---------- ----------
Non-accrual loans:
Mortgage loans
Single-family residential 1,299 1,897
Commercial real estate and multi-family residential 48 1,179
Construction - -
Home Equity 243 55
Consumer loans 6 104
Commercial business loans 334 724
---------- ----------
Total 1,930 3,959
---------- ----------
Performing troubled debt restructurings 1,496 1,512
---------- ----------
Total non-performing loans 3,665 5,671
Other real estate owned, net 391 85
---------- ----------
Total non-performing assets $ 4,056 $ 5,756
========== ==========
Non-performing loans to total loans, net of deferred fees 0.78% 1.28%
Non-performing assets to total assets 0.49% 0.76%
Total non-performing assets decreased $1.7 million, or 29.5%, to $4.1
million at March 31, 2003 compared to $5.8 million June 30, 2002. The decrease
was primarily related to a decrease in non-performing single family residential
mortgage loans, non-performing commercial and multi-family real estate loans ,
non-performing commercial business loans and non-performing consumer loans,
partially offset by an increase in non-performing home equity loans.
INTANGIBLE ASSETS. Intangible assets include a core deposit intangible and
an unidentified intangible asset, which represents the excess cost over fair
value of assets acquired over liabilities assumed in a branch acquisition which
occurred in 1994. The core deposit intangible is being amortized over a 12-year
life. At March 31, 2003 the Company had goodwill of $848,000 which is
periodically measured for impairment.
DEPOSITS. The Company's total deposits increased by $35.7 million to $565.4
million at March 31, 2003 compared to $529.8 million at June 30, 2002. This
increase occurred despite the Company being located in a highly competitive
market for deposits. Savings accounts increased $8.3 million or 11.3%, checking
and money market
19
accounts increased $20.4 million or 13.5% and certificates of deposit decreased
$7.0 million, or 2.3%. The Company intends to continue its marketing efforts
promoting core deposits in its effort to help fund asset growth.
FEDERAL HOME LOAN BANK ADVANCES. The Company utilizes advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB") primarily as an additional source
of funds to meet loan demand. FHLB advances increased $32.5 million, or 33.2% to
$130.3 million at March 31, 2003 compared to $97.8 million at June 30, 2002. The
Company also uses FHLB advances to fund certain investment strategies approved
by our Board of Directors.
STOCKHOLDERS' EQUITY. Total stockholders' equity of the Company amounted to
$126.3 million, or 15.2% of assets at March 31, 2003 compared to $124.4 million
or 16.4% of total assets at June 30, 2002, an increase of $2.0 million, or 1.6%.
Changes in stockholders' equity reflect year-to-date net income of $5.7 million,
as well as an increase of $674,000, net of taxes, in accumulated other
comprehensive income, primarily as a result of the increase in the value of the
available-for-sale investment securities portfolio. This was partially offset by
the purchase of shares in the open market for the Company's 2002 RRP Trust
totaling $3.2 million, which are recorded as a contra-equity account. Total
stockholders' equity of the Company included unrealized gains, net of taxes, of
$2.6 million and $1.9 million on available-for-sale securities at March 31, 2003
and June 30, 2002, respectively. The Company paid a cash dividend of $0.07,
$0.07 and $0.08, respectively, per share for the quarters ended September 30,
2002, December 31, 2002 and March 31, 2003. These regular dividends totaled $2.3
million during the nine-months ended March 31, 2003.
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing, and financing activities. The Company's
primary sources of funds are deposits, amortizations, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
The Company also utilizes borrowings, generally in the form of FHLB advances, as
a source of funds. While scheduled payments from the amortization of loans and
mortgage related securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Company invests excess funds in
short-term interest-earning assets which provide liquidity to meet lending
requirements.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as U.S. Treasury securities. The Company uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a portfolio
of mortgage backed and mortgage related securities and investment securities. At
March 31, 2003, the total approved investment and loan origination commitments
outstanding amounted to $27.8 million. Certificates of deposit scheduled to
mature in one year or less at March 31, 2003 totaled $211.7 million. Based on
historical experience, management believes that a significant portion of
maturing certificates of deposit will remain with the Company. The Company has
the ability to utilize borrowings, typically in the form of FHLB advances as an
additional source of funds. The maximum borrowing capacity available to the
Company from the FHLB was $418.9 million as of December 31, 2002, the most
recent date for which information is available, based on qualifying collateral.
The Company is required to maintain sufficient liquidity to ensure its safe and
sound operation. The Company anticipates that it will continue to have
sufficient funds, together with borrowings, to meet its current commitments.
20
CAPITAL
At March 31, 2003, the Bank had regulatory capital which was well in excess
of regulatory limits set by the Office of Thrift Supervision. The current
requirements and the Bank's actual capital levels are detailed below:
Required to Be Well
Capitalized under
Required for Capital Prompt Corrective
Actual Capital Adequacy Purposes Action Provision
--------------------- ---------------------- -----------------------
(DOLLARS IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------- --------- ------- --------- ------- -------- -------
AS OF MARCH 31, 2003
- --------------------------------
Tangible capital $ 83,651 10.1% $ 12,444 1.5% $ 16,592 2.0%
(to tangible assets)
Core capital 83,651 10.1% 33,040 4.0% 41,300 5.0%
(to adjusted tangible assets)
Tier I capital 83,651 18.7% N/A N/A 26,816 6.0%
(to risk-weighted assets)
Risk-based capital 88,759 19.9% 35,755 8.0% 44,694 10.0%
(to risk-weighted assets)
AS OF JUNE 30, 2002
- --------------------------------
Tangible capital $ 82,668 10.9% $ 11,393 1.5% $ 15,191 2.0%
(to tangible assets)
Core capital 82,668 10.9% 30,267 4.0% 37,834 5.0%
(to adjusted tangible assets)
Tier I capital 82,668 20.4% N/A N/A 24,311 6.0%
(to risk-weighted assets)
Risk-based capital 87,293 21.5% 32,414 8.0% 40,518 10.0%
(to risk-weighted assets)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the discussion of the Company's asset and liability management policies
as well as the potential impact of interest rate changes upon the market value
of the Company's portfolio equity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report to
stockholders for the year ended June 30, 2002. Management, as part of its
regular practices, performs periodic reviews of the impact of interest rate
changes upon net interest income and the market value of the Company's portfolio
equity. Management closely monitors interest rate risk and takes appropriate
short-term actions to maintain this risk at acceptable levels while focusing on
a longer-term loan diversification plan, which concentrates on the acquisition
of shorter maturity or repricing assets. Based on, among other factors, such
reviews, management believes that there are no material changes in the market
risk of the Company's asset and liability position since June 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
As a savings and loan holding company, the Company is subject to the
internal control reporting requirements of the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA"). FDICIA's requirements include an annual
assessment by our Chief Executive Officer and Chief Financial Officer of the
effectiveness of our internal controls over financial reporting, which generally
include those controls relating to the preparation of our financial statements
in conformity with generally accepted accounting principles. In addition, under
FDICIA our independent auditors have annually examined and attested to, without
qualification, management's assertions
21
regarding the effectiveness of our internal controls. Accordingly, we have
experience with the process of maintaining and evaluating our internal controls
over financial reporting.
In connection with recent legislation and proposed regulations, our
management has also focused its attention on our "disclosure controls and
procedures," which, as defined by the Securities and Exchange Commission (the
"SEC"), are generally those controls and procedures designed to ensure that
financial and non-financial information required to be disclosed in the
Company's reports filed with the SEC is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In
light of the new requirements, we have engaged in a process of reviewing our
disclosure controls and procedures. As a result of our review, and although we
believe that our pre-existing disclosure controls and procedures were effective
in enabling us to comply with our disclosure obligations, we have implemented
minor enhancements to our disclosure controls and procedures. These enhancements
generally formalize and document the disclosure controls and procedures that we
already have in place. Any future refinements to our controls and procedures
will continue to build upon our existing internal controls and disclosure
controls and procedures framework.
Following the review described above, and within the 90-day period prior to
the filing of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. There have been no significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
Part II. OTHER INFORMATION
ITEM L. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
EXHIBIT NO. DESCRIPTION
2.1 Plan of Conversion and Agreement and Plan of
Reorganization (1)
3.1 Articles of Incorporation of Willow Grove Bancorp,
Inc. (1)
3.2 Bylaws of Willow Grove Bancorp, Inc. (1)
4.0 Form of Stock Certificate of Willow Grove Bancorp,
Inc. (1)
10.1 Form of Employment Agreement entered into between Willow
Grove Bank and Frederick A. Marcell Jr. (2)
10.2 Form of Employment Agreement entered into between Willow
Grove Bank and each of Joseph M. Matisoff, Christopher
E. Bell, Thomas M. Fewer and John T. Powers (2)
10.3 Supplemental Executive Retirement Agreement (2)
10.4 Non-Employee Director's Retirement Plan (as amended
2002) (3)
10.5 1999 Stock Option Plan (4)
10.6 1999 Recognition and Retention Plan and Trust
Agreement (4)
10.7 Amended Incentive Compensation Plan (5)
10.8 2002 Stock Option Plan (6)
10.9 2002 Recognition and Retention Plan and Trust
Agreement (6)
99.1 Section 1350 Certification of Chief Executive Officer
99.2 Section 1350 Certification of Chief Financial Officer
- ------------
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1, filed on December 14, 2001, as amended,
and declared effective on February 11, 2002 (Registration No.
333-75106).
(2) Incorporated by reference from the registration statement on
Form S-1, filed by the Company's predecessor, a federal
corporation also known as Willow Grove Bancorp, Inc (the
"Mid-Tier") on September 18, 1999, as amended, and declared
effective on November 12, 1998 (Registration No. 333-63737).
(3) Incorporated by reference from the Company's Form 10-Q for the
quarter ended September 30, 2002, filed with the SEC on November
14, 2002 (SEC File No. 000-49706).
(4) Incorporated by reference from the Company's Definitive Proxy
Statement on Schedule 14A filed by the Mid-Tier on June 23, 1999
(SEC File No. 000-25191).
(5) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended June 30, 2002, filed with the SEC on September
30, 2002 (SEC File No. 000-49706).
(6) Incorporated by reference from the Company's Definitive Proxy
Statement on Schedule 14A filed on October 9, 2002 (SEC File No.
000-49706).
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed by the Company on January 29,
2003 disclosing, under Item 5, the Company's press release announcing
earnings results for the period ended December 31, 2003, an increased
cash dividend, and the opening of their Fourteenth Banking Office.
A Current Report on Form 8-K was filed by the Company on March 25,
2003 disclosing, under Item 9, the Company's press release announcing
its first stock repurchase plan and the adoption of a Dividend
Reinvestment and Stock Purchase Plan.
23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WILLOW GROVE BANCORP, INC.
Date: May 14, 2003 By: /s/ Frederick A. Marcell Jr.
-----------------------------
Frederick A. Marcell Jr.
President and Chief Executive Officer
Date: May 14, 2003 By: /s/ Christopher E. Bell
-----------------------------
Christopher E. Bell
Chief Financial Officer
24
CERTIFICATIONS
I, Frederick A. Marcell Jr., the President and Chief Executive Officer of Willow
Grove Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Willow Grove Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Frederick A. Marcell Jr.
----------------------------------------
Frederick A. Marcell Jr.
President and Chief Executive Officer
25
I, Christopher E. Bell, the Senior Vice President, Chief Financial Officer and
Corporate Secretary of Willow Grove Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Willow Grove Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Christopher E. Bell
----------------------------------
Christopher E. Bell
Senior Vice President, Chief Financial
Officer and Corporate Secretary
26