U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended June 30, 1999
OR
|_| Transition report under Section13 or 15(d) of the Securities and Exchange
Act of 1934
For the transition period from _________________ to ___________________
Commission File No. 0-25191
Willow Grove Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
United States 23-2986192
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (215) 646-5405
---------------------------
Securities registered under Section 12(b) of the Exchange Act:
Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (par value $0.01 per share)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_|
Check 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|
As of September 10, 1999, the aggregate value of the 1,944,669 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
385,844 shares held by all directors and executive officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP"), as a group and
2,812,974 shares held by Willow Grove Mutual Holding Company was approximately
$19.7 million. This figure is based on the closing sales price of $10.13 per
share of the Registrant's Common Stock on September 10, 1999. Although directors
and executive officers and the ESOP were assumed to be "Affiliates" of the
Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
The number of shares of Common Stock outstanding as of September 10, 1999 was
5,143,487.
The following documents have been incorporated by reference: Listed below are
the documents incorporated by reference and the Part of the Form 10-K into which
the document is incorporated: (1) portions of the Annual Report to Stockholders
for the year ended June 30, 1999 are incorporated into Part II, Items 5 through
8 of this Form 10-K; and (2) portions of the definitive proxy statement for the
1999 Annual Meeting of Stockholders are incorporated into Part III, Items 10
through 13 of this Form 10-K.
<PAGE>
PART I
Item 1. Business
General. Willow Grove Bancorp, Inc. (the "Company") is a federal corporation
that completed its initial public offering 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 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, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations, and on a limited basis, 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, home equity,
consumer and business. Our major source of income is the interest on our loan
and securities portfolio, 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 "Fed"), 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.
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.
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: eastern Montgomery County, southern Bucks County, and the northeast section
of Philadelphia that borders these counties. To a lesser extent, we service
areas of Chester and Delaware counties, the remainder of the City of
Philadelphia, 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 35 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.
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Lending Activities
General. At June 30, 1999 our net loan portfolio totaled $374.6 million or
79.35% of our total assets. Historically, our primary emphasis has been the
origination of loans secured by first liens on single-family 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, 1999, commercial and multi-family real
estate loans amounted to $65.7 million, or 17.07% of our total loan portfolio.
As of that date, commercial business loans totaled $13.0 million or 3.38% of the
total loan portfolio. Loans secured by liens on single-family residential
properties included first mortgage loans totaling $231.5 million or 60.14% of
the loan portfolio; and $54.1 million of home equity loans and lines of credit,
which accounted for 14.05% 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.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Single-family (1) $ 231,498 60.14% $ 243,131 71.41% $ 236,832 78.09% $ 208,877 79.64% $ 192,168 84.76%
Multi-family 12,938 3.36 7,500 2.20 7,686 2.53 4,565 1.74 4,203 1.85
Commercial 52,769 13.71 24,478 7.19 15,455 5.10 14,904 5.68 9,411 4.15
Construction 14,219 3.69 13,627 4.00 13,120 4.33 13,746 5.24 8,470 3.74
Home equity 54,090 14.05 41,366 12.15 25,553 8.43 16,184 6.17 10,494 4.63
------------------------------------------------------------------------------------------------------
Total Mortgage loans 365,514 94.95 330,102 96.95 298,646 98.48 258,276 98.47 224,746 99.13
Non-mortgage consumer 6,431 1.67 4,930 1.45 2,924 0.96 2,173 0.83 1,281 0.57
Commercial business 13,023 3.38 5,437 1.60 1,698 0.56 1,841 0.70 672 0.30
------------------------------------------------------------------------------------------------------
Total loans receivable 384,968 100.00% 340,469 100.00% 303,268 100.00% 262,290 100.00% 226,699 100.00%
====== ====== ====== ====== ======
Less
Undisbursed portion
of loan proceeds (6,446) (8,855) (9,344) (10,341) (3,541)
Allowance for loan
losses (3,138) (2,665) (1,678) (1,938) (1,728)
Deferred loan fees (800) (1,092) (1,477) (1,536) (1,848)
--------- --------- --------- --------- ---------
Loans receivable, net $ 374,584 $ 327,857 $ 290,769 $ 248,475 $ 219,582
========= ========= ========= ========= =========
</TABLE>
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(1) Includes loans available for sale totaling $12.2 million, $6.2 million,
$5.1 million and $9.4 million for the years ended June 30, 1998, 1997,
1996, and 1995. There were no loans available for sale at June 30, 1999.
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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,
1999, 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.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------------------------------------------------------------------------------
Loans Secured By
-----------------------------------------------------------------------------------------------
Single Multi-
Family family Non-
Residential Residential Commercial Construction Mortgage Commercial Total
Properties(1) Property Real Estate Loans (2) Consumer Business Loans
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due in:
1 year or less $ 595 $ -- $ 837 $ 4,350 $ 1,518 $ 6,099 $ 13,399
More than 1
year to 3 years 4,265 785 765 3,001 1,941 841 11,598
More than 3 years
to 5 years 14,488 -- 4,919 -- 1,819 1,465 22,691
More than 5 years
to 10 years 30,529 1,132 13,254 100 1,054 4,322 50,391
More than 10 years
to 20 years 83,597 8,977 25,008 322 45 296 118,245
More than 20 years 152,114 2,044 7,986 -- 54 -- 162,198
--------------------------------------------------------------------------------------------
Total $285,588 $ 12,938 $ 52,769 $ 7,773 $ 6,431 $ 13,023 $378,522
============================================================================================
</TABLE>
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(1) Includes both first mortgage and home equity loans.
(2) Net of undisbursed portion of loan proceeds.
Of the $365.1 million of loan principal repayments due after June 30,
2000, $285.6 million have fixed rates of interest and $79.5 million have
adjustable rates of interest.
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<PAGE>
Activity in Loans. The following table sets forth the activity in our loan
portfolio for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Total Loans held at the beginning of the period $ 340,469 $ 303,268 $ 262,290
Originations of loans for portfolio
Mortgage Loans:
Single-family residential $ 52,987 $ 33,653 $ 31,007
Multi-family residential 8,607 -- 1,000
Commercial real estate 20,335 11,591 6,298
Construction 12,769 13,020 4,708
Home equity 26,779 23,400 16,487
Non-mortgage consumer 3,622 3,800 1,717
Commercial business 19,185 6,668 297
Transfer of loans from available for sale to
portfolio -- -- 2,089
---------------------------------------
Total originations for and transfers to
portfolio $ 144,284 $ 92,132 $ 63,603
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Origination of available for sale loans 2,875 30,341 16,922
Transfer of loans from available for sale to
portfolio -- -- (2,089)
---------------------------------------
Total origination of loans $ 147,159 $ 122,473 $ 78,436
---------------------------------------
Purchases of loans for portfolio
Single-family residential 18,229 19,836 16,677
Commercial real estate 7,681 600 --
Construction -- -- 956
Home equity 4,342 3,988 --
Purchases of loans available for sale -- 6,055 12,205
---------------------------------------
Total purchases of loans $ 30,252 $ 30,479 $ 29,838
---------------------------------------
Repayments 117,827 85,328 40,841
Charge-offs of loans in portfolio 58 6 445
Sale of available for sale loans 15,027 30,417 26,010
---------------------------------------
Net activity in loans in portfolio $ 44,499 $ 37,201 $ 40,978
---------------------------------------
Total loans at the end of the period $ 384,968 $ 340,469 $ 303,268
=======================================
</TABLE>
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, that it was more cost effective for us to out-source single-family
residential origination. Since that time, we have developed a network of
approximately 25 correspondent mortgage brokers and mortgage bankers, and no
longer have single-family residential loan originators on staff. These
correspondents identify, process, and underwrite 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 in the above table. When the correspondent
advances funds for the closing of a loan we have committed to purchase, it is
classified as "purchase" in the above table. 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
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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). At times, we do acquire loans that do not conform to
FHLMC/FNMA guidelines ("non-conforming" loans). Most non-conforming loans we
consider are non-conforming due to either the amount of the loan exceeds the
maximum loan amount that FHLMC or FNMA will purchase (commonly referred to as
"jumbo" loans), or loans that do not have a monthly amortization schedule, such
as bi-weekly mortgage loans. Non-conforming loans are underwritten according to
our alternative underwriting standards, which in many respects are similar to
FHLMC/FNMA guidelines. These loans account for approximately one-quarter of our
single-family loan portfolio.
Our underwriting function for home equity loans, commercial and
multi-family real estate loans, construction, commercial business, and consumer
loans is centralized at our main office. We require a current appraisal prepared
by an independent appraiser on all new mortgage loans. We also require title
insurance and hazard insurance on all loans secured by real estate, except home
equity 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 on an
individual basis up to certain designated amounts, not exceeding $500,000 in the
case of the President. Loans exceeding individual limits must be approved by a
Loan Committee consisting of the President, the three other executive officers,
and a vice-president of lending; the Director's Loan Committee, consisting of
three outside directors, the President, and the Chief Credit 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 $7.0
million at June 30, 1999), 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, 1999, our three largest
credit relationships with an individual borrower and related entities amounted
to $5.4 million, $4.2 million, and $3.8 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 correspondent
mortgage brokers and bankers to originate and buy conventional single-family
(one-to-four 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 Montgomery and
Bucks Counties, Pennsylvania. At June 30, 1999, single-family mortgage loans
amounted to $231.5 million, or 60.14% of our total loan portfolio. During the
year ended June 30, 1999, originations of single-family residential loans were
$55.9 million and purchases totaled $18.2 million. Due to refinancing activities
that resulted in increased repayments and our increased focus on other types of
lending, the single-family portion of our loan portfolio has decreased during
the past years. We expect this trend to continue, although single-family
mortgage loans are likely to remain the single largest component of our loan
portfolio for the foreseeable future.
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.
Interest rates on our residential mortgages either are fixed for the life
of the loan ("fixed-rate") or may change periodically during the life of the
loan ("ARM"). Original maturities of fixed-rate loans are generally 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, 1999, the fixed-rate portion of our
single-family loan portfolio totaled $201.9 million which was 87.21% 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 time period, the interest rate will adjust on a periodic
basis in
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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, 1999, $29.6
million or 12.79% of our single-family residential 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 single 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 an equity loan is 15 years) and higher interest
rates. An 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. 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, 1999 we had $54.1 million of equity loans and lines of credit
outstanding. This compares to $41.4 million and $25.6 million outstanding at
June 30, 1998 and 1997, respectively. Of the $54.1 million outstanding at June
30, 1999, $6.8 million were in lines of credit. The unused portion of equity
lines of credit was $9.4 million at that date.
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
equity programs in amounts, when combined with the first mortgage, up to 100% of
the value of their property. In addition to originating home equity loans
through our branch offices, we purchase these loans from a network of
correspondents.
During the year ended June 30, 1999, we originated and purchased $25.3
million of equity loans and advanced $5.8 million in equity lines of credit.
Commercial Real Estate and Multi-Family Residential Real Estate Loans. At
June 30, 1999 commercial and multi-family real estate loans amounted to $52.8
million and $12.9 million respectively. This represents 13.71% and 3.36%,
respectively, of our total loan portfolio.
Our commercial loan portfolio consists of loans secured by small office
buildings, retail and industrial use buildings, strip shopping centers, and
other properties used for commercial purposes located in our market area. Our
commercial loans seldom exceed $3 million, and as of June 30, 1999, the average
commercial and multi-family real estate loan size was $424,000, and the largest
loan outstanding was $3.3 million. During the year ended June 30, 1999, our
commercial loan portfolio grew as the result of originations, purchases and the
conversion of loans from construction to permanent, by $28.3 million, or
115.58%. Originations during fiscal year 1999 totaled $20.3 million. This
compares to originations of $11.6 million and $6.3 million in fiscal 1998 and
1997, respectively. We
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<PAGE>
also purchased commercial real estate loans totaling $7.7 million in fiscal 1999
and $600,000 in fiscal 1998. During the past several years, we have hired 3 new
commercial lenders in our efforts to increase the size of this portfolio.
We also originate loans secured by multi-family (over 5 unit) residential
properties. During the year ended June 30, 1999, we originated $8.6 million in
loans of this type. In fiscal 1998, we did not originate any multi-family
residential loans while originations totaled $1.0 million in 1997. As of June
30, 1999, the amount of multi-family residential loans outstanding was $12.9
million. This represented an increase of $5.4 million, or 72.51%.
Although terms for commercial and multi-family loans vary, our
underwriting standards generally allow for terms up to 25 years with monthly
amortization over the life of the loan and LTV ratios of not more than 80%.
Rates are either fixed or adjustable based upon 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. Fees are also charged for the prepayment of a loan
prior to its maturity. Generally we obtain personal guarantees of the principals
as additional collateral for commercial and multi-family real estate loans.
Commercial 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.
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 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 bank officers. At June 30, 1999, we had $14.2 million, 3.69%
of total loans, in outstanding construction loans, plus an additional $6.4
million in undisbursed construction loans in process at that date. Construction
loans outstanding at June 30, 1998 were $13.6 million. In fiscal 1999, we
originated $12.8 million in new construction loans compared to originations of
$13.0 million in fiscal year 1998.
Our construction loans generally have variable rates of interest, a
maximum maturity of three years, and LTV ratios less than 90%. 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 an independent
appraiser prepare an appraisal of the property. We also review and inspect each
project at its inception and prior to every disbursement. 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 (i.e. roads, sewer and water) for sale. We make these loans only in
conjunction with a commitment for a construction loan for the units 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
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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 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 Loans. At June 30, 1999, we had $13.0 million in commercial
business loans (3.38% of gross loans outstanding) compared to $5.4 million at
June 30, 1998, an increase of $7.6 million or 139.53%. We began originating
loans to small-to-mid-sized businesses in our market area in May 1997. Since
that time, we have hired 3 commercial lenders to actively solicit commercial
business loans as well as commercial and multi-family real estate loans. As a
result of these efforts, we anticipate this portion of the loan portfolio will
continue to increase as a percent of the total loan portfolio. These types of
loans assist in our asset/liability management since generally they provide
shorter maturities and/or adjustable rates of interest in addition to generally
having higher returns to compensate for the additional credit risk associated
with the loan.
Loans which we originate may be either a revolving line of credit or for a
fixed term of generally five 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.
Generally, commercial business loans have been characterized as having
higher risks associated to them than single-family loans. This area of lending
is relatively new to us. We have hired individuals experienced in this type of
lending and implemented policies and procedures which we deem to be prudent. At
June 30, 1999, there were $13,000 in non-performing commercial business loans.
Non-Mortgage 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 other secured and unsecured personal loans. These loans are
originated primarily through existing and walk-in customers and direct
advertising. At June 30, 1999, $6.4 million, or $1.67% of our total loan
portfolio was in these types of loans. This compares to $4.9 million or 1.45% of
the total loan portfolio at June 30, 1998. During fiscal 1999, we originated
$3.6 million in consumer loans compared to originations of $3.8 million and $1.7
million in fiscal 1998 and 1997, respectively.
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.
Loan Origination and Loan Fees. In addition to the interest earned on
loans, we receive origination fees or "points" on many of the loans we
originate. Loan points are a percentage of the loan amount which are charged to
the borrower in connection with the origination of the loan.
Our origination fees are offset by certain direct loan origination costs,
and any remaining amount deferred and amortized as interest income over the
contractual life, adjusted for prepayments, of the related loan as an adjustment
to the yield on that loan. At June 30, 1999, deferred fees amounted to $800,000.
9
<PAGE>
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 assets are
subject to this classification system. Loans are periodically reviewed and the
classifications reviewed at least quarterly by the Asset Quality Committee of
the Board of Directors. In addition, we have retained an independent firm to
perform periodic, generally every six months, reviews of the asset quality of
designated portions of the loan portfolio.
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. Our
efforts are generally to 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 demonstrates 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 holding 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 sales of
real estate owned are charged to operations as incurred. There has been no real
estate owned at any of the five most recent fiscal year ends.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts as well as a percent
of each category of loans in the respective category of our portfolio. The
amounts presented represent the total outstanding principal balances of the
related loans rather than the actual payment amounts that are past due.
<TABLE>
<CAPTION>
-------------------------------------------------------
June 30, 1999
-------------------------------------------------------
30 - 59 Days 60 - 89 Days
------------ ------------
Percent of Percent of
Amount Loan Category Amount Loan Category
(1) (1)
-------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential
Single-family $3,534 1.53% $ 174 0.08%
Multi-family -- -- -- --
Commercial real estate 1,025 1.59 51 0.10
Construction -- -- -- --
Home equity 163 0.30 20 0.04
Non-mortgage consumer loans 37 0.58 13 0.20
Commercial business loans 198 1.52 250 1.92
------ ------
Total $4,957 1.31% $ 508 0.13%
====== ======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------
June 30, 1998
-------------------------------------------------------
30 - 59 Days 60 - 89 Days
------------ ------------
Percent of Percent of
Amount Loan Category Amount Loan Category
(1) (1)
-------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential
Single-family $2,268 0.93% $1,304 0.54%
Multi-family -- -- -- --
Commercial real estate 288 1.18 -- --
Construction -- -- -- --
Home equity 92 0.22 35 0.08
Non-mortgage consumer loans 17 0.34 -- --
Commercial business loans -- -- -- --
------ ------
Total $2,665 0.80% $1,339 0.40%
====== ======
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
June 30, 1997
-------------------------------------------------------
30 - 59 Days 60 - 89 Days
------------ ------------
Percent of Percent of
Amount Loan Category Amount Loan Category
(1) (1)
-------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential
Single-family $2,659 1.12% $ 519 0.22%
Multi-family -- -- -- --
Commercial real estate 136 0.88 310 2.01
Construction -- -- -- --
Home equity 32 0.13 46 0.18
Non-mortgage consumer loans -- -- -- --
Commercial business loans -- -- -- --
------ ------
Total $2,827 0.96% $ 875 0.30%
====== ======
</TABLE>
(1) Net of undisbursed loans in process.
11
<PAGE>
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.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more past due
Mortgage Loans $ 4 $ 142 $ 124 $ 101 $ --
Other loans -- -- -- -- --
----------------------------------------------------------
Total accruing loans $ 4 $ 142 $ 124 $ 101 $ --
----------------------------------------------------------
Non-accrual loans
Mortgage Loans
Single family residential 1,006 1,249 374 655 497
Multi-family residential -- -- -- -- --
Commercial real estate -- -- 54 55 95
Construction -- -- -- -- --
Home equity 37 -- -- 73 --
Non-mortgage consumer 8 2 17 34 --
Commercial business loans 13 96 1,346 1,786 --
----------------------------------------------------------
Total non-accrual loans $1,064 1,347 1,791 2,603 592
----------------------------------------------------------
Total non-performing loans $1,068 $1,489 $1,915 $2,704 $ 592
----------------------------------------------------------
Other real estate owned, net -- -- -- -- --
Total non-performing assets $1,068 $1,489 $1,915 $2,704 $ 592
==========================================================
Performing troubled debt restructurings -- -- -- -- --
Total non-performing assets and
troubled debt restructurings $1,068 $1,489 $1,915 $2,704 $ 592
==========================================================
Non-performing loans to total loans
(net of undisbursed loans in process) 0.28% 0.45% 0.65% 0.96% 0.27%
Non-performing assets to total assets 0.23% 0.37% 0.54% 0.87% 0.20%
</TABLE>
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. Another category designated "special mention" also must 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, 1999, we had $1.9 million in assets
classified as substandard; no assets were classified as doubtful or loss.
Allowance for Loan Losses. The allowance for loan losses is maintained at
a level we believe is adequate to absorb losses in the portfolio. Our
determination of the adequacy of the allowance is based upon an evaluation of
the portfolio, past loss experience, current economic conditions, volume,
growth, and composition of the portfolio, and other relevant factors. Among
other things, we consider the amount of loan origination volume and the risk
characteristics of new loans when establishing the appropriate amount of
provisions to the allowance for loan losses. The allowance is increased by
provisions for loan losses which are charges against income. As shown in the
table below, at June 30, 1999, our allowance for loan losses amounted to $3.1
million or 293.82% and 0.83% of our non-performing loans and total loans
receivable respectively. The increase in the allowance for loan losses for the
year ended June 30, 1999 was primarily due to the growth of our loan portfolio.
For fiscal year 1998 the primary reasons
12
<PAGE>
for the increase in our allowance for loan losses were the increase in our total
loan portfolio and our shift towards loans other than single-family residential.
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.
The following table sets forth the activity in our Allowance for Loan
Losses for periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for Loan Loss at the beginning
of the period $2,665 $1,678 $1,938 $1,728 $1,668
Plus: Provisions for loan loss 531 993 185 210 60
Less: Charge-offs for:
Mortgage Loans 32 -- -- -- --
Non-mortgage consumer loans 23 6 5 -- --
Commercial business loans 3 -- 440 -- --
-------------------------------------------------------------
Total Charge-offs 58 6 445 -- --
Plus: Recoveries -- -- -- -- --
Allowance for Loan Losses at the end of
the period $3,138 $2,665 $1,678 $1,938 $1,728
=============================================================
Allowance for loan losses to total non-
performing loans at the end of the
period 293.82% 178.98% 87.62% 71.67% 291.89%
=============================================================
Allowance for loan losses to total loans at
the end of the period (1) 0.83% 0.80% 0.57% 0.69% 0.77%
=============================================================
Ratio of charge-offs to average loans 0.02% 0.00%(2) 0.16% N/a(3) N/a(3)
=============================================================
</TABLE>
- ----------
(1) Total loans are net of undisbursed loans in process
(2) Less than 0.01%
(3) No charge-offs.
13
<PAGE>
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.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of Loan of Loan of Loan of Loan of Loan
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Single-family $ 598 60.14% $ 630 71.41% $ 253 78.09% $ 501 79.64% $ 661 84.76%
Multi-family 32 3.36% 19 2.20% 8 2.53% -- 1.74% -- 1.85%
Commercial 663 13.71% 352 7.19% 113 5.10% -- 5.68% -- 4.15%
Construction 346 3.69% 361 4.00% 188 4.33% -- 5.24% -- 3.74%
Home equity 359 14.05% 324 12.15% 128 8.43% 281 6.17% 58 4.63%
---------------------------------------------------------------------------------------------------
Total Mortgage loans 1,998 94.95% 1,686 96.95% 690 98.48% 782 98.47% 719 99.13%
Non-mortgage consumer 29 1.67% 28 1.45% 25 0.96% -- 0.83% -- 0.57%
Commercial business 186 3.38% 124 1.60% 138 0.56% -- 0.70% -- 0.30%
Unallocated 925 827 825 1,156 1,009
---------------------------------------------------------------------------------------------------
Total loans $3,138 100.00% $2,665 100.00% $1,678 100.00% $1,938 100.00% $1,728 100.00%
===================================================================================================
</TABLE>
14
<PAGE>
Securities Activities
General. The 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 obligations and commercial paper,
various type of mortgage-backed securities, certificates of deposits and federal
funds sold to financial institutions approved by our Board of Directors, equity
investments in 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, or 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 investments have been classified as Available For Sale
("AFS") 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, 1999, our investment securities amounted to $80.1 million, or
16.96% of total assets. This includes a $2.2 million 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 mortgage-backed pass-through securities, and other investments in
municipal bonds, equity investments in the FHLB of Pittsburgh, FNMA, and FHLMC,
and a mutual fund consisting of adjustable-rate mortgage-backed securities.
The following table sets forth information on the carrying value and the
fair value of our securities classified as available for sale at the dates
indicated:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-------------------------------------------------------------------
(In thousands)
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Securities $11,068 $11,052 $ 9,940 $ 9,937 $ 6,851 $ 6,682
Municipal Bonds 1,999 1,890 100 96 -- --
US Government and Agency
Securities 35,000 33,877 20,004 19,999 7,009 7,050
Mortgage -Related Securities 34,229 33,236 17,940 18,079 32,388 31,854
-------------------------------------------------------------------
Total $82,296 $80,055 $47,984 $48,111 $46,248 $45,766
===================================================================
</TABLE>
At June 30, 1997, we had $4.0 million of US Government and Agency
Securities that were classified as held to maturity. These securities matured
during fiscal 1998.
15
<PAGE>
The following table sets forth the activity in our securities portfolio
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1999 1998 1997
------------------------------------
(In thousands)
<S> <C> <C> <C>
Securities at the beginning of the period $ 48,111 $ 49,765 $ 50,163
Purchases 83,581 55,878 18,296
Sales and calls of securities (38,100) (53,375) (10,076)
Repayments, maturities, and amortization (11,169) (4,766) (9,219)
Increase (decrease) in unrealized gains and losses on
available for sale securities (1) (2,368) 609 601
------------------------------------
Securities at the end of the period $ 80,055 $ 48,111 $ 49,765
====================================
</TABLE>
(1) At June 30, 1999, the cumulative unrealized loss on securities classified
as available for sale was $2.2 million.
Mortgage-Backed Securities. At June 30, 1999, we had mortgage-backed
securities totaling $33.2 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 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, 1999, the weighted average remaining term of our
mortgage-backed securities was 18.5 years. This is 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 will 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 6.42% at June 30, 1999. 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 and Agency Securities and Municipal Bonds. At June 30, 1999,
we had $33.9 million, which includes approximately $1.1 million in unrealized
loss, 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
16
<PAGE>
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, 1999 had a carrying value of $2.0
million, and a net unrealized loss of $100,000. These municipal bonds include
issues from various townships and school districts located in Pennsylvania.
The following table sets forth certain information regarding the
contractual maturities (without regard to any call provisions) of the carrying
value of our US Government and Agency securities and Municipal bonds at June 30,
1999.
Amount Weighted
Maturing in: (In thousands) Average Yield
------------ --------------------------------
Under 1 year $ 1,000 5.00%
1-5 years 9,002 5.76%
6-10 years 14,998 6.63%
Over 10 years (1) 11,999 6.37%
-------
Total $36,999 6.20%
=======
(1) Includes $1.999 in municipal bonds at their stated rate which have not
been adjusted to a taxable equivalent rate.
Other Investments. Other than mortgage-backed securities and US Government
and agency securities, we have investments in various equity securities and
mutual funds. These investments totaled $3.1 million and $7.9 million,
respectively. The equity securities include stock in the FHLB, FNMA, and FHLMC.
The mutual fund investment is backed by investment 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 the activity in our deposit portfolio for
the years indicated.
Year Ended June 30,
----------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Beginning balance $340,793 $309,726 $267,695
Net deposits in excess of
withdrawals 37,192 18,985 30,999
Interest credited 12,696 12,082 11,032
----------------------------------
Total net increase 49,888 31,067 42,031
----------------------------------
Ending balance $390,681 $340,793 $309,726
==================================
17
<PAGE>
The following table sets forth by various interest rate categories, the
amount of certificates of deposits at the dates indicated.
June 30,
----------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
0.00% to 2.99% $ 32 $ 132 $ 30
3.00% to 3.99% 21,817 12 11
4.00% to 4.99% 67,875 41,261 37,989
5.00% to 6.99% 153,259 180,858 167,923
7.00% to 8.99% 8,149 9,133 9,817
9.00% and over 25 606 1,057
----------------------------------
Total $251,157 $232,002 $216,827
==================================
The following table sets forth the amount and remaining maturities of the
Certificates of Deposit as of June 30, 1999.
Over Six Over Over
Months One Year Two Years Over
Six months Through One Through Two Through Three Three
And Less Year Years Years Years
--------------------------------------------------------------
(In thousands)
0.00% to 1.99% $ -- $ -- $ -- $ -- $ --
2.00% to 2.99% 32 -- -- -- --
3.00% to 3.99% 15,626 6,191 -- -- --
4.00% to 4.99% 18,098 31,520 14,588 1,303 2,366
5.00% to 6.99% 50,002 34,986 36,737 16,528 15,006
7.00% to 8.99% 587 738 5,682 723 419
9.00% to 10.99% 8 17 -- -- --
11.00% and over -- -- -- -- --
--------------------------------------------------------------
Total $84,353 $73,452 $57,007 $18,554 $17,791
==============================================================
At June 30, 1999 the total amount of outstanding certificates of deposits
in amounts greater than or equal to $100,000 was $37.1 million. The following
table provides information regarding the maturity of these certificates of
deposits.
June 30, 1999
-------------
Amount Maturing in: (In thousands)
3 months or less $ 7,210
Over 3 months through 6 months 6,756
Over 6 months through 12 months 11,351
Over 12 months 11,842
-------
Total $37,159
=======
18
<PAGE>
The following table sets forth the amount of deposits in various
categories at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 48,773 12.48% $ 40,225 11.80% $ 36,373 11.74%
Certificates of
Deposits 251,157 64.29 232,002 68.08 216,827 70.01
Money market accounts 28,741 7.36 20,487 6.01 19,715 6.36
NOW Accounts
Interest bearing 29,013 7.43 25,638 7.53 23,527 7.60
Non-interest bearing 32,997 8.44 22,441 6.58 13,284 4.29
----------------------------------------------------------------
Total $390,681 100.00% $340,793 100.00% $309,726 100.00%
================================================================
</TABLE>
Borrowings
We use outside borrowings on a limited basis to supplement our lending
needs. We also use borrowings in a leverage program that allows us to take
advantage of arbitrage opportunities when investment returns exceed the cost of
borrowings. At June 30, 1999 we had $15.0 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 at of for the periods indicated.
<TABLE>
<CAPTION>
As of or For the Year Ended June 30,
------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB Advances
Average balance outstanding $14,198 $ 9,532 $10,349
Maximum amount outstanding at any month-
end during the period $19,000 $21,000 $16,120
Balance outstanding at the end of the period $14,986 $21,000 $ 6,000
Average interest rate during the period 5.44% 5.55% 5.36%
Average interest rate at the end of the period 5.33% 5.62% 5.50%
Other Borrowings
Average balance outstanding -- $ 263 $ 218
Maximum amount outstanding at any month-
end during the period -- $ 500 $ 500
Balance outstanding at the end of the period -- -- $ 500
Average interest rate during the period -- -- % -- %
Average interest rate at the end of the period -- -- % -- %
</TABLE>
The majority of FHLB Advances are callable at the direction of the FHLB
within certain parameters and substantially all of such advances 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.
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Employees. At June 30, 1999, we had 117 full-time employees, and 38 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.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company, the Bank and the MHC. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
General
The Bank, as a federally chartered savings institution, is subject to
federal regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the FDIC,
which insures the deposits of the Bank to the maximum extent permitted by law,
and requirements established by the Federal Reserve Board. Federally chartered
savings institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The investment and
lending authority of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Such regulation and
supervision primarily is intended for the protection of depositors and not for
the purpose of protecting shareholders.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that it may
find in the Bank's operations. The FDIC also has the authority to examine the
Bank in its role as the administrator of the SAIF. The Bank's relationship with
its depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage requirements. The OTS'
enforcement authority over all savings institutions and their holding companies
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Any change in such regulations, whether by the FDIC,
OTS or Congress, could have a material adverse impact on the MHC, the Company
and the Bank and their operations.
The Company
The Company, as a registered savings and loan holding company within the
meaning of Section 10 of the Home Owners' Loan Act ("HOLA") is subject to OTS
examination and supervision as well as certain reporting requirements. In
addition, because the Bank's deposits are insured by the SAIF maintained by the
FDIC, the Bank is subject to certain restrictions in dealing with the Company
and with other persons affiliated with the Bank.
Pursuant to regulations of the OTS and the terms of the Company's federal
stock charter, the purpose and powers of the Company 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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<PAGE>
The HOLA prohibits a savings and loan holding company, such as the
Company, directly or indirectly, from (1) acquiring control (as defined) of a
savings institution (or holding company thereof) without prior OTS approval, (2)
acquiring more than 5% of the voting shares of a savings institution (or holding
company thereof) which is not a subsidiary, subject to certain exceptions,
without prior OTS approval, or (3) acquiring through merger, consolidation or
purchase of assets, another savings institution (or holding company thereof) or
acquiring all or substantially all of the assets, another savings institution
(or holding company thereof) without prior OTS approval or (4) acquiring control
of an uninsured institution. A savings and loan holding company may not acquire
as a separate subsidiary a savings institution which has its principal offices
outside of the state where the principal offices of its subsidiary institution
is located, except (i) in the case of certain emergency acquisitions approved by
the FDIC, (ii) if the holding company controlled (as defined) such savings
institution as of March 5, 1987 or (iii) when the laws of the state in which the
savings institution to be acquired is located specifically authorize such an
acquisition. No director or officer of a savings and loan holding company or
person owning or controlling more than 25% of such holding company's voting
shares may, except with the prior approval of the OTS, acquire control of any
savings institution which is not a subsidiary of such holding company.
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 the Company is subject. See " -- The Company."
The Bank
Insurance of Accounts. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under current FDIC regulations, SAIF-insured institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system discussed below. These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging
prior to September 30, 1996 from 23 basis points for well capitalized, healthy
institutions to 31 basis points for undercapitalized institutions with
substantial supervisory concerns.
The deposits of the Bank are currently insured by the SAIF. Both the SAIF
and the BIF are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF achieved a fully funded status
first, and therefore as discussed below, effective January 1, 1996, the FDIC
substantially reduced the average deposit insurance premium paid by BIF-insured
banks. On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their then-current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
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
21
<PAGE>
points on such deposits (subject to adjustment for certain types of banks with
SAIF deposits) that were held at March 31,1995 payable by November 27, 1996 to
recapitalize the SAIF. The assessment increased the SAIF's reserve ratio to a
comparable level to that of the BIF at 1.25% of total insured deposits. The
Bank's share of this special assessment totaled $1.5 million and is reflected in
the fiscal 1997 operating results. The FDIC, in connection with the
recapitalization, also lowered SAIF premiums from $0.23 per $100 to $0.064 per
$100 of insured deposits beginning in January 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Regulatory Capital Requirements. The OTS capital requirements consist of a
"tangible capital requirement," a "leverage capital requirement" and a
"risk-based capital requirement." The OTS is authorized to impose capital
requirements in excess of those standards on individual institutions on a
case-by-case basis.
Under the tangible capital requirement, a savings bank must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.
Under the leverage capital requirement adopted by the OTS, savings banks
must maintain "core capital" in an amount equal to at least 3% of adjusted total
assets. Core capital is defined as common shareholders' equity (including
retained earnings), non-cumulative perpetual preferred stock, and minority
interests in the equity accounts of consolidated subsidiaries, plus purchased
mortgage servicing rights valued at the lower of 90% of fair market value, 90%
of original cost or the current amortized book value as determined under GAAP,
and "qualifying supervisory goodwill," less non-qualifying intangible assets. At
June 30, 1999, the Bank's ratio of core capital to total adjusted assets was
9.8%.
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, 1999, represented 75.8% of the total loans receivable, are weighted
at a 50% risk factor. Supplementary capital may include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and general
allowances for loan losses. The allowance for loan losses includable in
supplementary capital is limited to 1.25% of risk-weighted assets. Supplementary
capital is limited to 100% of core capital.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments (as
defined by regulation) and that portion of land loans and non-residential
construction loans in excess of an 80% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments. However, in calculating regulatory
capital, institutions can add back unrealized losses and deduct unrealized gains
net of taxes, on debt securities reported as a separate component of GAAP
capital.
The OTS regulations establish special capitalization requirements for
savings banks that own service corporations and other subsidiaries, including
subsidiary savings banks. According to these regulations, certain subsidiaries
are consolidated for capital purposes and others are excluded from assets and
capital. In determining
22
<PAGE>
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, 1999, 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, in October 1994, the Director of the OTS
indicated that the OTS would waive the capital deductions for institutions with
a greater than "normal" risk until the OTS published an appeals process. On
August 21, 1995, the OTS released Thrift Bulletin 67, which established (i) an
appeals process to handle "requests for adjustments" to the interest rate risk
component and (ii) a process by which "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to determine their
interest rate risk component. The Director of the OTS indicated, concurrent with
the release of Thrift Bulletin 67, that the OTS will continue to delay the
implementation of the capital deduction for interest rate risk pending the
testing of the appeals process set forth in Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim policy issued in
August 1993 under which savings institutions computed their regulatory capital
in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under the revised OTS policy, savings institutions must
value securities available for sale at amortized cost for regulatory capital
purposes. This means that in computing regulatory capital, savings institutions
should add back any unrealized losses and deduct any unrealized gains, net of
income taxes, on debt securities reported as a separate component of GAAP
capital.
At June 30, 1999, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 9.8%, 9.8%
and 18.1%, 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.
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
23
<PAGE>
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, 1999, 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.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. The Bank consistently has had liquidity well in excess
of the Federal requirements during the past three fiscal years.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock 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.
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
24
<PAGE>
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).
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, 1999, 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
25
<PAGE>
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, 1999, the Bank had $15.0
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. At June 30, 1999, the Bank had $3.0 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, 1999, 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.
Thrift Charter. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. Recent legislation required the Treasury
Department to prepare for Congress a comprehensive study on the development of a
common charter for federal savings institutions and commercial banks; and, in
the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single Deposit Insurance Fund
on that date. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Bank and its parent
holding company.
Affiliate Restrictions. Section 11 of HOLA provides that transactions
between an insured subsidiary of a holding company and an affiliate thereof will
be subject to the restrictions that apply to transactions between banks that are
members of the Federal Reserve System and their affiliates pursuant to Sections
23A and 23B of the Federal Reserve Act ("FRA").
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings institution or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the institution's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings institution and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
26
<PAGE>
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
The Common Stock of the Company 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 offering. The Company is subject
to the information, proxy solicitation, insider trading restrictions and other
requirements of the Exchange Act.
TAXATION
Federal Taxation
General. The Company is 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 our applicable tax rules. The Company's federal income tax returns have been
closed without audit by the Internal Revenue Service ("IRS") through 1995.
The Company will file a consolidated federal income tax return, which
includes the Bank. Accordingly, it is anticipated that any cash distributions
made by the Company would be treated as cash dividends, and not as a non-taxable
return of capital to stockholders for federal and state tax purposes.
27
<PAGE>
Method of Accounting. For federal income tax purposes, the Company reports
its income and expenses on the accrual method of accounting and files its
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 he 1996 Act, savings associations must use the specific chargeoff method in
computing its bad debt deduction beginning with their 1996 federal tax return.
In addition, federal legislation requires the recapture (over a six year period)
of the excess of tax bad debt reserves at December 31, 1995 over those
established as of December 31, 1987. The amount of such reserve subject to
recapture as of June 30, 1999 is approximately $2.4 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 cease to maintain a bank
charter.
At June 30, 1999, the 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. The Company
has not been subject to the AMT nor does it have any such amounts available as
credits for carryover.
Net Operating Loss Carryovers. The Company 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, 1999, the Company had no net operating loss carryforwards for federal income
tax purposes.
Corporate Dividends-Received Deduction. The Company 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. The Company is 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 thrift's interest expense
deduction in the proportion of interest
28
<PAGE>
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.
Item 2. Properties
We operate from the following locations:
<TABLE>
<CAPTION>
Owned Lease Net Book Deposits
Or Expiration Value at At
Location Leased Date June 30, 1999 June 30, 1999
- -------- ------ ---- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Executive Office:
Welsh & Norristown Roads(1) Owned N/a $1,901 $106,016.
Maple Glen, PA 19002-8030
Branch Offices:
1555 West Street Road Leased 01/2001 6 $ 48,469.
Warminster, PA 18974-3103
1141 Ivyland Road Leased 06/2004 33 $ 15,958.
Warminster, PA 18974-2048
9 Easton Road Owned N/a 659 $110,304.
Willow Grove, PA 19090-0905
701 Twining Road Owned N/a 807 $ 50,833.
Dresher, PA 19025-1894
761 Huntingdon Pike Owned N/a 350 $ 39,532.
Huntingdon Valley, PA 19006-8399
2 N. York Road Leased 05/2002 148 $ 12,752.
Hatboro, PA 19040-3201
1331 Easton Road(2) Leased 12/2004 52 $ 4,085.
Roslyn, PA 19001
11730 Bustleton Avenue(3) Leased 02/2004 32 $ 2,874.
Philadelphia, PA 19116
</TABLE>
(1) Includes adjacent nine acre parcel that could be used for future expansion
(2) Opened in February 1999.
(3) Opened in May 1999.
On July 8, 1999, we entered into an agreement to lease 7,725 square feet
at 101 Witmer Road, Horsham, Pennsylvania to be used as an Operations Center.
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings in the normal course
of business which, in the aggregate, are believed by management to be immaterial
to the financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
29
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information required herein, to the extent applicable, is incorporated
by reference from the inside back cover of the Company's 1999 Annual Report, and
attached hereto as Exhibit 13.0
Item 6. Selected Financial and Other Data
The information required herein is incorporated by reference from page 12
of the Company's 1999 Annual Report and attached hereto as Exhibit 13.0
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from pages 13
to 21 of the Company's 1999 Annual Report and attached hereto as Exhibit 13.0
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The information required herein is incorporated by reference from pages 22
to 24 of the Company's 1999 Annual Report nd attached hereto as Exhibit 13.0
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference from pages 25
to 60 of the Company's 1999 Annual Report and attached hereto as Exhibit 13.0
30
<PAGE>
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 6 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on November 9, 1999, which will be filed within 120 days
of June 30, 1999 ("Definitive Proxy Statement").
Item 11. Executive Compensation
The information required herein is incorporated by reference from pages 7
to 10 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 11
to 12 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from pages 9
of the Definitive Proxy Statement.
31
<PAGE>
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
incorporated by reference from Item 8 hereof (see Exhibit 13):
Report of Independent Auditors
Consolidated Statements of Financial Condition as of
June 30, 1999 and 1998
Consolidated Statements of
Operations for the Years Ended
June 30, 1999, 1998 and 1997.
Consolidated Statements of Changes in Equity and
Comprehensive Income for the Years Ended
June 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997.
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
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 Thomas M. Fewer, John J. Foff, Jr.
and John T. Powers
10.3 *Supplemental Executive Retirement Agreement
10.4 *Non-Employee Director's Retirement Plan
10.5 **1999 Stock Option Plan
10.6 **1999 Recognition and Retention Plan and Trust Agreement
13.0 1999 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is made to "Item
2. Business" for the required information
23.0 Consent of KPMG LLP
27.0 Financial Data Schedule
- ----------
* 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 Special Meeting of
Stockholders Proxy Statement on Schedule 14A filed on June 23, 1999.
(b) The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1999
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index.
(d) There are no financial statements or schedules which were excluded from
Item 8 which are required to be reported herein.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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/ Elizabeth H. Gemmill
- ---------------------------------
Elizabeth H. Gemmill
Director
/s/ Lewis W. Hull
- --------------------------------- September 28, 1999
Lewis W. Hull
Director
/s/ J. Ellwood Kirk
- --------------------------------- September 28, 1999
J. Ellwood Kirk
Director
/s/ Charles F. Kremp 3rd
- --------------------------------- September 28, 1999
Charles F. Kremp 3rd
Director
/s/ William W. Langan
- --------------------------------- September 28, 1999
William W. Langan
Chairman of the Board
/s/ Frederick A. Marcell, Jr.
- --------------------------------- September 28, 1999
Frederick A. Marcell, Jr.
Director, President and Chief
Executive Officer
/s/ A. Brent O'Brien
- --------------------------------- September 28, 1999
A. Brent O'Brien
Director
/s/ Samuel H. Ramsey, III
- --------------------------------- September 28, 1999
Samuel H. Ramsey, III
Director
/s/ William B. Weihenmayer
- --------------------------------- September 28, 1999
William B. Weihenmayer
Director
/s/ John J. Foff, Jr.
- --------------------------------- September 28, 1999
John J. Foff, Jr.
Senior Vice President and
Chief Financial Officer
(principal financial officer)
33
EXHIBIT 13.0
<PAGE>
(cover)
(eyebrow)
FIRST ANNUAL REPORT, 1999
WILLOW GROVE BANCORP, Inc.
(headline)
The road to prosperity begins
with family, friends,
and your community bank.
(graphic---site map)
(map of Willow Grove, PA area. Has 9 bank icons, labeled as Maple Glen,
Warminster Shopping Area, Warminster K-Mart, Hatboro, Dresher, Willow Grove,
Huntingdon Valley, Roslyn, and Somerton. There are also various farm icons.)
(lower right corner)
Willow Grove Bancorp, Inc. logo
<PAGE>
(inside front cover)
FINANCIAL HIGHLIGHTS
Three bar charts, one showing Asset Growth, one showing Loan Growth and one for
Deposit Growth.
One plotted point graph showing Branch Office Growth.
TABLE OF CONTENTS
President's Letter 1
History: The Road Traveled 2
Services for Today & Tomorrow 4
Investing in Our Community 6
Listening to the Needs of Every Customer 8
Management's Discussion & Analysis of
Financial Condition and Results of Operations 13
Report of Independent Public Accountants 26
Financial Statements 27
Corporate Information back cover
<PAGE>
[President's Letter]
(Picture of the President, Frederick A. Marcell, Jr.)
To Our Shareholders:
Less than a year ago we converted Willow Grove Bank (the "Bank") from a
federally chartered mutual savings bank to a federally chartered stock savings
bank, and established a mid-tier holding company, Willow Grove Bancorp, Inc.
("WGBC") and the Willow Grove Mutual Holding Company("MHC"). This move, we
reasoned, would provide growth opportunities, open the way for additional
capital, and enhance the ability to expand the products and services we offer to
our customers. It would give our customers the chance to invest IN the Bank,
even while they deposited their funds WITH the Bank.
The reasoning was correct. It's been a productive year for your Bank; a
worthwhile addition to our ninety-year history of success. When we look around
at our growing establishment of nine community banking offices, our family of
depositors and investors, our increases in value and our ever-expanding
community investment, we feel the satisfaction of a job well done. A job we hope
to continue doing for at least the next ninety years!
The new capital allows us to expand our services and our hours, stay
current in technology, and increase the number of banking offices. Meanwhile, an
amazing 78% of our public shareholders (that is, shareholders other than MHC,
our parent mutual holding company) are depositors holding shares in their own
name. In our very first quarter as a public company, WGBC paid a cash dividend
amounting to $.08 per share, and it is our goal to continue to issue quarterly
dividends.
These developments, coupled with a focused Board of Directors,
professional management team and highly competent staff, have enabled your Bank
to double in size over the last five years: we've doubled assets, deposits,
loans, and customer base. On the horizon we expect continued growth, along with
the continued development of competitive products and services.
Long-standing community roots are an important part of the Willow Grove
Bank story. We have always endeavored to be an active member of the communities
in which
1
<PAGE>
our banking offices are located; Eastern Montgomery, Bucks, and Philadelphia
Counties. Your Bank has made a firm commitment to "giving back" over the years,
culminating in charitable contributions totaling more than one million dollars
in the last fiscal year. To uphold this worthwhile tradition we have established
the Willow Grove Foundation, which is equally committed to investing in the
people and projects that impact our towns and neighborhoods. From little leagues
and libraries to senior citizen centers and ecological trusts, the Willow Grove
Foundation will continue to offer support.
Caring about our neighbors is indeed a grand American tradition, and we
take enormous pride in reporting that the people who work with us share our
passion for investing in the community: more than 60 Bank employees are active
in 180 different volunteer organizations.
We've proven that the words "local" and "community," when associated with
a bank, can also mean comprehensive and committed. Our ongoing relationships and
excellent financial performance are testimonials to the strength of our
governing principles: to develop and adhere to sound financial practices; to
provide an outstanding portfolio of products and services; and to reinvest in
the community. We believe that the Bank's mission is only fulfilled when we are
in tune with the people and the needs of those around us. In the truest possible
sense, we intend to remain Your Community Bank.
(signature)
Frederick A. Marcell Jr.
President and CEO
2
<PAGE>
History---The Road Traveled
(Bank icon with Willow Grove banner)
How does a small community bank evolve into a big-service bank with assets
totaling almost half a billion dollars? By meeting the needs of the public. Like
any service organization, the one sure way to grow is to attract business.
Willow Grove Bank expanded upon this traditional model by formulating and
executing a series of three-year plans. These plans were designed to move the
Bank into the position of offering added value through more products and
services, greater diversification of loans and investments, and the
cost-effective utilization of financial services technology. The result was a
more competitive bank, one with the structure and profile of a large financial
institution, while preserving our identity as "The Bank Next Door."
How we spent the last 90 years
Since its initial charter in 1909, Willow Grove Bank has maintained a healthy
and progressive financial statement, primarily based upon the lending secured by
first mortgages for residential homes in our market. As recently as 1995, this
type of loan constituted 77% of our portfolio. The benefit of such a long and
steady presence in the community meant that our name became associated with a
willingness to invest in the growth of the surrounding area. This in turn
contributed to the growth of the Bank.
(house icon)
The transformation
In recent years, we made the decision to diversify the products and services
offered to our community, and to grow and expand without sacrificing the quality
and continuity of our investments. The move to a publicly held mid-tier holding
company structure in December 1998 helped achieve this by generating new
capital. Equally important was the diversification of our lending practices into
home equity loans, consumer loans, business loans, construction loans and other
commercial loans. The continued pursuit of
(tree icon)
deposits from individuals and businesses and a host of new services has promoted
our growth. Over the last five years, the Bank increased its total assets by
more than 100%,
3
<PAGE>
from $232 million to $472 million. Along with this growth of assets has been an
increase in profitability, and Willow Grove Bancorp, Inc. is pleased to report
our net earnings reached $3.6 million in fiscal 1999. We have continuously
exceeded all regulatory capital requirements, currently maintaining a total
capital position of $58 million, with capital ratios that exceed protective
levels mandated by the Federal banking agencies.
[SIDEBAR BOX]
Willow Grove Bank's Variety of Services
Passbook, CDs &
Statement Savings Commercial and
Money Market Accounts Real Estate Loans
Personal & Business Checking Construction Financing
Individual Retirement Accounts Student Loans
Residential Mortgages Auto Loans
Home Equity Loans Telephone Banking
ATM/Debit Cards
Our depositors (boat icon)
Our neighbors are the people who make this possible. We reach out for their
business, and because of our commitment to provide both a range of services and
a consistent responsiveness to their needs, they have indeed made Willow Grove
Bank a resounding success. Currently we boast a family of more than 60,000
accounts, encompassing a variety of loans, mortgages, money markets, savings and
checking accounts, IRAs, and more. We believe delivering traditional banking
services has served us well and will continue to do so as we grow.
4
<PAGE>
Our shareholders
Many shareholders in Willow Grove Bancorp, Inc. are the same people who comprise
our customer deposit base. More than 2,200 depositors took advantage of the
December 1998 stock offering by WGBC of 2.2 million shares; in fact, the average
investor purchased 1,000 shares. We believe this community support is a
reflection of the roots we have maintained in our community, and the additional
equity capital enables the Bank to accelerate its plans for diversification,
growth, and community investment. The additional capital also enables us to
consider acquisitions that would fit within our current roster of financial
holdings, and expand our banking office network.
(paper and envelope icon)
Our success
Even a bank with a solid track record, steadily rising performance, loyal
customer base and outstanding regulatory compliance must look to the future to
sustain the drive to excellence. For Willow Grove Bank, the success we have
engendered thus far is only a prelude to the next steps. Our plan is to sustain
our success and continue our growth in assets, with a goal to double in size
again. Success, to the Bank, need not be repeated; it should always be
surpassed. The can-do spirit and relationships we created have brought us this
far. We expect those same qualities to carry us into the next century.
(golf hole icon)
[CHART: More Services Increase Customer Base-4 bars]
Actual numbers for this chart are:
June-93, 25,144
June-95, 34,255
June 97, 48,083
June 99, 59,800
(caption)
The expanding variety and number of banking services offered leads to a
concurrent increase in depositors, with an increase in one leading to an
increase in another.
[end of spread]
5
<PAGE>
Services for Today & Tomorrow
Making it easier to bank, borrow, and thrive (checkbook icon)
The expansion of products and services became the driving force for the
evolution of Willow Grove Bank. The steps we took to serve our communities
represent the essential reason we have maintained profitability. As just one
illustrative example, we can now report that our Free Checking product resulted
in over 10,000 new accounts.
From our deliberate beginnings as a banking institution committed to making
residential mortgage loans, we have moved forward in a number of quietly
aggressive yet financially sound ways. Customers have come to expect traditional
products like passbook and statement savings accounts along with personal and
business checking, but we have added a considerable number of options to our
list of services.
Conservative investment choices are provided through savings, certificates of
deposit, IRAs and Keoghs, which look to the long term, while the needs of today
are being met through home equity and consumer loans and lines of credit. Our
expanded products, including business, construction and commercial lending, are
designed to address the needs of our business sector. In addition, we've added
many other services long associated with larger banking institutions.
Availability of these services is another key factor in the continuing drive to
meet the needs of our customers. To that end, we have steadily expanded the
number of banking offices, selecting new locations based on careful studies of
community need. We have established our presence in the marketplace with
advertising and public relations efforts, as well as our ongoing community
support programs. At all times, though, our goal remains to provide a complete,
convenient, and responsive banking experience for our customers.
6
<PAGE>
Our products and practices reflect a dedication to service that we deem an
indispensable part of our mission. We have established Willow Grove Bank as a
safe and sound bank which is committed to meeting the needs of our communities.
Constant improvements, consistent innovation
"More for the customer" is a successful creed all by itself. It entails repeated
examination of the ways in which we serve our customers, and has resulted in
longer hours on weekdays, nights, and Saturdays, along with other innovative,
flexible programs and services designed around busy schedules.
The pie charts below illustrate the continuing diversification that is ongoing
in our loan programs, which effectively extends our market for lending and
enhances our status in the community.
(1999 Deposit Portfolio pie chart and 1999 Loan Portfolio pie chart)
Regulatory compliance (building icon)
Solid banking practices and judicious decisions are also contributing factors in
the consistently high rate of loan repayments and profitability the Bank
experiences. Willow Grove Bank is subject to the mandates of Federal bank
regulatory agencies, and we are committed to remaining in total compliance with
Federal regulations, regardless of the type or extent of banking services we
provide. Deposits at the Bank are FDIC insured up to applicable limits and
Willow Grove Bank is a member in good standing of both the Federal Reserve Bank
and the Federal Home Loan Bank System. We strive to ensure that the technology
we use to transmit, store and process financial data, such as our Voice Response
Unit, is always on the cutting edge of sophistication and reliability.
Sheshunoff Information Services, a leader in financial data and analysis, has
recognized the Bank's success by giving us its highest rating, based upon
capital adequacy, asset quality, earnings, and liquidity.
7
<PAGE>
A strong and sure course (map icon with a bank)
Our long history reflects the solidity and consistency of the Bank's management
and goals. The Bank's financial position is stronger than ever. In an era of
mergers and multiple ownerships, we have positioned ourselves in the marketplace
as a distinctly independent entity. The Bank is now a wholly-owned subsidiary of
a publicly-held corporation, yet we have made sure that our parent mutual
holding company retains ownership of more than a majority of the shares. Our
current Charter and Bylaws contain provisions that discourage takeover attempts,
while Federal law establishes specific restrictions on acquisition of the
holding company or Bank. Collectively, these safeguards further protect our
ability to continue our successful banking practices. We intend to remain a
unique, independent, community-focused institution, providing quality financial
products and services to those within our area.
Expanding to meet demand (computer icon)
Our future plans involve strategic decisions that will build our community
relationships even further. We are committed to continually exploring the newest
technological advances as they become available. Securities and annuities
brokerage services began through Willow Financial Services within the past year
and are expected to grow along with demand. In the near future, we will examine
internet banking, insurance and trust services. Finding new products and
services to bring to the marketplace is a Willow Grove Bank tradition.
Giving back (awards icon)
Supporting our community with investment, contributions, and sponsorship has
been an integral part of the way we do business. At our corporate headquarters
in Maple Glen, we proudly display plaques and awards honoring our commitment to
giving back. Among these are business achievement, community support, and
service awards. An essential element in our reorganization and the incorporation
of Willow Grove Bancorp, Inc. involved the establishment and endowment of the
Willow Grove Foundation. The Foundation was established as part of our effort to
continue and broaden those activities that deepen our connection to the
communities in which we live and work.
[end of spread]
8
<PAGE>
(headline)
Investing in our Community
(picture of around 15 people and man on right holding a check)
(caption)
Shade trees are planted in Cherry Street Park, located in Willow Grove, thanks
to the generosity of Willow Grove Bank.
(picture of clowns holding a "Willow Grove Presents Clowning Around" banner)
(caption)
Willow Grove Bank brightens the spirits of young and old alike by participating
in and sponsoring carnivals and parades throughout the areas we serve.
(picture of 10 people standing in front of a school, 2 are holding big
ribbons)
(caption)
When McKinley Elementary School, located in Abington Township, became one of 20
public schools in the 1998-1999 National Elementary Blue Ribbon Schools Program,
Willow Grove Bank was prouder than ever of our contributions to the "Community
of Learners" collaborative approach to education.
(9 people holding a check made out to the American Red Cross)
(caption)
Willow Grove Bank joined with the American Red Cross in funding a program in
Community Disaster Education at Sandy Run Middle School in Dresher and at other
locations in Bucks and Montgomery Counties.
9
<PAGE>
(picture of 6 people standing near a railing)
(caption)
Founded with a gift of over a million dollars from Willow Grove Bank, Willow
Grove Foundation is dedicated to investing in all the communities serviced by
the bank.
Pictured here is The Board of Directors of the Foundation.
From left to right; Robert Abel, Frederick A. Marcell Jr., Senator Stewart J.
Greenleaf, Sandra Fields Henley, Senator Joe Conti, Charles F. Kremp, III,
Chairman.
(picture of 3 men holding a check and three baseball players in front of them)
(caption)
New bleachers for the Hatboro Little League mean there will be more cheering
from the stands, thanks to Willow Grove Bank.
(picture of 3 people holding a check made out to the Interfaith of Ambler)
(caption)
Inter-Faith of Ambler, an organization increasingly active in services to the
homeless, received a generous check from Willow Grove Bank. The funds will be
used in the Hospitality Network Program for Emergency Shelters.
(picture of 6 people standing in front of Willow Grove Bank sign with a big
check)
(caption)
Willow Grove Bank recently donated $7,000 to restore heating systems in Mather
Mill, near historic Hope Lodge in Whiemarsh Township.
10
<PAGE>
Listening to the Needs of Every Customer
(Photo of Donna Hamm with baby, and Thomas F. Powers, VP/Banking Office
Coordinator)
Donna Hamm and family, including Patrick, 15 months, arrived in Maple Glen two
years ago. "We were delighted to discover better hours, better service, and
genuinely helpful tellers at Willow Grove Bank. I'm telling all my new friends
about them, and young Patrick already has savings and Christmas club accounts
with the bank. It's a simple truth: you go where you feel wanted."
(photo of Agnes M. Jester)
Agnes M. Jester of Maple Glen, PA, has been a loyal customer of Willow Grove
Bank for 20 years. "I love that they know my name when I walk in the door and
I'm always greeted with a smile. And they really do care, you know. I was
seriously ill last year and the bank sent me flowers! Imagine that. It's the
extra touch of kindness I really appreciate. I'll bank with Willow Grove
forever."
(Photo of Paul Wagner standing next to Yankee Coach)
Paul Wagner reports a terrific experience with the loan department of Willow
Grove Bank. "This is how I like to be treated by a bank! Everyone was on the
ball. I met with the decision makers and they had a real can-do attitude. The
loan I got from Willow Grove Bank enabled me to acquire a business in Orlando,
Florida. They really know how to make things happen."
(Photo of Adina Ardman)
Adina Ardman of Allied Hobbies took the advice of her family and her accountant
and brought her business to Willow Grove Bank. "We're not a huge corporation,
just a small local company. I was thrilled by the attention I received from
Willow Grove Bank---much more than I ever got from the larger banking
institutions. Thanks to a timely loan, my computer systems are ready for Y2K.
11
<PAGE>
Selected Financial and Other Data
The following selected historical financial data is derived in part form.
It should be read in conjunction with, and is qualified in its entirety by, our
historical financial statements, including the related notes.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total Assets $472,039 $405,374 $354,679 $312,236 $293,589
Cash and Cash Equivalents 4,889 18,291 4,204 4,282 6,871
Investment securities held to maturity -- -- 3,999 -- 55,480
Securities available for sale 80,055 48,111 45,766 50,163 742
Loans Available for sale -- 12,152 6,173 5,140 9,370
Loans receivable, net 374,584 315,705 284,596 243,310 210,212
Real estate held for investment, net -- -- 180 204 206
Deposits 390,681 340,793 309,729 267,695 237,645
Borrowings 14,986 21,000 6,500 10,120 22,620
Total equity 58,442 35,945 33,122 30,374 28,420
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data
Interest income $ 32,015 $ 28,604 $ 25,423 $ 22,105 $ 19,848
Interest expense 16,164 15,097 13,817 12,370 10,207
Net interest Income 15,851 13,507 11,606 9,735 9,641
Provision for loan losses 531 993 185 210 60
Net interest income after provision
for loan losses 15,320 12,514 11,421 9,525 9,581
Non-interest income 1,009 760 786 1,245 1,553
Non-interest expense 10,652 9,462 8,284 6,024 5,598
Income before income taxes 5,677 3,812 3,923 4,746 5,536
Provision for income taxes 2,044 1,367 1,548 1,744 2,108
Net Income 3,633 2,445 2,375 3,002 3,428
Earnings per share - basic and diluted (1) $ 0.46 n/a n/a n/a n/a
Cash dividends declared (per share) $ 0.08 n/a n/a n/a n/a
Dividend payout ratio (2) 8.31% N/a N/a N/a N/a
<CAPTION>
Key Operating Ratios (3) At or For the Year Ended June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets 0.84% 0.65% 0.71% 1.02% 1.28%
Return on average equity 7.63% 6.81% 7.54% 10.11% 12.73%
Average interest-earning assets to
average interest-bearing liabilities 120.60% 108.22% 108.06% 108.74% 108.78%
Interest rate spread (4) 2.97% 3.36% 3.21% 3.02% 3.35%
Net interest margin (4) 3.76% 3.71% 3.56% 3.40% 3.69%
Asset Quality Ratios:(end of period)
Non-performing assets to total assets (5) 0.23% 0.37% 0.54% 0.87% 0.20%
Allowance for loan losses to non- performing loans 293.82% 178.98% 87.62% 71.67% 291.89%
Allowance for loan losses to total loans (6) 0.83% 0.80% 0.57% 0.69% 0.77%
Capital and Other Ratios
Average equity to average assets 11.02% 9.59% 9.39% 10.09% 10.02%
Tangible equity to end of period assets 9.80% 8.32% 8.70% 9.00% 8.60%
Total risk-based capital to
risk-weighted assets (7) 18.10% 14.89% 15.87% 16.06% 18.17%
</TABLE>
- ----------
(1) Our initial public offering was completed on December 23, 1998. Earnings
per share data presented for 1999 represents the period January 1, 1999 to
June 30, 1999. Earnings per share data prior to January 1, 1999 are not
applicable.
(2) Dividend payout ratio for 1999 equals dividends declared divided by net
income for the period January 1, 1999 though June 30, 1999. The data for
the period December 23, 1998 through December 31, 1998 is not meaningful,
and not available for the prior years in which we were not a public
company.
(3) With the exception of end of period ratios for the year ended June 30,
1995 ratios are based on average daily balances during the respective
periods. Ratios for the year ended June 30, 1995 are based upon month-end
balances.
(4) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, net interest margin represents net interest
income as a percentage of average interest earning assets.
(5) Non-performing assets consist of non-accrual loans and accruing loans 90
days or more past due. We had no real estate acquired through foreclosure
or by deed-in-lieu thereof ("REO") at any year-end.
(6) Total loans are net of the undisbursed portion of loans in process.
(7) Bank only
12
<PAGE>
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 operation for Willow Grove Bancorp, Inc.
(the "Company") and its subsidiary for the fiscal years ended June 30, 1999,
1998 and 1997. The information in this section should be read in conjunction
with the Company's Financial Statements and the accompanying Notes included
elsewhere herein.
General
This Annual Report 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. 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.
Our earnings are primarily based upon our net interest income, which is
the difference between the income earned on interest-bearing 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 $66.7 million, or 16.45%, to $472.0
million at June 30, 1999 compared to $405.4 million at June 30, 1998. This
increase was primarily due to increases in loans receivable and securities
available for sale, which increases were partially offset by a decrease in loans
available for sale and a decrease in cash and cash equivalents.
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 $4.9 million and $18.3 million at June 30, 1999 and 1998,
respectively. The decrease was due to the reduction of funds maintained in
interest-earning accounts, which were primarily used to originate and purchase
loans and securities available for sale.
Assets Available for Sale. At June 30, 1999, assets that were classified
available for sale ("AFS") consisted solely of securities totaling $80.1
million. This compares to $60.3 million in the aggregate of assets available for
sale at June 30, 1998, of which $48.1 million were securities available for sale
and $12.2 million were loans. This increase was primarily due to the investment
of funds acquired through our initial public offering, deposit inflows and
transfers of funds from cash and cash equivalents.
Throughout the past three fiscal years, all of our securities have been
classified as available for sale. This classification provides the flexibility
to sell securities prior to maturity, if, for example, we determine that our
interest rate risk profile should be modified, or a sale would be desirable to
change our liquidity position, or for 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 equity. As a result
of changes in market interest rates, at
13
<PAGE>
June 30, 1999, we have recorded $1.4 million in cumulative unrealized losses net
of income taxes. This compares to an $80,000 net gain at June 30, 1998.
Mortgage loans that are originated with the intention to be 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 statement of operations.
At June 30, 1999, we had no mortgage loans classified as AFS.
Loans. Our net loan portfolio grew to $374.6 million at June 30, 1999 from
$327.9 million at June 30, 1998, which 1998 amount included $12.2 million in
loans held for sale. This increase of $46.7 million, or 14.24% was due to strong
loan demand throughout our market area, and our desire to expand our lending
efforts into consumer, home equity, business, and commercial real estate areas.
During the year ended June 30, 1999, total mortgage loans increased by
$35.4 million, or 10.73%, of which commercial real estate loans increased $28.3
million (115.58%), home equity loans increased by $12.7 million (30.76%),
multi-family mortgages increased $5.4 million (72.51%) and single-family first
mortgages decreased by $11.6 million (4.78%). Commercial business loans
increased by $7.6 million (139.53%)
The Company's allowance for loan losses amounted to $3.1 million at June
30, 1999. This represented a net increase of $473,000 (17.75%) from the
allowance of $2.7 million at June 30, 1998.
Intangible Assets. At June 30, 1999 the amount of our intangible assets
totaled $2.0 million. This compares to $2.4 million at June 30, 1998. These
assets are comprised of goodwill and a core deposit intangible, which resulted
from the purchase of three branch offices in 1994. The goodwill is being
amortized on a straight-line basis over a 15-year period. The core deposit
intangible is being amortized on an accelerated basis over a 10-year period.
Deposits. Total deposits increased by $49.9 million or 14.64% to $390.7
million at June 30, 1999 compared to $340.8 million at June 30, 1998.
During the year ended June 30, 1999, NOW accounts grew by $13.9 million,
this was an increase of 28.98% from the June 30, 1998 balance of $48.1 million.
Certificates of deposit comprise the largest component of our deposit portfolio
and, at June 30, 1999, these accounts totaled $251.2 million. However, given the
growth in the Company's NOW, money market and savings accounts, certificates of
deposit amounted to 64.29% of the Company's total deposits at June 30, 1999
compared to 68.08% and 70.01%, at June 30, 1998 and 1997, respectively.
Federal Home Loan Bank Advances. From time to time, we use advances from
the Federal Home Loan Bank ("FHLB") of Pittsburgh as an additional source of
funds to meet our loan demand. At June 30, 1999, the outstanding amount of these
borrowings was $15.0 million, which is a $6.0 million reduction from the $21.0
million outstanding at June 30, 1998.
We have established a leveraging program with limits approved by our Board
of Directors. This program allows us to obtain FHLB Advances and at the same
time purchase securities with estimated average lives corresponding to the terms
of the advances. At June 30, 1999, $10.0 million in borrowings were outstanding
under this program. This compares to $16.0 million outstanding at June 30, 1998.
Equity. At June 30, 1999, our total stockholder's equity was $58.4 million
compared to $35.9 million at June 30, 1998. This increase of $22.5 million, or
62.59%, was due primarily to our issuance of common stock, which added $20.6
million to stockholder's equity, $19.7 million was raised in our initial public
offering and $896,000 in common stock was issued to the Willow Grove Foundation.
Net income for the fiscal year added $3.6 million to stockholder's equity. These
increases were partially offset by $100,000 for the initial capitalization of
our mutual holding company pursuant to our reorganization, the payment of a cash
dividend totaling $187,000 and accounting for $1.4 million of unrealized losses,
net of income taxes, on securities classified as available for sale.
14
<PAGE>
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income from interest-earning
assets and the resultant average yields; (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the resultant average rate;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. Information is based on average daily balances during the indicated
periods. Yields and costs at June 30, 1999 are shown for our interest earning
assets and interest-bearing liabilities. No adjustment has been made to reflect
after tax yields on municipal bonds which were outstanding ($2.0 million at June
30, 1999 and $100,000 at June 30, 1998).
<TABLE>
<CAPTION>
For the Year Ended June 30,
At -------------------------------------------------
June 30, 1999 1999
------------- -------------------------------------------------
Average
Average Yield/
Yield/Cost Balance Interest Cost
------------- -------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable
Mortgage loans 7.69% $325,710 $26,141 8.03%
Non-mortgage consumer 8.32 5,795 402 6.94
Commercial business loans 8.91 8,995 857 9.53
-------------------------------
Total loans 7.75 340,500 27,400 8.05
Securities 6.22 63,460 3,860 6.08
Other interest-earning assets 5.36 17,410 755 4.34
-------------------------------
Total interest-earning assets 7.48 421,370 32,015 7.60
---------
Non-interest-earning assets 10,507
----------
Total assets $431,877
==========
Interests-bearing liabilities:
Deposits
NOW and money market accounts 1.45 $46,955 $1,111 2.37
Savings accounts 2.04 43,032 896 2.08
Certificates of deposit 5.34 241,795 13,359 5.52
-------------------------------
Total deposits 4.03 331,782 15,366 4.63
Borrowings 5.33 14,198 772 5.44
Advance payments by borrowers
for taxes and insurance 2.00 3,423 26 0.76
-------------------------------
Total interest-bearing liabilities 4.05 349,403 16,164 4.63
---------
Non-interest bearing liabilities 34,863
----------
Total Liabilities 384,266
Stockholders' equity 47,611
----------
Total liabilities and equity $431,877
==========
Net interest earning assets $71,967
Net interest income/interest rate spread 3.43% $15,851 2.97%
===========================
Net interest margin 3.76%
=======
Ratio of average interest earning assets
to average interest bearing liabilities 120.60%
=======
<CAPTION>
For the Year Ended June 30,
-----------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------------------------------- -----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable
Mortgage loans $303,458 $24,824 8.18% $273,423 $22,208 8.12%
Non-mortgage consumer 4,038 254 6.29 2,635 164 6.22
Commercial business loans 3,423 278 8.12 1,743 2 0.11
----------------------- -----------------------
Total loans 310,919 25,356 8.16 277,801 22,374 8.05
Securities 46,335 2,923 6.31 44,811 2,877 6.42
Other interest-earning assets 6,961 325 4.67 3,641 172 4.72
----------------------- -----------------------
Total interest-earning assets 364,215 28,604 7.85 326,253 25,423 7.79
--------- ---------
Non-interest-earning assets 9,572 9,121
---------- ----------
Total assets $373,787 $335,374
========== ==========
Interests-bearing liabilities:
Deposits
NOW and money market accounts $42,991 $916 2.13 $47,784 $803 1.68
Savings accounts 36,984 787 2.13 34,690 768 2.21
Certificates of deposit 226,340 12,833 5.67 205,792 11,653 5.66
----------------------- -----------------------
Total deposits 306,315 14,536 4.75 288,266 13,224 4.59
Borrowings 9,532 529 5.55 10,567 555 5.25
Advance payments by borrowers
for taxes and insurance 3,274 32 0.98 3,091 38 1.23
----------------------- -----------------------
Total interest-bearing liabilities 319,121 15,097 4.73 301,924 13,817 4.58
--------- ---------
Non-interest bearing liabilities 19,548 1,948
--------- ---------
Total Liabilities 338,669 303,872
Stockholders' equity 35,118 31,502
---------- ----------
Total liabilities and equity $373,787 $335,374
========= =========
Net interest earning assets $45,094 $24,329
Net interest income/interest rate spread $13,507 3.12% $11,606 3.21%
===================== ======================
Net interest margin 3.71% 3.56%
======== ========
Ratio of average interest earning assets
to average interest bearing liabilities 114.13% 108.06%
======== ========
</TABLE>
15
<PAGE>
Rate/Volume Analysis
The following table shows the effects of changing rates and volumes on our
net interest income. Information is provided with respect to (1) the effects on
interest income attributable to changes in volume (change in volume multiplied
by prior rate); (2) effects on interest income attributed to changes in rate
(changes in rate multiplied by prior volume); and (3) changes in rate/volume
(change in rate times the change in volume).
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------
1999 compared to 1998 1998 compared to 1997
----------------------------------------- ------------------------------------------
Increase (decrease) due to Increase (decrease) due to
----------------------------------------- ------------------------------------------
Total Net Total Net
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
----------------------------------------- ------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ (469) $ 1,820 $ (34) $ 1,317 $ 164 $ 2,439 $ 13 $ 2,616
Non-mortgage consumer loans 26 111 11 148 2 87 1 90
Commercial business loans 48 453 78 579 140 2 134 276
----------------------------------------- ------------------------------------------
Total loans receivable (395) 2,384 55 2,044 306 2,528 148 2,982
Securities (105) 1,080 (38) 937 (49) 98 (3) 46
Other interest-earning assets (23) 488 (35) 430 (2) 157 (2) 153
----------------------------------------- ------------------------------------------
Total net change in income
on interest-earning assets (523) 3,952 (18) 3,411 255 2,783 143 3,181
----------------------------------------- ------------------------------------------
Interest-bearing liabilities:
Deposits
NOW and money market accounts 101 84 10 195 (76) 208 (19) 113
Savings accounts (17) 129 (3) 109 (28) 51 (4) 19
Certificates of deposit (328) 876 (22) 526 21 1,163 (4) 1,180
----------------------------------------- ------------------------------------------
Total deposits (244) 1,089 (15) 830 (83) 1,422 (27) 1,312
Borrowings (11) 259 (5) 243 16 (41) (1) (26)
Advances by borrowers for
taxes and insurance (7) 1 -- (6) (8) 2 -- (6)
----------------------------------------- ------------------------------------------
Total net change in income
on interest-bearing liabilities (262) 1,349 (20) 1,067 (75) 1,383 (28) 1,280
----------------------------------------- ------------------------------------------
Net change in net interest income $ (261) $ 2,603 $ 2 $ 2,344 $ 330 $ 1,400 $ 171 $ 1,901
========================================= ==========================================
</TABLE>
16
<PAGE>
Results of Operations
General. Our net income for the year ended June 30, 1999 was $3.6 million
compared to $2.4 million for each of the years ended June 30, 1998 and 1997. In
fiscal 1999, the increase in net interest income was the primary reason for the
increase in net income compared to fiscal 1998, but this increase in net
interest income was partially offset by higher non-interest expenses. In fiscal
1998, the increase in net interest income compared to fiscal 1997 was offset by
increases in non-interest expenses and provisions for loan losses. In fiscal
1999, $896,000 of expense was incurred with the establishment of the Willow
Grove Foundation, and in fiscal 1997, a one-time special SAIF assessment of $1.5
million was incurred.
Net Interest Income. Net Interest Income is determined by our interest
rate spread (i.e., the difference between the yields 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, 1999, 1998 and 1997 was 2.97%,
3.12%, and 3.21%, respectively. Our net interest margin (i.e., net interest
income expressed as a percentage of average interest-earning assets) was 3.76%,
3.71%, and 3.56% for the same three years. The reduction in our interest spread
has been due to the changes in market interest rates whereby rates on
longer-term financial instruments declined to a greater degree than rates on
shorter-term financial instruments creating a flattening of the yield curve.
Proceeds received from our various sources of funds were reinvested in new
interest-earning assets with yields that were closer to costs paid on our
interest-bearing liabilities causing the declining spread. Net interest margins
increased because the percentage of interest-earning assets to interest-bearing
liabilities has been increasing. For fiscal year 1999, the average balance of
interest-earning assets to interest-bearing liabilities was 120.60%, compared to
114.13% and 108.06% for fiscal 1998 and 1997, respectively. The primary reasons
for these increases are the investment of funds raised through our initial
public offering being invested in interest-earning assets and the growth of our
non-interest bearing checking accounts.
For the year ended June 30, 1999, net interest income totaled $15.9
million compared to $13.5 million and $11.6 million in fiscal 1998 and 1997,
respectively. The increase in fiscal 1999 of $2.4 million, or 17.35%, was
primarily due to increases in the average balances of interest-earning assets.
The increase in fiscal 1998 of $1.9 million, or 16.38%, was also due to higher
average balances of interest-earning assets, in particular mortgage loans.
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, 1999 was
$32.0 million compared to $28.6 million and $25.4 million for fiscal 1998 and
1997, respectively.
The increase in interest income in fiscal 1999 compared to 1998 was $3.4
million, or 11.92%. Increases in the average balances of loans outstanding
($29.6 million), particularly mortgage loans ($22.3 million), and increases in
the average balances of securities ($17.1 million) and other interest-earning
assets ($10.4 million) were the primary reasons for the increase in interest
income. This increase was partially offset by a reduction in the yield earned on
average interest-earning assets, particularly mortgage loans. For fiscal 1999,
the yield on average interest-earning assets fell to 7.60% from 7.85%; the major
contributing factor for this decrease was the decline in the average yield on
mortgage loans, which fell to 8.03% in fiscal 1999 from 8.18% in fiscal 1998.
The $3.2 million, or 12.6%, increase in interest income in fiscal 1998
compared to fiscal 1997 was primarily due to a $3.0 million increase in interest
on loans. This was primarily attributed to a $30.0 million increase in the
average balance of real estate loans outstanding.
Interest Expense. Interest expense consists of the interest paid to our
depositors on their interest-bearing accounts with us, and to a lesser extent,
interest paid on funds borrowed from the FHLB and certain escrow accounts. For
the year ended June 30, 1999, our total interest expense was $16.2 million, of
which $15.4 million was interest on deposits. For the years ended June 30, 1998
and 1997, total interest expense was $15.1 million and $13.8 million,
respectively.
For the year ended June 30, 1999, interest expense increased by $1.1
million, or 7.07%. The increase in interest expense for fiscal 1999 was
primarily due to an $830,000 increase in interest on deposits to $15.4 million.
The increase in interest on deposits was mainly due to a larger average balance
of deposits outstanding, offset
17
<PAGE>
slightly by a reduction of the average rate paid on deposits. Interest on
borrowings increased due to a higher average balance of borrowings outstanding
during the fiscal year.
The primary reason for the $1.3 million, or 9.26%, increase in interest
expense for the year ended June 30, 1998 compared to fiscal 1997 was the
increased cost associated with the higher volume of our certificates of deposit
("CDs"), which constitute the largest potion of our deposit portfolio.
During fiscal year 1999, the average balance of CDs increased $15.5
million to $241.8 million, a 6.83% increase. At June 30, 1999, CDs made up
64.29% of our deposits, this compares to 68.08% at June 30, 1998. Money Market
and NOW accounts, which both increased as a percentage of total deposits at June
30, 1999, comprise an aggregate of 23.23% of the portfolio compared to 20.12% at
June 30, 1998. Currently interest rates on CDs are in excess of rates paid on
money market and NOW accounts. Increasing money market and NOW accounts as a
percentage of total deposits should decrease our weighted average cost of funds
in a stable interest rate environment.
Provision for Loan Losses. We establish provisions for loan losses, which
are charges to our operations, in order to maintain a level of total allowance
for losses that we deem adequate to absorb potential future losses on loans or
other interest-earning assets we may consider uncollectible. In determining the
appropriate level of allowance for losses, we consider industry-wide loss
experience, our past loss experience, current and anticipated economic
conditions, real estate and other forms of collateral, the volume and type of
lending and the level of non-performing and classified assets. The amount of our
allowance for loan loss is only an estimate, and actual losses may vary from
these estimates. We assess our allowance for loan 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, 1999, 1998, and
1997, our provisions for losses were $531,000, $993,000, and $185,000,
respectively.
In fiscal year 1999, the amount of our provision for loan losses declined
to $500,000 compared to $1.0 million in fiscal 1998. At June 30, 1999, the
amount of our allowance for losses was $3.1 million compared to $2.7 million at
June 30, 1998. Management believed that a $500,000 provision for loan losses in
fiscal 1999 was appropriate given, among other things, the continuing growth in
the Company's loan portfolio. The percentage of the allowance for losses to
loans increased slightly to 0.83% at June 30, 1999 compared to 0.80% at June 30,
1998.
The primary reason for the $808,000 increase in the year ended June 30,
1998 compared to fiscal 1997 was the addition of industry-wide loss experience
in the factors used to determine the adequacy of our allowance for losses. Prior
to that time, our major emphasis 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, and consumer, including
industry-wide loss experience provides a better representation of the inherent
risks in our loan portfolio due to the changing mix of our loan portfolio.
We believe that the allowance for losses was adequate at June 30, 1999
based upon the facts and circumstances known to us at that date. No assurance
can be made that additional provisions may 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 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 gains and losses on assets available or held
for sale. Total non-interest income for the years ended June 30, 1999, 1998, and
1997 was $1.0, million, $760,000, and $786,000, respectively. The increase in
non-interest income for fiscal 1999 was due to losses on the sales of assets
incurred during fiscal 1998, not incurred in 1999, and increases in service fees
and charges 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, federal deposit insurance
premiums, data processing, and a variety of other expenses. For the years ended
June 30, 1999, 1998, and 1997, non-interest expense totaled $10.7 million, $9.5
million, and $8.3 million, respectively. The primary reason for the increase in
non-interest expenses in fiscal 1999 was due to $896,000 in expense for the
establishment of and one-time contribution of stock to the Willow Grove
Foundation.
18
<PAGE>
Compensation and benefits totaled $5.5 million, $5.4 million, and $3.4
million respectively for the years ended June 30, 1999, 1998, and 1997. The
major reason for the increases has been increases in the number of employees due
to our growth. Expenses of $90,000 attributed to the ESOP are included in fiscal
1999. Fiscal year 1998 expenses included $566,000 in the aggregate in expenses
with respect to the implementation of a directors' retirement plan and a
supplemental executive retirement plan.
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 stock to the Foundation and incurring an expense of
$896,000. Occupancy and furniture and equipment expenses were $918,000,
$964,000, and $734,000 for the years ended June 30, 1999, 1998, and 1997,
respectively. The $230,000 increase in fiscal 1998 compared to fiscal 1997 was
primarily due to opening two new branches. Federal deposit insurance premiums
were $206,000, $195,000 and $1,829,000 for fiscal 1999, 1998, and 1997,
respectively. A special one-time SAIF assessment was included in fiscal 1997.
Amortization of intangible assets was constant at $410,000, while advertising
was $436,000, $413,000 and $297,000 for the fiscal years ended June 30, 1999,
1998 and 1997, respectively. Other expenses, which include miscellaneous
operating items, were $1.7 million, $1.3 million, and $1.0 million, respectively
for the fiscal years ended June 30, 1999, 1998 and 1997, respectively, with
increases primarily attributable to our growth and diversification efforts.
Income Taxes. Provisions for income taxes amounted to $2.0 million, $1.4
million, and $1.5 million for the years ended June 30, 1999, 1998 and 1997,
respectively. The effective tax rates for these periods were 36.00%, 35.86%, and
39.46%.
Liquidity and Commitments
Our primary sources of funds are from deposits, amortization, prepayments
and the maturity of loans, mortgage-backed securities and other investments, and
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, on a limited basis 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, 1999, we had outstanding approved loan commitments
totaling $13.5 million and certificates of deposit maturing within the next
twelve months amounting to $157.8 million. Based upon historical experience, we
anticipate that a significant portion of the maturing certificate of deposits
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 service.
Year 2000 Consideration
In order to be ready for the year 2000 (the "Year 2000 Issue"), we have
developed a Year 2000 Action and Assessment Plan (the "Action Plan") which was
presented to the Board of Directors in February 1998. The Action Plan was
developed using the guidelines outlined in the Federal Financial Institutions
Examination's Council's "The Effect of 2000 on Computer Systems". Our Board of
Directors assigned responsibility for the Action Plan to our
19
<PAGE>
Year 2000 Committee which reports to the board on a quarterly basis. The Action
Plan recognizes that our operating, processing and accounting operations are
computer reliant and could be affected by the Year 2000 Issue. Our Action Plan
addressed the potential impact of the Year 2000 Issue on both our Information
Technology ("IT") systems and non-IT systems (such as security, elevators,
heating and air-conditioning, telephone, check-signing equipment, etc.) Pursuant
to our Action Plan, we have reviewed our IT systems and non-IT systems and
equipment for Year 2000 readiness and believe that we have identified all
equipment which needs to be upgraded or replaced. Commencing in early 1998, we
began a program of upgrading or replacing all such equipment in order to ensure
that our equipment is Year 2000 compliant on or before December 31, 1999. We are
primarily reliant on third party vendors for our computer output and processing,
as well as other significant non-IT functions and services (i.e. securities
safekeeping services, securities pricing information, etc.) The Year 2000
Committee is currently working with these third party vendors to assess their
Year 2000 readiness. Such vendors generally are reluctant to guarantee or
provide firm assurance that their products will be Year 2000 compliant in a
timely fashion. In addition, we believe that it would be difficult to prevail on
legal claims against such vendors with respect to Year 2000 Issues. Instead, our
approach has been that we are primarily responsible for identifying and
correcting Year 2000 compliance issues. A major factor in our operations is the
data processing software which is used on a company-wide basis. A third party
vendor maintains such software. We have been working closely with this vendor,
whose clients include many depository institutions, in an effort to ensure Year
2000 preparedness. In this respect, we have on three occasions during
non-banking hours, tested our operation systems, both IT and non-IT system for
Year 2000 readiness. These tests revealed only minor problems which have all
been corrected as of June 30, 1999. Based upon our initial assessment, we
presently believe that with the planned modifications to existing software and
hardware and planned conversions to new software and hardware, our third party
vendors are taking the appropriate steps to ensure critical systems will
function properly. Our Action Plan calls for monitoring all of the software
vendors and as of June 30, 1999, all vendors are Year 2000 compliant. As of June
30, 1999, we have completed the awareness, assessment, renovation and validation
phases of our Year 2000 Action Plan. We currently are completing the
implementation phase which includes replacing certain equipment identified as
not being Year 2000 compliant. We are approximately 65% complete on this
implementation phase. While no assurance can be given as to actual systems
operations upon the turn of the century, based upon information currently known
to us and upon consideration of our testing efforts to date, we believe that in
the worst case scenario, we will suffer only a slight interruption of business
practices as a result of minor application failures of our IT and non-IT systems
and software as a result of the Year 2000. However, if appropriate modifications
and conversions are not made, or not completed on a timely basis, the Year 2000
Issue could have a material impact on our operations.
The results from the Year 2000 mailing to our commercial customers
indicated that commercial customers that use software have or will update their
software packages by December 31, 1999. Many of the customers use outsource
services such as payroll companies who are assuring their customers that they
are Year 2000 compliant. It has been determined that none of our customers are
facing a high risk of business disruption because of technological defaults.
We have completed a company-wide Year 2000 contingency plan. Individual
contingency plans concerning specific software and hardware issues have been
formulated for specific departments. These plans include the identification of
our operations that can be done on a manual basis or with stand-alone personal
computers and printers. We have identified telephone lines which should not be
affected by any Year 2000 problems and have also identified alternative power
sources.
Additionally, we have established a Year 2000 Business Resumption Plan to
specifically address a situation where telephone communication is not available
for whatever reason. This plan is divided into three contingencies. Contingency
A makes the assumption we are able to complete all banking functions "as usual"
utilizing normal procedures and security measures. Contingency B prepares for a
situation in which we have no communication with our primary third-party service
bureau for a period of from one hour to one day. Contingency C addresses the
situation in which we have no communication with our primary third-party service
bureau for more than one day.
Third party vendors are primarily absorbing the costs of modifications to
our existing software; however we have recognized the need to purchase new
software and hardware. Currently, we estimate that the total cost including
hardware, software and other issues will be $300,000 to complete the Year 2000
project. Through June 30, 1999, approximately $244,000 has been expensed for the
Year 2000 project. It is anticipated that the remaining $56,000 will be expensed
over the next six months.
20
<PAGE>
Impact of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. According to the statement, all items of comprehensive
income are to be reported in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income is defined
as the change in the equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. Along
with net income, examples of comprehensive income include foreign currency
translation adjustments, unrealized holding gains and losses on available for
sale securities, changes in the market value of a futures contract that
qualifies as a hedge of an asset reported at fair value, and minimum pension
liability adjustments. Currently, our comprehensive income consists of net
income and the net change in unrealized holding gains and losses on available
for sale securities. This statement is effective for fiscal years beginning
after December 15, 1997. We adopted SFAS No. 130 effective July 1, 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement, which supersedes SFAS No.
14, requires public companies to report financial and descriptive information
about their reportable operating segments on both an annual and interim basis.
SFAS No. 131 mandates disclosure of a measure of segment profit/loss, certain
revenue and expense items and segment assets. In addition, the statement
requires reporting information on the entity's products and services, countries
in which the entity earns revenues and holds assets, and major customers. We
adopted SFAS No. 131 effective July 1, 1998.
In February 1998 the FASB issued SFAS No. 132, Employer's Disclosures
About Pensions and Other Post Retirement Benefits. This statement revises
employer's disclosures about pension and other post-retirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other post-retirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful. We adopted SFAS No. 132 effective July 1, 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of certain exposure to
changes in the value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of an exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of a foreign currency exposure. This statement, as
amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. We have not yet determined the impact, if any, of this statement,
including its provision for potential reclassifications of investment
securities, on operations, financial condition and equity. However, we currently
have no derivatives covered by this statement and currently we do not conduct
any hedging activity.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed security based
upon the ability and intent to sell or to hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed security that it commits to sell before or during the
securitization process. This statement is effective for the first fiscal quarter
beginning after December 15, 1998 with early adoption permitted. This statement
provides a one-time opportunity for an enterprise to reclassify, based upon the
ability and intent on the date of adoption of this statement, mortgage-backed
securities and other beneficial interests retained after securitization of
mortgage loans held for sale from the trading category, except for those with
commitments in place.
21
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
Market Risk Analysis - Asset and Liability Management
Qualitative Risk Analysis. The ability to maximize net interest income is
largely dependent upon the achievement of a positive interest 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
within shorter maturities would adversely affect net interest income, while a
positive gap within shorter maturities would result in an increase in net
interest income. During a period of falling interest rates, a negative gap
within shorter maturities would generally result in an increase in net interest
income, and a positive gap within shorter maturities would result in a decrease
in net interest income. This is generally the case, however, interest rates on
differing financial instruments will not always change at the same time or to
the same extent. At June 30, 1999, the ratio of the cumulative interest-earning
assets maturing or re-pricing in one-year or less to interest-bearing
liabilities maturing or re-pricing in one-year or less is 50.89%, which results
in a cumulative one-year gap to total assets ratio of minus 22.19%.
We have adopted asset/liability management policies designed to better
match the maturities and re-pricing of our interest-earning assets and
interest-bearing liabilities. These interest rate risk and asset/liability
management actions are taken under the guidance of the Asset/Liability
Management Committee ("ALCO"), which is comprised of directors Langan, Kremp,
and Ramsey, our President, and three executive officers. The ALCO's purpose is
to communicate, coordinate, and control asset/liability management consistent
with our business plan and Board approved policies. The objective of the ALCO is
to manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk and profitability goals. The ALCO
meets at least quarterly and establishes 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.
In recent years, in order to manage our assets and liabilities and improve
our interest rate risk position, we have emphasized 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, we have attempted to increase our core deposits
and emphasize longer-term certificates of deposit. We also use FHLB Advances as
an additional source of funds.
Quantitative Risk Analysis. The ALCO regularly reviews interest rate risk
by, among other things, examining the impact of alternative interest rate
environments on net interest income and net portfolio value ("NPV" - the
difference between the market value of our assets and the market value of our
liabilities and off-balance sheet items under various interest rate scenarios),
and comparing such impacts to maximum potential changes in net interest income
and NPV authorized by the Board of Directors.
Presented below, as of June 30, 1999 and 1998, is an analysis of our
interest rate risk position as measured by changes in NPV for instantaneous and
parallel shifts in the yield curve of plus/minus 100, 200, and 300 basis points
and changes in net interest income for the same interest rate environments. 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.
22
<PAGE>
June 30, 1999
---------------------------------------------------
Estimated Changes in
---------------------------------------------------
Interest rate change Net Interest Income NPV
in basis points (1) (Next four quarters) ---
- -------------------- --------------------
(Dollars in thousands)
+300 (23)% $(4,042) (55)% $(29,439)
+200 (14) (2,462) (36) (19,280)
+100 (6) (1,026) (17) (9,141)
0
-100 7 1,272 11 5,939
-200 8 1,312 17 9,382
-300 15 2,584 23 12,480
June 30, 1998
---------------------------------------------------
Estimated Changes in
---------------------------------------------------
Interest rate change Net Interest Income NPV
in basis points (1) (Next four quarters) ---
- -------------------- --------------------
(Dollars in thousands)
+300 (24)% $(3,355) (48)% $(21.254)
+200 (25) (2,055) (30) (13,523)
+100 (6) (858) (13) (5,917)
0
-100 8 1,089 8 3,607
-200 8 1,182 11 4,955
-300 16 2,271 16 7,480
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
Our NPV at June 30, 1999, for a plus 200 basis point rate change declined
to -36% compared to -30% at June 30, 1998. This is as a result of increases in
the general level of interest rates which caused a decline in the market value
of our assets.
23
<PAGE>
The following table summarizes the anticipated maturities or repricing of
our interest-earning assets and interest-bearing liabilities as of June 30, 1999
based upon the information and assumptions set forth in the notes below.
<TABLE>
<CAPTION>
More
More Than
Than One Three
Within Three to Year to Years to
Three Twelve Three Five Over Five
Months Months Years Years Years Total
-----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Cash and interest-earning deposits $ 4,889 $ -- $ -- $ -- $ -- $ 4,889
Investment Securities (1) 7,769 1,000 5,001 13,998 18,961 46,729
Mortgage-backed securities (2) 600 1,797 15,424 7,200 8,305 33,326
Loans (2) (3) (4) 53,030 67,097 105,372 91,782 60,173 377,454
-----------------------------------------------------------------------------
Total interest-earning assets $ 66,288 $ 69,894 $ 125,797 $ 112,980 $ 87,439 $ 464,639
-----------------------------------------------------------------------------
Interest-bearing liabilities
Escrow accounts $ 2,862 $ 1,541 $ -- $ -- $ -- $ 4,403
Money market accounts (5) 21,556 5,389 1,347 337 112 28,741
Savings accounts (5) 7,316 6,218 5,286 4,493 25,460 48,773
NOW accounts (5) 20,463 13,710 9,186 6,155 12,496 62,010
Certificates of deposit 47,310 110,494 75,562 16,355 1,436 251,157
Borrowings (6) 4,000 -- 6,000 986 4,000 14,986
-----------------------------------------------------------------------------
Total interest
bearing-liabilities $ 103,507 $ 137,352 $ 97,381 $ 28,326 $ 43,504 $ 410,070
-----------------------------------------------------------------------------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ (37,219) $ (67,458) $ 28,416 $ 84,654 $ 43,935 $ 52,328
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities $ (37,219) $(104,677) $ (76,261) $ 8,393 $ 53,328
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities as a percent of
total assets (7.89)% (22.19)% (16.17)% 1.78% 11.09%
Ratio of interest-earning
assets to interest-bearing
liabilities 64.04% 50.89% 129.18% 398.86% 200.99% 112.76%
</TABLE>
- ----------
(1) The expected repayment of callable agency securities is based upon our
estimates given the interest rate environment at June 30, 1999.
Investments at fair market value.
(2) The level of prepayments is based upon our estimate given the level of
interest rates at June 30, 1999. Mortgage backed securities are stated at
fair market value.
(3) Adjustable rate loans are included in the period in which the interest
rate is next scheduled to change rather than in the period they are
scheduled to be repaid. Fixed rate loans are included in the period they
are scheduled to be repaid. Both have been adjusted for our estimated
prepayments.
(4) Deferred loan fees and allowance for loan losses have been added back to
the balances shown. Non-performing loans totaling approximately $1.1
million are not included.
(5) Although NOW, savings, and MMD accounts are available for immediate
withdrawal, we estimate that a substantial amount of these accounts are
core deposits. As such, their maturity is distributed based upon our
estimates and are not indicative of actual withdrawals that may be
experienced.
(6) FHLB Advances are stated at their contractual maturity. A substantial
amount of these advances have provisions that may require repayment within
one year.
24
<PAGE>
The following table presents selected unaudited quarterly financial
information for the past two years:
Quarterly Selected Financial Data
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
For the Quarter Ending
June 30, March 31, December 31, September 30,
1999 1999 1998 1998
-----------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $8,586 $8,070 $7,755 $7,605
Total interest expense 4,101 3,961 4,140 3,962
-----------------------------------------------------------------------
Net interest income 4,485 4,109 4,615 3,643
Provision for loan loss 180 121 140 90
Total non-interest income 215 214 279 300
Total non-interest expense 2,764 2,491 3,193 2,204
Income tax expense (benefit) 628 578 226 611
-----------------------------------------------------------------------
Net income $1,128 $1,133 $ 335 $1,038
=======================================================================
Per share data
Basic and diluted (1) $ 0.23 $ 0.23 N/a N/a
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
For the Quarter Ending
June 30, March 31, December 31, September 30,
1998 1998 1997 1997
-----------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Total interest income $ 7,435 $ 7,247 $ 7,079 $ 6,810
Total interest expense 3,914 3,757 3,752 3,674
-----------------------------------------------------------------------
Net interest income 3,521 3,490 3,327 3,136
Provision for loan loss 723 90 90 90
Total non-interest income 202 200 197 194
Total non-interest expense 3,409 2,037 2,129 1,887
Income tax expense (benefit) (132) 543 471 486
-----------------------------------------------------------------------
Net income $ (277) $ 1,020 $ 834 $ 867
=======================================================================
Per share data
Basic and diluted (1) N/a N/a N/a N/a
</TABLE>
(1) Earnings per share data prior to January 1, 1999 is not applicable.
The primary reason for the decrease in net income for the quarter ended
December 31, 1998 was the increse in non-interest expense. This was the result
of the $896,000 expense incurred with the formation of the Willow Grove
Foundation.
The primary reasons for the decline in net income for the quarter ended
June 30, 1998 were the $633,000 increase in the provision for loan loss and
increases in non-interest expense associated with the implementation of a
directors retirement benefit ($800,000), Year 2000 testing and replacement of
obsolete equipment, ($105,000), and costs relating to the relocation of a branch
office ($85,000).
25
<PAGE>
[LETTERHEAD OF KPMG LLP]
Independent Auditors' Report
The Board of Directors
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, 1999 and 1998, and
the related consolidated statements of operations, changes in equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
July 23, 1999, except as to note 18, which is as of July 27, 1999
26
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
================================================================================================================
Assets 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Cash on hand and non-interest bearing deposits $ 3,447 $ 2,932
Interest bearing deposits 1,442 15,359
--------- ---------
Total cash and cash equivalents $ 4,889 $ 18,291
Assets available for sale:
Securities (amortized cost of $82,296 and $47,984,
respectively) $ 80,055 $ 48,111
Loans -- 12,152
Loans (net of allowance for loan losses of $3,138
and $2,665, respectively) 374,584 315,705
Accrued income receivable 2,519 2,109
Property and equipment, net 5,135 4,772
Intangible assets 1,950 2,360
Other assets 2,907 1,874
- ----------------------------------------------------------------------------------------------------------------
Total assets 472,039 $ 405,374
================================================================================================================
Liabilities and Stockholder's Equity
- ----------------------------------------------------------------------------------------------------------------
Deposits $ 390,681 $ 340,793
Federal Home Loan Bank advances 14,986 21,000
Advance payments from borrowers for taxes 4,403 4,481
Accrued interest payable 706 389
Other liabilities 2,821 2,766
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 413,597 369,429
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; (25,000,000 authorized; 5,143,487
issued; 5,143,487 outstanding as of June 30, 1999) 51 --
Additional paid-in capital 22,295 --
Retained earnings - substanially restricted 39,211 35,865
Accumulated other comprehensive income (1,412) 80
Unallocated common stock held by employee stock
ownership plan (ESOP) (1,703) --
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 58,442 $ 35,945
Total liabilities and stockholders' equity $ 472,039 $ 405,374
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended June 30, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
======================================================================================================================
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 27,400 $ 25,356 $ 22,374
Securities primarily taxable 4,615 3,248 3,049
- ----------------------------------------------------------------------------------------------------------------------
Total interest income $ 32,015 $ 28,604 $ 25,423
- ----------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits $ 15,366 $ 14,536 $ 13,224
Borrowings 772 529 555
Advance payment from borrowers for taxes 26 32 38
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense $ 16,164 $ 15,097 $ 13,817
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $ 15,851 $ 13,507 $ 11,606
Provision for loan losses 531 993 185
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses $ 15,320 $ 12,514 $ 11,421
- ----------------------------------------------------------------------------------------------------------------------
Non-interest income:
Service charges and fees $ 846 $ 618 $ 409
Gain (loss) on sale of real estate held for investment -- (25) 16
Loss on sale of securities available for sale -- (105) (8)
Gain on sale of loans available for sale 10 69 29
Loan servicing income, net 153 203 340
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 1,009 $ 760 $ 786
- ----------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and employee benefits $ 5,475 $ 5,386 $ 3,440
Occupancy 599 636 470
Furniture and equipment 319 328 264
Federal insurance premium 206 195 1,829
Amortization of intangible assets 410 410 410
Data processing 426 388 319
Advertising 436 413 297
Foundation expense 896 -- --
Community enrichment 175 373 259
Other expenses 1,710 1,333 996
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 10,652 $ 9,462 $ 8,284
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 5,677 $ 3,812 $ 3,923
Income taxes 2,044 1,367 1,548
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 3,633 $ 2,445 $ 2,375
- ----------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.46(1) (1) (1)
Diluted $ 0.46(1) (1) (1)
======================================================================================================================
</TABLE>
(1) Earnings per share is presented in the 1999 financial statements from
January 1, 1999 to June 30, 1999. Earnings per share prior to January 1, 1999
are not applicable.
See accompanying notes to consolidated financial statements.
28
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Equity and Comprehensive Income
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Unallocated
Accumulated Common
Additional Other Stock Total
Comprehensive Common Paid in Retained Comprehensive Held by Stockholders'
(Dollars in thousands) Income Stock Capital Earnings Income (Loss) ESOP Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $31,045 ($671) $30,374
Comprehensive Income:
Net income $2,375 $2,375 $2,375
Other Comprehensive Income net of tax:
Net change in unrealized loss
on securities available for sale $329
Less: Reclassification adjustments
for losses included in net income $44
-------------
Other Comprehensive Income $373 $373 $373
Comprehensive Income $2,748
=============
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 - - $33,420 ($298) - $33,122
===================================================================================================================================
Comprehensive Income:
Net income $2,445 $2,445 $2,445
Other Comprehensive Income net of tax:
Net change in unrealized loss
on securities available for sale $242
Less: Reclassification adjustments
for losses included in net income $136
-------------
Other Comprehensive Income $378 $378 $378
Comprehensive Income $2,823
=============
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 - - $35,865 $80 - $35,945
===================================================================================================================================
Comprehensive Income:
Net income $3,633 $3,633 $3,633
Other Comprehensive Income net of tax:
Net change in unrealized gain
on securities available for sale ($1,492)
Other Comprehensive Loss ($1,492) ($1,492) ($1,492)
-------------
Comprehensive Income $2,141
=============
Issuance of stock $51 $22,295 $22,346
Unallocated common stock held by ESOP ($1,793) ($1,793)
Capitalization of Mutual
Holding Company ($100) ($100)
ESOP shares committed to be released $90 $90
Dividend paid - $0.08 per share ($187) ($187)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $51 $22,295 $39,211 ($1,412) ($1,703) $58,442
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 3,633 $ 2,445 $ 2,375
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 409 453 313
Amortization of premium and accretion of discount, net 94 85 46
Amortization of intangible assets 410 410 410
Foundation contribution expense 896 -- --
Provision for loan losses 531 993 185
Loss (gain) on sale of real estate held for investment -- 25 (16)
Gain on sale of loans available for sale (10) (69) (29)
Loss on sale of securities available for sale -- 105 8
Decrease in deferred loan fees (292) (385) (59)
Increase in accrued income receivable (410) (172) (272)
Decrease in real estate held for investment -- -- 24
Decrease (increase) in other assets 325 (147) (10)
Increase in accrued interest payable 317 101 --
Deferred income tax (benefit) expense (446) (738) 30
(Decrease) increase in other liabilities (45) 1,919 733
Expense of allocated ESOP shares 90 -- --
Originations and purchases of loans available for sale (2,865) (36,396) (29,127)
Proceeds from sale of loans available for sale 15,027 30,486 26,039
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 17,664 ($ 885) $ 650
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans ($59,153) ($31,706) ($39,323)
Purchase of securities available for sale (83,581) (55,878) (14,296)
Purchase of securities held to maturity -- -- (3,999)
Proceeds from maturities and calls of securities -- 3,999 --
held to maturity
Proceeds from sales and calls of securities available 38,100 53,270 10,067
for sale
Principal repayments of securities available for sale 11,075 682 9,170
Proceeds from sale of real estate held for investment -- 155 16
Purchase of property and equipment, net (772) (1,401) (1,234)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ($94,331) ($30,879) ($39,599)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 49,888 $ 31,067 $ 42,030
Net increase in FHLB advances with 4,000 11,000 (5,000)
original maturity less than 90 days
Increase in FHLB advances with 1,000 4,000 11,000
original maturity greater than 90 days
Repayment of FHLB advances with original maturity (11,014) -- (10,120)
greater than 90 days
Net increase (decrease) in advance payments from (78) 284 461
borrowers for taxes
Issuance (repayment) of notes payable (500) 500
Dividends paid (187) -- --
Proceeds from stock issuance, net 19,656 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 63,265 $ 45,851 $ 38,871
============================================================================================================================
Net increase (decrease) in cash and cash equivalents ($13,402) $ 14,087 ($78)
Cash and cash equivalents:
Beginning of year $ 18,291 $ 4,204 $ 4,282
- ----------------------------------------------------------------------------------------------------------------------------
End of year $ 4,889 $ 18,291 $ 4,204
============================================================================================================================
Supplemental disclosures of cash and cash flow information:
Interest paid $ 15,847 $ 14,966 $ 13,718
Income taxes paid $ 2,085 $ 1,854 $ 1,109
============================================================================================================================
Noncash items:
Change in unrealized gain (loss) on securities available
for sale (net of taxes of $912, ($233) and ($1,492) $ 378 $ 373
($229) in 1999, 1998 and 1997, respectively)
Loans transferred from loans available for sale to
loans receivable -- -- $ 2,089
Foundation contribution $ 896 -- --
============================================================================================================================
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
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 nine branches in Dresher, Willow
Grove, Maple Glen, Warminster (2), Hatboro, Huntingdon Valley, Roslyn and
Somerton (Philadelphia), Pennsylvania. All of the branches are
full-service and offer commercial and retail products. These products
include checking accounts (interest and non-interest bearing), savings
accounts, certificates of deposit, commercial and consumer loans, real
estate loans, and home equity loans. The 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 "Regorganization"). 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 that it serves, Willow Grove and the Company
have established a charitable foundation known as the Willow Grove
Foundation (the "Foundation") and have 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 the period from December 23, 1998 to December 31, 1998 is
not meaningful.
Basis of Financial Statement Presentation
The Company has prepared its accompanying consolidated financial
statements in accordance with generally accepted accounting principles
("GAAP") and general practice within the banking industry. Certain amounts
in prior years have been reclassified for comparative purposes. Such
reclassification had no effect on net income. 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. A material estimate that
is particularly susceptible to significant change in the near-term relates
to the determination of the allowance for loan losses. Management believes
that the allowance for loan losses is adequate.
32
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 reprice 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 borrowers 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 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 regulation presents the risk
that future costs will be incurred which may materially 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 average balances in
accordance with Federal Reserve Bank requirements. The reserve balances
maintained in accordance with such requirements at June 30, 1999 and 1998
were $2.3 million and $1.2 million, respectively. Such reserve requirement
is 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
operations. Loans transferred from loans available for sale to loans
receivable are transferred at the lower of cost or market value at the
date of transfer.
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 accounted for 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
accounted for at fair value, with unrealized gains or losses, net of
taxes, being reflected as adjustments to equity. The fair value of
marketable securities available for sale is determined from publicly
quoted market prices. Securities available for sale which are not readily
marketable, which include Federal Home Loan Bank of Pittsburgh stock, are
carried at cost which approximates liquidation value.
33
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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
management decisions, which might reasonably result in such securities not
being held to maturity, are classified as available for sale. If
securities are sold, a gain or loss is determined by specific
identification method and is reflected in the operating results in the
period the trade occurs.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management
considers adequate to provide for inherent loan losses based on an
evaluation of known and inherent risks in the loan portfolio. Management's
judgment is based upon periodic evaluation of the portfolio, past loss
experience, current economic conditions, and other relevant factors. While
management uses the best information available to make such evaluations,
future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the 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.
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
commerical loans with balances of less than $100,000. Interest income
recognition on impaired loans ceases and any accrued interest is reversed.
Cash receipts on impaired loans are applied to principal. Impaired loans
are charged off when the Company determines that foreclosure is probable,
and the fair value of the collateral is less than the recorded investment
of the impaired loan.
Mortgage Servicing Rights
The 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 operations. There was no impairment
in the mortgage servicing rights at June 30, 1999 and 1998.
Real Estate Owned
Real estate acquired through foreclosure is recorded at the lower of cost
or fair value less estimated selling costs. Costs of improving foreclosed
property are usually capitalized to the extent that carrying value does
not exceed fair value less estimated selling costs. Holding costs are
charged to expense. Gains and losses on such sales are charged to
operations as incurred. The Company had no real estate owned as of June
30, 1999 and 1998.
34
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans, Loan Origination Fees, and Uncollected Interest
Loans are recorded at cost net of unearned discounts, deferred fees, and
allowances. Discounts or premiums on purchased loans are amortized using
the interest method over the remaining contractual life of the portfolio,
adjusted for actual prepayments. Loan origination fees and certain direct
origination costs are deferred and amortized using the level yield method
over the contractual life of the related loans as an adjustment of the
yield on the loans.
Interest receivable on loans is accrued to income as earned. Non-accrual
loans are loans on which the accrual of interest has ceased because the
collection of principal or interest payments is determined to be doubtful
by management. It is the policy of the 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 5 to 40 years. Significant renovations and additions are
capitalized. Leasehold improvements are depreciated over the shorter of
the useful lives of the assets or the related lease term. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss
is reflected in income for the period. The cost of maintenance and repairs
is charged to expense as incurred.
Intangible Assets
Intangible assets include a core deposit intangible and goodwill, which
represents the excess cost over fair value of assets acquired and
liabilities assumed. The core deposit intangible is being amortized to
expense over a ten-year life on an accelerated basis and goodwill is being
amortized to expense using the straight-line method over a period of
fifteen years. The carrying amount of intangible assets at June 30, 1999
and 1998 is net of accumulated amortization of $2.2 million and $1.7
million, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. 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.
35
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Earnings Per Share
Basic and diluted earnings per share are computed based on the weighted
average number of common shares outstanding during the year plus the
weighted average number of committed to be released ESOP shares during the
year.
Recent Accounting Pronouncements
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. According to the statement, all items of
comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. Along with net income, examples of
comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on available-for-sale securities,
changes in the market value of a futures contract that qualifies as a
hedge of an asset reported at fair value, and minimum pension liability
adjustments. Currently, the comprehensive income of the Company consists
primarily of net income and the net change in unrealized holding gains and
losses on available-for-sale securities. This statement is effective for
fiscal years beginning after December 15, 1997. The Company adopted SFAS
No. 130 effective July 1, 1998, and made the required disclosure in these
consolidated financial statements.
Disclosures About Segments of an Enterprise and Related Information
In June 1997 the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement, which supersedes
SFAS No. 14, requires public companies to report financial and descriptive
information about their reportable operating segments on both an annual
and interim basis. SFAS No. 131 mandates disclosure of a measure of
segment profit/loss, certain revenue and expense items and segment assets.
In addition, the statement requires reporting information on the entity's
products and services, countries in which the entity earns revenues and
holds assets, and major customers. The Company adopted SFAS No. 131 on
July 1, 1998. The Company determined that it has no segment other than the
banking segment. The Company was not required to make additional
disclosures in these consolidated financial statements.
Employer's Disclosures About Pensions and Other Post Retirement Benefits
In February 1998 the FASB issued SFAS No. 132, Employer's Disclosures
About Pensions and Other Post Retirement Benefits. This statement revises
employer's disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful. The Company adopted the SFAS No.
132 on July 1, 1998. There was no impact on financial condition, operating
results or equity of the Company upon adoption.
36
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Accounting for Derivative Instruments and Hedging Activities
In June 1998 the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the
resulting designation. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of certain exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of an exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of a foreign currency exposure.
This statement, as amended, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Earlier adoption is permitted. The
Company has not yet determined the impact, if any, of this statement,
including its provisions for the potential reclassifications of investment
securities, on operations, financial condition, and equity. However, the
Company currently has no derivatives covered by this statement and
currently conducts no hedging activities.
In October 1998, The FASB issued SFAS No. 134 Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise. This statement
requires that after the securitization of a mortgage loan held for sale,
an entity engaged in mortgage banking activities classify any retained
mortgage-backed securities based on the ability and intent to sell or to
hold those investments, except that a mortgage banking enterprise must
classify as trading any retained mortgage-backed securities that it
commits to sell before or during the securitization process. The Company
adopted SFAS No. 134 on January 1, 1999. There was no impact on
operations, financial condition or equity upon adoption of this statement
since the Company does not currently engage in the securitization of
mortgage loans held for sale.
(2) Earnings Per Share
Earnings per share, basic and diluted, were $0.46 and $0.46, respectively
for the six months ended June 30, 1999. Due to the Bank's recent
conversion and formation of the Company, earnings per share figures for
prior periods are not applicable.
37
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) Continued
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share calculations.
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
---------------------------------------------
(Dollars in thousands, except per share data)
Per share
Net income Shares Amount
=======================================================================================
<S> <C> <C> <C>
Weighted average common stock outstanding $ 2,261 4,964,217 $ 0.46
Allocated ESOP shares -- 4,482 --
- ---------------------------------------------------------------------------------------
Basic earnings per share $ 2,261 4,968,699 $ 0.46
Per share
Net income Shares Amount
=======================================================================================
Weighted average common stock outstanding $ 2,261 4,964,217 $ 0.46
Allocated ESOP shares -- 4,482 --
- ---------------------------------------------------------------------------------------
Diluted earnings per share $ 2,261 4,968,699 $ 0.46
=======================================================================================
</TABLE>
38
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) Securities Available for Sale
Securities available for sale at June 30, 1999 and 1998 consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1999
---------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities:
Mutual fund $ 8,010 -- ($ 63) $ 7,947
Federal Home Loan Mortgage 89 27 -- 116
Corporation common stock
Federal National Mortgage 8 20 -- 28
Association stock
Federal Home Loan Bank 2,961 -- -- 2,961
of Pittsburgh stock
U.S. Government and government 35,000 -- (1,123) 33,877
agency securities
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation 2 -- -- 2
Federal National Mortgage
Association 25,065 -- (740) 24,325
Government National
Mortgage Association 9,162 56 (309) 8,909
Municipal security 1,999 -- (109) 1,890
- ----------------------------------------------------------------------------------------
Total $82,296 $ 103 ($2,344) $80,055
========================================================================================
<CAPTION>
1998
---------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities:
Mutual fund $ 7,010 -- ($ 25) $ 6,985
Federal Home Loan Mortgage 100 1 -- 101
Corporation preferred stock
Federal Home Loan Mortgage 89 5 -- 94
Corporation common stock
Federal National Mortgage 8 16 -- 24
Association stock
Federal Home Loan Bank 2,733 -- -- 2,733
of Pittsburgh stock
U.S. Government and government 20,004 30 (35) 19,999
agency securities
Mortgage-backed securities:
Federal Home Loan Mortgage 3 -- -- 3
Corporation
Federal National Mortgage 13,532 112 (100) 13,544
Association
Government National 4,405 127 -- 4,532
Mortgage Association
Municipal security 100 -- (4) 96
- ----------------------------------------------------------------------------------------
Total 47,984 291 (164) 48,111
========================================================================================
</TABLE>
39
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) Continued
Proceeds from sales and calls of securities available for sale for the
years ended June 30, 1999, 1998 and 1997 were $38.1 million, $53.3, and
$10.1 million, respectively. Gross gains of $0, $24,000 and $44,000 were
realized in fiscal 1999, 1998 and 1997, respectively. There were gross
losses of $0, $129,000, and $52,000 in fiscal 1999, 1998 and 1997,
respectively.
Accrued interest receivable on securities amounted to $753,000 and
$492,000 at June 30, 1999 and 1998, respectively.
The amortized cost and estimated fair value of securities available for
sale at June 30, 1999, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Maturing Maturing
after one after 5
Maturing year but years but Maturing
within one within within 10 after 10
(Dollars in thousands) year 5 years years years Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Gov't/Gov't agency securities $998 $8,815 $14,540 $9,524 $33,877
Municipal securities:
PA school district -- -- -- 1,890 1,890
----------------------------------------------------------
Total debt securities $998 $8,815 $14,540 $11,414 $35,767
Equity securities $11,052
Mortgage backed securities $33,236
----------------------------------------------------------
Total securities at fair value $998 $8,815 $14,540 $11,414 $80,055
==========================================================
Total securities at amortized cost $1,000 $9,002 $14,998 $11,999 $82,296
==========================================================
Weighted Average Yield 5.00% 5.76% 6.63% 6.37%
</TABLE>
The Company must maintain stock as a member of the Federal Home Loan Bank
of Pittsburgh ("FHLB") of $3.0 million and $2.7 million as of June 30,
1999 and 1998, respectively.
For mortgage- backed securities, expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Substantially all of the U.S. Government and Government agency securities
are callable within one year. Weighted average yields are based on market
value.
As described in note 10, certain securities available for sale are
maintained to collateralize advances from the FHLB.
40
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) Loans
Loans receivable as of June 30, 1999 and 1998 consisted of the following:
==========================================================================
1999 1998
--------------------------------------------------------------------------
(Dollars in thousands)
First mortgage loans:
Single family residential $231,498 $230,979
Multiple family residential 12,938 7,500
Commerical real estate 52,769 24,478
Construction 7,773 4,772
Home equity 54,090 41,366
--------------------------------------------------------------------------
Total real estate loans $359,068 $309,095
Non-mortgage consumer loans 6,431 4,930
Commerical business loans 13,023 5,437
--------------------------------------------------------------------------
Total Loans $378,522 $319,462
Less:
Allowance for loan losses (3,138) (2,665)
Deferred loan fees (800) (1,092)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total loans receivable, net $374,584 $315,705
==========================================================================
As described in note 10, certain loans are maintained to collateralize
advances from the FHLB.
Included in loans receivable are loans on nonaccrual status in the amounts
of $1.1 million and $1.3 million at June 30, 1999 and 1998, respectively.
Interest income that would have been recognized on such nonaccrual loans
during the years ended June 30, 1999, 1998 and 1997 had they been current
in accordance with their original terms is $143,000, $90,000 and $111,000,
respectively. Interest income that was recognized on these nonaccrual
loans during the years ended June 30, 1999, 1998 and 1997 totaled $4,000,
$46,000 and $15,000, respectively.
As of June 30, 1999 and 1998, the Company had impaired loans with a total
recorded investment of $13,000 and $96,000, respectively, and an average
recorded investment for the years ended June 30, 1999, 1998, and 1997 of
$37,000, $464,000, and $1.6 million, respectively. As of June 30, 1999 and
1998, the amount of recorded investment in impaired loans for which there
is a related allowance for credit losses and the amount of related
allowance is $13,000 and $96,000, respectively, and $1,000 and $10,000,
respectively. There were no impaired loans for which there was no related
allowance for credit losses at June 30, 1999 and 1998. Cash of $83,000,
$1.2 million, and $0 was collected on these impaired loans during the year
ended June 30, 1999, 1998 and 1997, respectively. No interest income was
recognized on such loans during the year ended June 30, 1999, 1998 and
1997.
41
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) Continued
The following is a summary of the activity in the allowance for loan
losses for the years ended June 30, 1999, 1998 and 1997:
Years ended June 30,
==========================================================================
1999 1998 1997
--------------------------------------------------------------------------
(Dollars in thousands)
Balance, beginning of year $ 2,665 $ 1,678 $ 1,938
Provision for loan losses 531 993 185
Charge-offs (58) (6) (445)
Recoveries -- -- --
--------------------------------------------------------------------------
Balance, end of year $ 3,138 $ 2,665 $ 1,678
==========================================================================
(5) Mortgage Servicing Activity
A summary of mortgage servicing rights activity follows:
Years ended June 30,
--------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
--------------------------------------------------------------------------
Balance, beginning of year $ 251 $ 213 --
Originated servicing rights 119 144 $ 265
Amortization (134) (106) (52)
--------------------------------------------------------------------------
Balance, end of year $ 236 $ 251 $ 213
==========================================================================
At June 30, 1999, 1998 and 1997, the Company serviced loans for others of
$67.0 million, $66.4, and $58.8 million, respectively. Loans serviced by
others for the Company as of June 30, 1999, 1998 and 1997 were $2.8
million, $2.9 and $3.5 million, respectively.
42
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Deposits
Deposit balances by type with related interest rates consisted of the
following at June 30, 1999, 1998 and 1997:
================================================================================
1999 1998
------------------- -------------------
Percent Percent
Amount of Total Amount of Total
- --------------------------------------------------------------------------------
(Dollars in thousands)
Savings accounts (passbook, $48,773 12.5% $40,225 11.8%
statement, clubs)
Money market accounts 28,741 7.4 20,487 6.0
Certificates of deposit less than 213,998 54.8 193,533 56.8
$100,000
Certificates of deposit greater than 37,159 9.5 38,469 11.3
$100,000 (1)
NOW accounts 29,013 7.4 25,638 7.5
Non-interest bearing deposits 32,997 8.4 22,441 6.6
- --------------------------------------------------------------------------------
$390,681 100.0% $340,793 100.0%
================================================================================
(1) Deposit balances in excess of $100,000 are not federally insured.
While the certificates frequently are renewed at maturity rather than paid
out, a summary of certificates by contractual maturity at June 30, 1999 is
as follows:
Years ended June 30,
-----------------------------------------------------------
(Dollars in thousands)
2000 $157,805
2001 57,007
2002 18,554
2003 11,460
2004 4,895
2005 and thereafter 1,436
-----------------------------------------------------------
$251,157
===========================================================
43
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Continued
Interest expense on deposits for the years ended June 30, 1999 and 1998
consisted of the following:
1999 1998 1997
--------------------------------------------------------------------------
(Dollars in thousands)
Savings accounts $896 $787 $768
NOW accounts 1,111 916 803
Certificates 13,359 12,833 11,653
--------------------------------------------------------------------------
Total $15,366 $14,536 $13,224
==========================================================================
(7) Property and Equipment
==========================================================================
June 30,
Depreciable -----------------------
Lives 1999 1998
--------------------------------------------------------------------------
(Dollars in thousands)
Land $1,323 $1,323
Buildings 15 to 40 yrs. $4,178 $3,928
Furniture, fixtures, and equipment 5 to 7 yrs. $2,952 $2,430
--------------------------------------------------------------------------
Total $8,453 $7,681
Less accumulated depreciation ($3,318) ($2,909)
--------------------------------------------------------------------------
Property and equipment, net $5,135 $4,772
==========================================================================
Amounts charged to operating expense for depreciation for the years ended
June 30, 1999, 1998 and 1997 amounted to $409,000, $453,000, and $313,000,
respectively.
(8) Income Taxes
The Small Business Job Protection Act of 1996, enacted on August 20, 1996,
provides for the repeal of the tax bad debt deduction computed under the
percentage of taxable income method. The repeal of the use of this method
is effective for tax years beginning after December 31, 1995. Prior to the
change in law, the Company had qualified under the provisions of the
Internal Revenue Code which permitted it to deduct from taxable income an
allowance for bad debts based on 8% of taxable income.
Upon repeal, the Company is required to recapture into income, over a
six-year period, the portion of its tax bad debt reserves that exceed its
base year reserves (i.e., tax reserves for tax years beginning before
1988). The base year tax reserves, which may be subject to recapture if
the Company ceases to qualify as a bank for federal income tax purposes,
are restricted with respect to certain distributions. The Company's
44
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Continued
total tax bad debt reserves at June 30, 1999 are approximately $8.2
million, of which $6.2 million represents the base year amount and $2.0
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 operations.
Income tax expense (benefit) for the years ended June 30, 1999, 1998 and
1997 consisted of the following:
==========================================================================
Current Deferred Total
--------------------------------------------------------------------------
(Dollars in thousands)
1999:
Federal $2,311 ($446) $1,865
State 179 -- 179
--------------------------------------------------------------------------
Total $2,490 ($446) $2,044
==========================================================================
1998:
Federal $1,873 ($738) $1,135
State 232 -- 232
--------------------------------------------------------------------------
Total $2,105 ($738) $1,367
==========================================================================
1997:
Federal $1,279 $30 $1,309
State 239 -- 239
--------------------------------------------------------------------------
Total $1,518 $30 $1,548
==========================================================================
The expense for income taxes differed from that computed at the statutory
federal corporate rate for the years ended June 30, 1999, 1998 and 1997 as
follows:
<TABLE>
<CAPTION>
==========================================================================================================
1999 1998 1997
------------------ ------------------ ------------------
Percentage Percentage Percentage
of pretax of pretax of pretax
Amount income Amount income Amount income
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
At statutory rate $1,930 34% $1,296 34% $1,334 34%
Adjustment resulting from:
State tax, net of federal
tax benefit 118 2 152 4 158 4
Low income housing tax credits (29) (1) (29) (1) (11) (0)
Other 25 (0) (52) (2) 67 2
- ----------------------------------------------------------------------------------------------------------
Income tax expense per
statements of operations $2,044 36% $1,367 36% $1,548 39%
==========================================================================================================
</TABLE>
45
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(8) Continued
Significant deferred tax assets and liabilities of the Company as of
June 30, 1999 and 1998 are as follows:
1999 1998
--------------------------------------------------------------------------
(Dollars in thousands)
Deferred loan fees $272 $371
Retirement plan reserves 300 271
Employee benefits 149 88
Other reserves 26 34
Intangible asset amortization 292 249
Capital loss carryover 85 85
Charitable contributions 216 107
Uncollected interest 50 45
Reserve for land held for investment 6 --
Book bad debt reserves 1,067 906
Unrealized loss on securities available for sale 861 --
--------------------------------------------------------------------------
Gross deferred tax assets $3,324 $2,156
--------------------------------------------------------------------------
Unrealized gain on securities available for sale -- ($51)
Tax bad debt reserves in excess of base year (688) (826)
Investment in Joint Venture 2 4
Prepaid expenses (37) (35)
Originated mortgage servicing rights (80) (85)
--------------------------------------------------------------------------
Gross deferred tax liabilities ($803) ($993)
--------------------------------------------------------------------------
Net deferred tax asset $2,521 $1,163
==========================================================================
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. Such
contributions were $193,000 and $182,000 for the years ended June 30, 1999
and 1998, 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. Such
contributions were $89,000 and $79,000 for the years ended June 30, 1999
and 1998, respectively.
46
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Continued
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. Credit is 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 payment in
the event of a change in control of the Company. The costs of the
Directors' Plan and President's Plan were $60,000 and $18,000, and
$566,000 and $234,000, respectively, for the years ended June 30, 1999 and
1998. The expense of these plans incurred in 1998 included the cost for
past service. The Directors' Plan and Presidents' Plan are intended to be
and are unfunded.
The ESOP Plan
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, 1999, there were no ESOP shares allocated to
participants in the year ended June 30, 1999, however, there were 8,964
shares committed to be released. The Company recorded compensation expense
of $90,000 for the ESOP for the year ended June 30, 1999.
(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 and Agency
mortgage-backed securities, notes and bonds) in the amount of at least as
much as its advances from the FHLB. The Company's FHLB stock is also
pledged to secure these advances.
47
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Continued
At June 30, 1999 and 1998, such advances have contractual maturities as
follows:
==========================================================================
Weighted
Average
Due by June 30, Rate June 30, 1999
--------------------------------------------------------------------------
(Dollars in thousands)
2000 5.11% $4,000
2001 -- --
2002 5.50% $6,000
2003 -- --
2004 5.79% $986
Thereafter 5.21% $4,000
--------------------------------------------------------------------------
Total Federal Home Loan Bank advances 5.33% $14,986
==========================================================================
Weighted
Average
Due by June 30, Rate June 30, 1998
--------------------------------------------------------------------------
(Dollars in thousands)
1998 5.84% $11,000
1999 -- --
2000 -- --
2001 5.50% $6,000
2002 -- --
Thereafter 5.21% $4,000
--------------------------------------------------------------------------
Total Federal Home Loan Bank advances 5.62% $21,000
==========================================================================
Substantially all of the above advances with contractual maturities beyond
one year are callable by the FHLB within one year of the respective
balance sheet dates.
(11) Commitments and Contingencies
At June 30, 1999 and 1998, the Company was committed to fund loans as
follows:
==========================================================================
June 30, 1999 1998
--------------------------------------------------------------------------
(Dollars in thousands)
Loans with fixed rates of interest $5,497 $6,563
Loans with variable rates of interest $8,469 $8,299
--------------------------------------------------------------------------
Total commitments to fund loans $13,966 $14,862
==========================================================================
48
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Continued
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, 1999, the Company is committed to the funding of
first mortgage loans of approximately $12.4 million, and construction
loans of approximately $1.0 million, and committed to commercial business
loans of approximately $422,000.
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 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
The Company is involved in routine legal proceedings in the normal course
of business which, in the aggregate, are believed by management to be
immaterial to the financial condition of the Company.
49
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Continued
Other Commitments
In connection with the operation of nine of its branches, the Company
leases certain office space. The leases are classified as operating
leases, with rent expense of $148,000, $205,000, and $124,000 for the
years ended June 30, 1999, 1998 and 1997, respectively. Minimum payments
over the remainder of the leases are summarized as follows:
Minimum
Lease
Year ended June 30, Payments
------------------------------------------------
(Dollars in thousands)
2000 $255
2001 262
2002 249
2003 208
2004 and thereafter 86
------------------------------------------------
$1,060
================================================
(12) Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain certain minimum amounts and ratios (set forth
in the table below). Management believes that the Bank meets, as of June
30, 1999, all capital adequacy requirements to which it is subject.
As of June 30, 1999, 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.
50
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Continued
The Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual capital Purposes Action Provisions
-------------- -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
==========================================================================================
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
As of June 30, 1999:
Tangible capital $46,180 9.8% $7,079 1.5% N/A N/A%
(to tangible assets)
Core capital 46,180 9.8 18,855 4.0 $23,568 5.0
(to adjusted
tangible assets)
Tier I Capital 46,180 16.9 10,901 4.0 16,352 6.0
(to risk-
weighted assets)
Risk-based capital 49,318 18.1 21,803 8.0 27,253 10.0
(to risk-
weighted assets)
As of June 30, 1998:
Tangible capital $33,505 8.3% $6,038 1.5% N/A N/A%
(to tangible assets)
Core capital 33,505 8.3 12,075 3.0 $20,126 5.0
(to adjusted
tangible assets)
Tier I Capital 33,505 13.8 9,719 4.0 14,578 6.0
(to risk-
weighted assets)
Risk-based capital 36,170 14.9 19,438 8.0 24,297 10.0
(to risk-
weighted assets)
==========================================================================================
</TABLE>
51
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Continued
On September 30, 1996, federal legislation was enacted which included
provisions for recapitalizing the Savings Association Insurance Fund
("SAIF") and the eventual merger of this fund with the Bank Insurance
Fund. In accordance therewith, the FDIC billed the Bank, in fiscal 1997,
for a special assessment of $1.5 million based on the amount of SAIF
assessable deposits at an estimated assessment rate of 65.7 basis points
per $100 of insured deposits.
The Bank is not under any agreement with the regulatory authorities nor is
it aware of any current recommendations by the regulatory authorities
which, if they were to be implemented, would have a material effect on
liquidity, capital resources, or operations of the Bank.
(13) Fair Value of Financial Instruments
The 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 conditions, perceived risks associated with these
financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only and,
therefore, cannot be compared to the historical accounting model. Use of
different assumptions or methodologies is likely to result in
significantly different fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the 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 noninterest-bearing demand
deposits, savings and NOW accounts, and money market deposit accounts is
equal to the carrying amount because these deposits have no stated
maturity. This approach to estimating fair value excludes the significant
benefit that results from the low-cost funding provided by such deposit
liabilities, as compared to alternative sources of funding. As a
consequence, this presentation may distort the actual fair value of a
banking organization that is a going concern.
52
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) Continued
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at June 30, 1999 and
1998:
Cash and Cash Equivalents
Current carrying amounts approximate estimated 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 discount 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 fo 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.
Accrued Income Receivable
Current carrying amounts approximate estimated fair value.
Deposits with No Stated Maturity (which consist of NOW, Money Market, and
Passbook Accounts)
Current carrying amounts approximate estimated fair value.
Certificates of Deposit
Fair value was estimated by discounting the contractual cash flows using
current market rates offered in the Company's market area for deposits
with comparable terms and maturities.
Accrued Interest Payable
Current carrying amounts approximate estimated fair value.
53
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) Continued
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
market 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, were as
follows at June 30, 1999 and 1998 (dollars in thousands):
1999
------------------------
Carrying Estimated
Assets Amount Fair Value
-------------------------------------------------------------------------
Cash and cash equivalents $4,889 $4,889
Securities available for sale $80,055 $80,055
Loans, net $374,584 $380,266
Accrued income receivable $2,519 $2,519
=========================================================================
Liabilities
-------------------------------------------------------------------------
Deposits with no stated maturity $139,524 $139,524
Certificates of Deposit $251,157 $254,000
FHLB advances $14,986 $14,435
Accrued interest payable $706 $706
=========================================================================
54
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) Continued
Off-Balance Sheet Financial Instruments:
Contract Estimated
Amount Fair Value
--------------------------------------------------------------------------
Commitments to extend credit $13,966 $22
==========================================================================
1998
-----------------------
Carrying Estimated
Assets Amount Fair Value
--------------------------------------------------------------------------
Cash and cash equivalents $18,291 $18,291
Securities available for sale $48,111 $48,111
Loans available for sale $12,152 $12,205
Loans, net $315,705 $320,168
Accrued income receivable $2,109 $2,109
==========================================================================
Liabilities
--------------------------------------------------------------------------
Deposits with no stated maturity $108,791 $108,791
Certificates of Deposit $232,002 $233,677
FHLB advances $21,000 $21,119
Accrued interest payable $389 $389
==========================================================================
Off-Balance Sheet Financial Instruments:
Contract Estimated
Amount Fair Value
--------------------------------------------------------------------------
Commitments to extend credit $14,862 $178
==========================================================================
55
<PAGE>
- --------------------------------------------------------------------------------
(14) Comprehensive Income
The tax effects allocated to each component of "Other comprehensive
income" are as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------
Before-tax Tax Net of tax
Amount Benefit Amount
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Unrealized gains on securities available
for sale
Unrealized holding losses arising
during the period ($2,404) $ 912 ($1,492)
Other comprehensive income ($2,404) $ 912 ($1,492)
====================================================================================
<CAPTION>
1998
-----------------------------------------
Before-tax Tax Net of tax
Amount Expense Amount
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Unrealized gains on securities available
for sale
Unrealized holding gains arising
during the period $ 391 ($149) $ 242
Less: reclassification adjustment for
losses included in net income $ 219 ($ 83) $ 136
Other comprehensive income $ 610 ($232) $ 378
====================================================================================
<CAPTION>
1997
-----------------------------------------
Before-tax Tax Net of tax
Amount Expense Amount
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Unrealized gains on securities available
for sale
Unrealized holding gains arising
during period 531 202 329
Less: reclassification adjustment for
losses included in net income 71 27 44
Other comprehensive income 602 229 373
====================================================================================
</TABLE>
(15) Reorganization
Pursuant to the Plan, the Company offered and sold 2,240,878 shares of
Company common stock in its initial public offering, issued 2,812,974
shares to the MHC and contributed 89,635 shares to the Foundation.
The Company's initial public offering was completed on December 23, 1998
and resulted in net cash proceeds of $19.7 million. The Company loaned
$1.8 million to the Bank to establish an ESOP which purchased 179,270
shares of the Company's stock in the initial public offering. The Company
used $9.8 million, or 50% of the remaining net proceeds to purchase all of
the outstanding stock of the Bank.
56
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(15) Continued
As part of the Plan of Conversion, the Company formed the Willow Grove
Foundation and donated 89,635 shares of the Company valued at
approximately $896,000. The Company recorded a contribution expense charge
and a corresponding deferred tax benefit of $305,000 for this donation.
The formation of this private charitable foundation is to further the
Bank's commitment to the communities that it serves.
(16) Dividend Policy
The Company's ability to pay dividends is dependent, in part, upon its
ability to obtain dividends from the Bank. The future dividend policy of
the Company is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial
conditions, cash needs, and general business conditions. Holders of common
stock will be entitled to receive dividends as and when declared by the
Board of Directors of the Company out of funds legally available for that
purpose. Such payment, however, will be subject to the regulatory
restrictions set forth by the OTS. In addition, FDICIA provides that, as a
general rule, a financial institution may not make a capital distribution
if it would be undercapitalized after making the capital distribution.
To date, the MHC has waived its receipt of cash dividends from the
Company. The dollar amount of dividends waived by MHC are considered as a
restriction on the retained earnings of the Company. The amount of any
dividend waived by MHC shall be available for declaration as a dividend
solely to MHC. At June 30, 1999, the cumulative amount of such waived
dividend was $225,000.
57
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) Parent Company Financial Information
Condensed Statements of Financial Condition
================================================================================
June 30,
1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Cash on deposit with subsidiary bank $ 142
Note receivable 11,293
Investment in subsidiary bank 48,421
Other assets 455
- --------------------------------------------------------------------------------
Total assets $ 60,311
================================================================================
Liabilities and stockholders' equity:
- --------------------------------------------------------------------------------
Other liabilities $ 166
Total liabilities $ 166
Stockholders' equity:
Common stock $ 51
Additional paid-in capital 59,932
Retained earnings 1,573
Unrealized (losses) gains on securities available for sale ($ 1,411)
- --------------------------------------------------------------------------------
Total stockholders' equity $ 60,145
Total liabilities and stockholders' equity $ 60,311
================================================================================
Condensed Statement of Operations
================================================================================
1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
Income:
Interest income on note receivable $ 143
Equity in undistributed income of subsidiary 2,366
- --------------------------------------------------------------------------------
Total income $ 2,509
================================================================================
Expense:
Professional $ 125
Stationary and printing 31
Charitable foundation 896
Other 11
- --------------------------------------------------------------------------------
Total expense $ 1,063
================================================================================
Income before taxes $ 1,446
Income tax expense (benefit) (313)
- --------------------------------------------------------------------------------
Net income $ 1,759
================================================================================
58
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) Continued
Condensed Statements of Cash Flows
================================================================================
1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 1,759
Less items not affecting cash flows:
Equity in undistributed income of subsidiary (2,366)
Increase in accrued interest receivable (142)
Foundation contribution expense 896
Increase in other assets (313)
Increase in other liabilities 166
- --------------------------------------------------------------------------------
Net cash used in operating activities $ O
================================================================================
Cash flows from investing activities:
Capital investment in subsidiary bank ($ 9,828)
Issuance of notes receivable from subsidiary (11,293)
- --------------------------------------------------------------------------------
Net cash used in financing activities ($21,121)
================================================================================
Cash flows from financing activities:
Proceeds from stock issuance $ 21,450
Dividends paid (187)
- --------------------------------------------------------------------------------
Net cash provided by financing activities $ 21,263
================================================================================
Net increase in cash and cash equivalents $ 142
Cash and cash equivalents at beginning of period --
Cash and cash equivalents at end of period $ 142
================================================================================
(18) Subsequent Event
The Company approved its 1999 Stock Option Plan (the "Option Plan") and
the 1999 Recognition and Retention Plan ("RRP") on July 27, 1999 at a
special shareholders meeting; and declared an $.08 per share dividend
payable on September 1, 1999 to shareholders of record on August 13, 1999.
Sock Option Plan
The Company maintains the Option Plan and has reserved for future issuance
pursuant to the Option Plan 224,087 shares of Common Stock, which is equal
to 10% of the Common Stock sold in the Company's initial public offering.
Under the Option Plan, stock options (which expire ten years from the date
of grant) may be granted to the directors and officers of the Bank. Each
option entitles the holder to purchase one
59
<PAGE>
WILLOW GROVE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(18) Continued
share of the Company's common stock at an exercise price equal to the fair
market value of the stock at the date of the grant. Options will be
exercisable in whole or in part over the vesting period. The options vest
ratably over a 5-year period. All options become 100% exercisable in the
event of death or disability.
Recognition and Retention Plan (RRP)
The Company maintains the RRP for the directors and officers of the
Company which was approved by the Company's Board of Directors in June
1999. The objective of the RRP is to enable the Company to provide
officers, key employees and directors of the Bank with a proprietary
interest in the Company as an incentive to contribute to its success. The
Plan is authorized to maintain up to 89,635 shares of the Company stock or
4% of the stock sold in the Company's initial public offering. Awards vest
at a rate of 20% per year for directors and officers, commencing one year
from the date of award. Awards become 100% vested in the event of death or
disability.
- --------------------------------------------------------------------------------
60
<PAGE>
(photo of William Langan and Fred Marcell sitting at table)
(caption)
William W. Langan, Chairman
Frederick A. Marcell Jr., President
(photo of 9 bank directors at conference table)
(caption)
Willow Grove Bank Directors: (standing left to right) William B. Weihenmayer,
J. Ellwood Kirk, Frederick A. Marcell Jr., Betsy Gammill, Samuel H. Ramsey, III
(Seated left to right) Lewis W. Hull, William W.Langan, Chairman,
Charles F. Kremp, III, A. Brent O'Brien
(photo of Senior Management Team in front of Willow Grove Bank sign)
(caption)
John T. Powers, Senior Vice President
John J. Foff, Jr., Senior Vice President
Thomas M. Fewer, Senior Vice President
(listing of Executive Officers of Bank and Bancorp)
Executive Officers of Willow Grove Bank and Willow Grove Bancorp, Inc.
Frederick A. Marcell Jr., President and Chief Executive Officer
Thomas M. Fewer, Senior Vice President
John J. Foff, Jr., Senior Vice President, Chief Financial Officer and Treasurer
John T. Powers, Senior Vice President and Corporate Secretary
Directors of Willow Grove Bank and Willow Grove Bancorp, Inc.
Elizabeth H. Gemmill*, Managing Trustee, Warwick Foundation, Philadelphia, PA
Lewis W. Hull, Chairman of Hull Corporation and Hull Company (manufacturing
companies) Hatboro, PA
J. Ellwood Kirk, Retired President of Willow Grove Bank
Charles F. Kremp, III, President and owner of Charles F. Kremp, III (florist),
Willow Grove, PA
William W. Langan, President and owner of Marmetal Industries, Inc., Horsham, PA
Frederick A. Marcell, Jr., President and Chief Executive Officer of Willow Grove
Bank since July 1992
A. Brent O'Brien, President and owner of Bean, Mason & Eyer (insurance broker),
Doylestown, PA
Samuel H. Ramsey, III, President and owner of Samuel H. Ramsey, III, Certified
Public Accountants
William B. Weihenmayer, Self-employed real estate investor, Huntingdon Valley,
PA
* Director since July 31, 1999.
(Willow Grove Bancorp, Inc. logo)
61
<PAGE>
(heading)
CORPORATE INFORMATION
Annual Meeting
The annual meeting of the stockholders will be held on November 9, 1999 at 11:00
am:
The Fairway Room
North Hills Country Club
99 Station Avenue
North Hills, Pennsylvania
Independent Auditors
KPMG LLP
1600 Market Street
Philadelphia, Pennsylvania 19103
Shareholder Inquiries
For information relating to the annual report on Form 10-K, press releases,
reports filed with the SEC and the annual meeting of stockholders, call
Frederick A. Marcell, Jr. or John J. Foff, Jr. at 215-646-5405.
General Counsel
Duffy, North, Wilson, Thomas & Nicholson
104 North York Road
Hatboro, Pennsylvania 19040
Special Counsel
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, N.W., 12th Floor
Washington, DC 20005
Transfer Agent and Registrar
For information relating to your stock holdings, stock transfer requirements,
lost certificates, dividends, tax forms, and related matters, contact:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
800-368-5948
Corporate Headquarters
Willow Grove Bancorp, Inc.
Welsh and Norristown Roads
Maple Glen, Pennsylvania 19002-8030
Common Stock
Willow Grove Bancorp, Inc.'s common stock is traded on The Nasdaq Stock Market
(NASDAQ) under the symbol WGBC. Newspaper stock listings: WillowG. or
WillGrvBcp.
The price range for the Company's common stock for each quarter for fiscal 1999:
Quarter ended High Low
Dec. 31, 1998 10 5/8 10
Mar. 31, 1999 10 1/2 9 5/8
June 30, 1999 10 9 1/8
Market Makers
Boenning & Scattergood, Inc.
F.J. Morrissey & Co., Inc.
Freidman Billings Ramsey & Co., Inc.
Keefe, Bruyette & Woods, Inc.
Knight Securities LP
Mayer & Schweitzer, Inc.
Ryan, Beck & Co.
Sandler O'Neill & Partners
Spear Leeds & Kellogg
Tucker Anthony, Inc.
heading
OFFICE LOCATIONS
Maple Glen
Welsh and Norristown Roads
Maple Glen, PA 19002-8030
Warminster
Warminster Square Shopping Center
1555 West Street Road
Warminster, PA 18974
Warminster
K-Mart Plaza
1141 Ivyland Road
Warminster, PA 18974
Willow Grove
9 Easton Road
Willow Grove, PA 19090
Dresher
701 Twining Road
Dresher, PA 19025
Huntingdon Valley
Huntingdon Valley Shopping Center
761 Huntingdon Pike
Huntingdon Valley, PA 19006
Hatboro
2 North York Road
Hatboro, PA 19040
Somerton
Lumar Shopping Center
11730 Busleton Avenue
Philadelphia, PA 19116
Roslyn Valley
Roslyn Valley Shopping Center
1331 Easton Road
Roslyn, PA 19001
<PAGE>
(back cover)
(Willow Grove Bank logo)
(caption)
Your Community Bank
EXHIBIT 23.0
<PAGE>
Consent of Independent Certified Public Accountants
The Board of Directors
Willow Grove Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-70131) on Form S-8 of Willow Grove Bancorp, Inc. of our report dated July
23, 1999, except as to note 18, which is as of July 27, 1999, relating to the
consolidated statements of financial condition of Willow Grove Bancorp, Inc. and
subsidiary as of June 30, 1999 and 1998, and the related consolidated statements
of operations, changes in equity and comprehensive income, and cash flows for
each of the years in the three-year period ended June 30, 1999, which report
appears in the June 30, 1999 annual report on Form 10-K of Willow Grove Bancorp,
Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,447
<INT-BEARING-DEPOSITS> 1,442
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,055
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 374,584
<ALLOWANCE> 3,138
<TOTAL-ASSETS> 472,039
<DEPOSITS> 390,681
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 2,821
<LONG-TERM> 10,986
0
0
<COMMON> 51
<OTHER-SE> 58,391
<TOTAL-LIABILITIES-AND-EQUITY> 472,039
<INTEREST-LOAN> 27,400
<INTEREST-INVEST> 4,615
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 32,015
<INTEREST-DEPOSIT> 15,366
<INTEREST-EXPENSE> 16,164
<INTEREST-INCOME-NET> 15,851
<LOAN-LOSSES> 531
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,652
<INCOME-PRETAX> 5,677
<INCOME-PRE-EXTRAORDINARY> 3,633
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,633
<EPS-BASIC> .46
<EPS-DILUTED> .46
<YIELD-ACTUAL> 7.60
<LOANS-NON> 1,064
<LOANS-PAST> 4
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,068
<ALLOWANCE-OPEN> 2,665
<CHARGE-OFFS> 58
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,138
<ALLOWANCE-DOMESTIC> 3,138
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 925
</TABLE>
