UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-25191
Willow Grove Bancorp, Inc.
(Exact name of registrant as specified in its charter)
United States 23-2986192
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002
(Address of principal executive offices)
(215) 646-5405
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The Registrant had 5,143,487 shares of Common Stock issued and outstanding as of
November 12, 1999.
1
<PAGE>
WILLOW GROVE BANCORP, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition at
September 30, 1999 and June 30, 1999 3
Consolidated Statements of Operations - For the Three
Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - For the Three
Months Ended September 30, 1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 2: Changes in Securities and Use of Proceeds 20
Item 3: Defaults upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 21
2
<PAGE>
Willow Grove Bancorp, Inc.
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Assets September 30, 1999 June 30, 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Cash on hand and non-interest bearing
deposits $ 4,119 $ 3,447
Interest-bearing deposits 4,890 1,442
---------- -----------
Total cash and cash equivalents 9,009 4,889
Assets available for sale:
Securities (amortized cost of $74,525 and $82,296,
respectively) 71,775 80,055
Loans (net of allowance for loan losses of $3,344
and $3,138, respectively) 396,495 374,584
Accrued income receivable 2,654 2,519
Property and equipment, net 5,142 5,135
Other real estate owned 281 --
Intangible assets 1,847 1,950
Other assets 2,819 2,907
- ----------------------------------------------------------------------------------------------
Total Assets $ 490,022 $ 472,039
- ----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------
Deposits $ 391,477 $ 390,681
Federal Home Loan Bank advances 34,914 14,986
Advance payments from borrowers for taxes and insurance 1,938 4,403
Accrued interest payable 539 706
Other liabilities 2,942 2,821
- ----------------------------------------------------------------------------------------------
Total Liabilities 431,810 413,597
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; (25,000,000
authorized; 5,143,487 issued and
outstanding as of September 30, and June 30, 1999) 51 51
Additional paid-in capital 22,295 22,295
Retained earnings 40,230 39,211
Unallocated common stock held by
employee stock ownership plan (ESOP) (1,703) (1,703)
Unamortized common stock held by recognition
and retention plan trust (RRP) (929) --
Accumulated other comprehensive loss (1,732) (1,412)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 58,212 58,442
Total liabilities and stockholders' equity $ 490,022 $ 472,039
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
3
<PAGE>
Willow Grove Bancorp, Inc.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data)
For the Three Months Ended
September 30,
--------------------------
1999 1998
- --------------------------------------------------------------------------------
Interest and dividend income:
Loans receivable $7,656 $6,748
Securities, primarily taxable 1,242 857
- --------------------------------------------------------------------------------
Total interest income 8,898 7,605
- --------------------------------------------------------------------------------
Interest expense:
Deposits 3,932 3,739
Borrowings 328 215
Advance payments from borrowers for taxes 6 8
- --------------------------------------------------------------------------------
Total interest expense 4,266 3,962
- --------------------------------------------------------------------------------
Net interest income 4,632 3,643
Provision for loan losses 270 90
- --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 4,362 3,553
- --------------------------------------------------------------------------------
Non-interest income:
Service charges and fees 253 215
Gain on sale of loans available
for sale -- 12
Loan servicing income, net 9 73
- --------------------------------------------------------------------------------
Total non-interest income 262 300
- --------------------------------------------------------------------------------
Non-interest expense:
Compensation and employee benefits 1,571 1,265
Occupancy 180 144
Furniture and equipment 108 67
Federal insurance premium 54 50
Amortization of intangible assets 103 103
Data Processing 123 95
Advertising 80 68
Community enrichment 38 100
Other expense 508 312
- --------------------------------------------------------------------------------
Total non-interest expense 2,765 2,204
- --------------------------------------------------------------------------------
Income before income taxes 1,859 1,649
Income taxes 652 611
- --------------------------------------------------------------------------------
Net income $1,207 $1,038
- --------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.24 NA
Diluted 0.24 NA
- --------------------------------------------------------------------------------
NA: Earnings per share presentation for periods prior to January 1, 1999 are
not applicable.
See accompanying notes to the consolidated financial statements
4
<PAGE>
Willow Grove Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash flows from operating activities:
Net income $ 1,207 $ 1,038
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 116 96
Amortization of premium and accretion of discount, net 41 129
Amortization of intangible assets 103 103
Provision for loan losses 270 90
Gain on sale of loans available for sale -- (12)
Decrease in deferred loan fees -- 48
Increase in accrued income receivable (135) (177)
Decrease (increase) in other assets 277 (66)
(Decrease) increase in accrued interest payable (167) 18
Deferred income tax expense (benefit) (189) 88
Increase in other liabilities 121 166
Originations and purchases of loans available for sale -- (2,865)
Proceeds from sale of loans available for sale -- 9,368
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 1,644 $ 8,024
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans ($22,275) ($ 4,786)
Purchase of securities available for sale -- (5,000)
Proceeds from sales and calls of securities available for sale 6,506 12,000
Principal repayments of securities available for sale 1,224 4,877
Purchase of property and equipment, net (123) (171)
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities ($14,668) $ 6,920
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits $ 796 $ 2,162
Net increase (decrease) in FHLB advances with
original maturity less than 90 days 13,000 (7,000)
Increase in FHLB advances with original maturity greater than 90 days 7,000 --
Repayment of FHLB advances with original maturity greater than 90 days (72) --
Net decrease in advance payments from borrowers for taxes and insurance (2,465) (2,543)
Dividends paid (186) --
Purchase of RRP shares (929) --
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 17,144 ($ 7,381)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 4,120 $ 7,563
Cash and cash equivalents:
Beginning of period $ 4,889 $ 18,291
- -------------------------------------------------------------------------------------------------------------------------
End of period $ 9,009 $ 25,854
- -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash and cash flow information:
Interest paid $ 4,433 $ 3,944
Income taxes paid $ 240 $ 305
- -------------------------------------------------------------------------------------------------------------------------
Noncash items:
Change in unrealized gain (loss) on securities available for sale
(net of taxes of $189 and ($88) in 1999 and 1998, respectively) ($ 320) $ 144
Loans transferred to other real estate owned $ 281 --
</TABLE>
See accompanying notes to the consolidated financial statements
5
<PAGE>
WILLOW GROVE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all normal, recurring adjustments
which, in the opinion of management, are necessary for a fair presentation of
these financial statements, have been included. These financial statements
should be read in conjunction with the audited financial statements and the
notes thereto for the period ended June 30, 1999. The results for the interim
periods presented are not necessarily indicative of the results that may be
expected for the year ended June 30, 2000.
2. Summary of Significant Accounting Policies
On December 23, 1998, Willow Grove Bancorp, Inc. (the "Company") completed
the reorganization of Willow Grove Bank, a federally chartered mutual savings
bank ("Willow Grove" or the "Bank"), into the federal mutual holding company
form of ownership, whereby the Bank 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, a federally
chartered mutual holding company (the "MHC") (the "Reorganization"). In
connection with the Reorganization, the Company sold 2,240,878 shares of Company
common stock, par value $0.01 per share ("Company Common Stock") at $10.00 per
share to total, 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. The
Foundation will provide funding to support charitable causes and community
development activities which will complement Willow Grove's existing community
activities. In addition, the Company established an ESOP for the employees of
the Company and the Bank which became effective with the completion of the
Reorganization.
Additional information regarding the Reorganization is included in the
Company's Registration Statement on Form S-1 filed on September 18, 1998, as
amended.
6
<PAGE>
3. Earnings Per Share
Earnings per share, basic and diluted, were $0.24 for the three months
ended September 30, 1999. For the three-month period ended September 30, 1999,
the weighted average number of shares outstanding were 4,951,645 for both basic
and diluted shares. No dilutive common stock equivalent shares were awarded
during the period. Due to the Bank's recent conversion and formation of the
Company, earnings per share for periods prior to January 1, 1999 are not
applicable.
4. Loan Portfolio
The Bank's Loan Portfolio consisted of the following at the dates
indicated:
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------------------------------------------------------
Percent of Percent of
Amount Total Amount Total
- ----------------------------------------------------------------------------------------------------------
Mortgage Loans: (Dollars in Thousands)
<S> <C> <C> <C> <C>
Single-family residential $ 238,917 59.6% $ 231,498 61.2%
Multi-family residential 13,531 3.4% 12,938 3.4%
Commercial real estate 60,447 15.1% 52,769 13.9%
Construction 8,193 2.0% 7,773 2.1%
Home equity 58,457 14.6% 54,090 14.3%
- ----------------------------------------------------------------------------------------------------------
Total mortgage loans 379,545 94.7% 359,068 94.9%
- ----------------------------------------------------------------------------------------------------------
Non-mortgage consumer loans 6,836 1.7% 6,431 1.7%
- ----------------------------------------------------------------------------------------------------------
Commercial business loans 14,258 3.6% 13,023 3.4%
- ----------------------------------------------------------------------------------------------------------
Total loans receivable 400,639 100.0% 378,522 100.0%
Less:
Allowance for loan losses (3,344) (3,138)
Deferred loan origination fees (800) (800)
- ----------------------------------------------------------------------------------------------------------
Loans receivable, net $ 396,495 $ 374,584
- ----------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
5. Securities
The amortized cost of available-for-sale securities and their estimated
fair values at September 30, 1999 and June 30, 1999 are as follows:
<TABLE>
<CAPTION>
At September 30, 1999
- -----------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------
Equity Securities: (Dollars in Thousands)
<S> <C> <C> <C>
Mutual fund $ 8,010 -- ($ 95) $ 7,915
Federal Home Loan Bank
of Pittsburgh stock 2,961 -- -- 2,961
U.S. Government and
government agency
obligations 32,000 -- (1,388) 30,612
Mortgage-Backed securities:
Federal Home Loan
Mortgage Corporation 2 -- -- 2
Federal National Mortgage
Association 22,027 -- (782) 21,245
Government National
Mortgage Association 7,526 -- (339) 7,187
Municipal securities 1,999 -- (146) 1,853
- -----------------------------------------------------------------------------------
Total $74,525 -- ($2,750) $71,775
- -----------------------------------------------------------------------------------
<CAPTION>
At June 30, 1999
- --------------------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------
Equity Securities: (Dollars in Thousands)
<S> <C> <C> <C> <C>
Mutual fund $ 8,010 -- ($ 63) $ 7,947
Federal Home Loan
Mortgage Corporation
common stock 89 27 -- 116
Federal National
Mortgage Association
stock 8 20 -- 28
Federal Home Loan Bank
of Pittsburgh stock 2,961 -- -- 2,961
U.S. Government and
government agency
obligations 35,000 -- (1,123) 33,877
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 securities 1,999 -- (109) 1,890
- --------------------------------------------------------------------------------------
Total $82,296 $ 103 ($2,344) $80,055
- --------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
6. Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which was subsequently amended.
This statement standardizes the accounting for derivative instruments, including
certain derivative instruments imbedded in other contracts, and those used for
hedging activities, by requiring that an entity recognize those items as assets
or liabilities in the statement of financial position and measure them at fair
value. The Statement categorized derivatives used for hedging purposes as either
fair value hedges, cash flow hedges, foreign currency fair value hedges, foreign
currency cash flow hedges, or hedges of certain foreign currency exposures. The
Statement generally provides for matching of gain or loss recognition on the
hedging instrument with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, so long as
the hedge is effective. Prospective application of SFAS No. 133 is required for
all fiscal years beginning after June 15, 2000, however earlier application is
permitted. Currently, the Company does not use any derivative instruments nor
does it engage in any hedging activities. The Company has not yet determined the
impact, if any, of this Statement, including its provisions for the potential
reclassification of investment securities, on results of operations, financial
condition or equity.
7. Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only component of other comprehensive income is the change in the estimated
fair value of investment securities available-for-sale.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Comprehensive income: (Dollars in Thousands)
<S> <C> <C>
Net income $ 1,207 $ 1,038
Other comprehensive income (loss) net of tax:
Net change in unrealized gain (loss)
on securities available-for-sale (320) 144
Less: Reclassification adjustments
for losses included in net income -- --
Other Comprehensive Income (loss) (320) 144
----------------------------------------------------------------------------
Comprehensive Income: $ 887 $ 1,182
----------------------------------------------------------------------------
</TABLE>
8. Benefit Plans
The Company approved its 1999 Stock Option Plan (the "Option Plan") and
the 1999 Recognition and Retention Plan (the "RRP") on July 27, 1999 at a
special shareholders meeting. Pursuant to the RRP, the Company acquired 89,635
shares at a cost of $929,000. There have been no shares or stock options granted
pursuant to these plans at September 30, 1999.
Stock Option Plan
The Company will account for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock issued to Employees", and related interpretations, as permitted by
Statement of Financial Accounting Standards Statement No. 123, "Accounting for
Stock-based Compensation." As such, compensation expense will be recognized at
the date of an option grant only if the current market price of the underlying
stock exceeds the exercise price of the option. Statement No. 123 requires
entities which continue to apply the provisions of APB Opinion No. 25 to provide
proforma disclosures of net income and earnings per share for stock options
granted which proforma disclosures are based on the fair-value based method
defined in Statement No. 123.
RRP
Compensation expense on RRP shares granted will be recognized ratably over
the vesting period in an amount which totals the market price of the Company's
stock at the date of grant.
9
<PAGE>
Item 2. Management's Discussion and Analysis
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples for forward-looking
statements include, but are not limited to, estimates with respect to the
financial condition, results of operations and business of the Company that are
subject to various factors which could cause actual results to differ materially
from these estimates. These factors include, but are not limited to, general
economic conditions, changes in interest rates, deposit flows, loan demand, real
estate values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting the
Company's operations, pricing, products and services.
Changes in Financial Condition
General. Total assets of the Company increased by $18.0 million or 3.8% to
$490.0 million at September 30, 1999 compared to $472.0 million at June 30,
1999. This increase is reflected primarily in an increase of $21.9 million in
loans, partially offset by a decrease of $8.3 million in securities available
for sale at September 30, 1999 compared to June 30, 1999. The increases in loans
were funded by increases of $796,000 in deposits and $19.9 million in Federal
Home Loan Bank borrowings.
Cash and cash equivalents. Cash and cash equivalents amounted to $9.0
million and $4.9 million at September 30, 1999 and June 30, 1999, respectively.
Assets Available for Sale. At September 30, 1999, the Company's assets
available for sale consisted of $71.8 million in securities compared to $80.1
million in securities at June 30, 1999. This decrease in securities was due
primarily to normal amortization payments on mortgage-backed securities and the
sale of $5.5 million of government agency, mortgage-backed and equity securities
during the quarter. The sale of the securities was executed to take advantage of
rising interest rates available in the loan portfolio.
At September 30, 1999 the Company had net unrealized losses on securities
available for sale of $2.8 million compared to net unrealized losses on
securities available for sale of $2.2 million at June 30, 1999.
Loans. The net loan portfolio of the Company increased from $374.6 million
at June 30, 1999 to $396.5 million at September 30, 1999. The increase in the
Company's net loan portfolio was due, in large part, to the Company's continuing
efforts to expand its lending activities with a concentrated effort to
proportionally expand multi-family, commercial real estate, consumer and
business loans.
During the three months ended September 30, 1999, the Company's
single-family residential mortgage loans in portfolio increased by $7.4 million
or 3.2%. During the same period, the Company's commercial real estate mortgage
loans increased by $7.7 million or 14.5% and its home equity loans increased by
$4.4 million or 8.1%. During the quarter, the Company's multi-family residential
mortgage loans, outstanding construction loans, and non-mortgage consumer loans
all increased modestly. Such changes in the Bank's loan portfolio reflect the
10
<PAGE>
Company's continuing efforts to diversify its loan portfolio and increase its
holdings in loans which generally have higher yields and shorter terms to
maturity and/or repricing than single-family residential mortgage loans.
However, commercial real estate loans, multi-family residential mortgage loans,
construction loans, home equity loans and consumer loans all generally are
deemed to have increased credit risk characteristics in comparison to
single-family residential mortgage loans.
The following table sets forth information with respect to non-performing
assets identified by the Company, including non-accrual loans and other real
estate owned.
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
-------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Accruing loans 90 days or more
past due:
Mortgage loans $ 205 $ 4
------ ------
Total 205 4
Non-accrual loans:
Mortgage loans:
Single-family residential 1,095 1,006
Home equity 10 37
Non-mortgage consumer loans 26 8
Commercial business loans 9 13
------ ------
Total 1,140 1,064
------ ------
Total non-performing loans 1,345 1,068
------ ------
Other real estate owned, net 281 --
------ ------
Total non-performing assets $1,626 $1,068
====== ======
Non-performing loans to total loans 0.41% 0.32%
Non-performing assets to total assets 0.33% 0.27%
</TABLE>
11
<PAGE>
Intangible Assets. The Company's intangible assets amounted to $1.8
million and $2.0 million at September 30, 1999 and June 30, 1999, respectively.
Such assets are comprised of goodwill and a core deposit intangible resulting
from the Bank's purchase of three branch offices from another institution in
March 1994. The goodwill is being amortized on a straight-line basis over 15
years while the core deposit intangible is being amortized on an accelerated
basis over 10 years.
Other Assets. The Company's other assets were relatively unchanged during
the quarter.
Liabilities. The Company's total liabilities increased by $18.2 million,
or 4.4%, to $431.8 million at September 30, 1999 compared to $413.6 million at
June 30, 1999. The primary reason for such increase was a $19.9 million increase
in Federal Home Loan Bank ("FHLB") advances. The Company`s deposits grew
$796,000 during the quarter. The Company continued its efforts in soliciting
non-interest checking and business accounts.
Stockholders' Equity. Total stockholders' equity of the Company amounted
to $58.2 million or 11.9% of assets at September 30, 1999 compared to $58.4
million or 12.4% of total assets at June 30, 1999. Total stockholders' equity of
the Company included net unrealized losses, net of taxes, of $1.7 million and
$1.4 million on securities available for sale at September 30, 1999 and June 30,
1999, respectively. The Company paid a cash dividend aggregating $186,000 during
the quarter. The Company executed the repurchase of 89,635 shares for the RRP
authorized at the special shareholders meeting on July 27, 1999. The shares were
purchased at a market price of $929,000 which is reflected as a contra equity
component of stockholders' equity.
Results of Operations
General - Net income for the three month September 30, 1999 was $1.2
million. This compares to net income of $1.0 for the respective prior year
period. Net income grew as a result of a continuing larger interest-earning
asset base in part resulting from the Company's initial public offering in
December 1998. The increase in net interest income was partially offset by
increases in the provision for loan losses and non-interest expense.
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 and non-interest-bearing
deposit liabilities.
For the three months ended September 30, 1999 net interest income
increased $989,000 or 27.1% compared to three months ended September 30, 1998.
The increase was a result of increases in interest rate spread and ratio of
interest-earning assets to interest-bearing liabilities. Specifically, interest
rate spread increased seven basis points from 3.06% at September 30, 1998
12
<PAGE>
to 3.13% at September 30, 1999. The average yield on interest-earning assets
decreased 21 basis points which was more than offset by a 28 basis point
decrease in the rate paid on interest-bearing liabilities. Average
interest-earning assets increased $79.1 million or 20.2% from $389.9 million at
September 30, 1998 to $469.0 million at September 30, 1999. The increase in
interest-earning assets more than offset the increase in interest-bearing
liabilities which for the three month period increased on average $48.3 million
from September 30, 1998 to September 30, 1999. The ratio of average
interest-earning assets to average interest-bearing liabilities increased from
116.05% at September 30, 1998 to 122.02% at September 30, 1999. The combination
of an increase in the interest rate spread along with an increase in the ratio
of interest-earning assets to interest-bearing liabilities resulted in an
increase of the net interest margin from 3.75% at September 30, 1998 to 3.96% at
September 30, 1999.
The following tables set forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company 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. Given that the Company had only nominal amounts of tax-exempt
investments, the data below is not presented on a tax equivalent basis.
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable: (1)
Mortgage loans $367,925 $ 7,220 7.85% $318,889 $ 6,498 8.15%
Non-mortgage consumer loans 6,582 116 6.99 5,265 85 6.41
Commercial business loans 13,236 320 9.59 6,553 165 9.99
-------- -------- -------- --------
Total loans 387,743 7,656 7.83 330,707 6,748 8.10
Securities 75,950 1,215 6.35 43,922 661 5.97
Other interest-earning assets 5,263 27 2.04 15,313 196 5.08
-------- -------- -------- --------
Total interest-earning assets 468,956 $ 8,898 7.53 389,942 $ 7,605 7.74
Non-interest-earning assets 12,142 -------- 10,025 --------
-------- --------
Total assets $481,098 $399,967
======== ========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 58,257 $ 337 2.30 $ 46,133 $ 255 2.19
Savings accounts 49,577 255 2.04 41,014 218 2.11
Certificates of deposit 249,428 3,340 5.31 230,265 3,266 5.63
-------- -------- -------- --------
Total deposits 357,262 3,932 4.37 317,412 3,739 4.67
Total borrowings 23,676 328 5.50 15,076 215 5.66
Total escrows 3,398 6 0.70 3,535 8 0.90
-------- -------- -------- --------
Total interest-bearing liabilities 384,336 $ 4,266 4.40 336,023 $ 3,962 4.68
-------- -------- --------
Non-interest-bearing liabilities 37,582 26,699
-------- --------
Total liabilities 421,918 362,722
Total equity 59,180 37,245
-------- --------
Total liabilities and equity $481,098 $399,967
-------- --------
Net interest-earning assets $ 84,620 $ 53,919
======== ========
Net interest income/interest rate spread $ 4,632 3.13% $ 3,643 3.06%
======== ====== ======== ======
Net interest margin 3.96% 3.75%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 122.02% 116.05%
====== ======
</TABLE>
- ----------
(1) The average balance of loans receivable includes loans available-for-sale
and nonperforming loans, interest on which is recognized on a cash basis.
13
<PAGE>
Interest Income - Interest income on average loans increased $908,000 or
13.5%. The increase in balances on average loans more than offset the decline in
average loan rates. Interest income on average securities increased $554,000 or
83.8%. The increase in average securities balances and increase in average
securities rates accounted for the change. The increases in average balances
were partially a result of the deployment of proceeds from the Company's
December 1998 stock offering.
Interest Expense - Interest expense on deposit accounts increased $193,000
or 5.2%. The increase in balances on average deposits was partially offset by a
decrease in average deposit rates. Interest expense on borrowings increased
$113,000 or 52.6%. The increase in borrowings was partially offset by a decrease
in average borrowing rates. Management has continued to be competitive with
interest rates paid on deposits. Savings balances continue to increase during
the three months ended September 30, 1999 due to the Company's continued
promotional efforts to attract new customers during the period.
Provision for Loan Losses - The Company's provision for loan losses was
$270,000 for the three month period ended September 30, 1999. This compares to
the provision for loan losses of $90,000 for the same period of the prior year.
The increase is a result of continued loan growth and the Company's desire to
allocate appropriate provisions given the inherent risk of a diversifying loan
portfolio, and the replenishment of loan loss reserves for current period
charge-offs.
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
--------------------------
1999 1998
--------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
Allowance at beginning of period $3,138 $2,665
------ ------
Provisions 270 90
Charge-offs:
Mortgage loans 51 --
Non-mortgage consumer loans 13 --
Commercial business loans -- --
------ ------
Total charge-offs 64 --
Recoveries -- --
------ ------
Allowance at end of period $3,344 $2,755
====== ======
Allowance for loan losses to total nonperforming
loans at end of period 206.80% 196.36%
======
Allowance for loan losses net of deferred fees to
loans at end of period 0.83% 0.83%
====== ======
Ratio of charge-offs to average loans 0.02% N/A
====== ======
</TABLE>
Non-interest Income - Non-interest income decreased $38,000 for the three
months ended September 30, 1999 as compared to the same respective period in the
prior year. The three month period decrease was due primarily to net loan
servicing income, which declined $64,000 from the respective prior year period.
Net loan servicing income declined due to a reduction in mortgage servicing
rights recognized as a result of reduced mortgage loan sale activity. The
14
<PAGE>
decline in servicing income was partially offset by an increase of $38,000 in
other service charges and fees for the three months ended September 30, 1999.
Non-interest Expense - Non-interest expense increased $531,000 for the
three months ended September 30, 1999 compared to the same period in the prior
year. Compensation and employee benefits expense increased due to general
increases in salary levels and benefits and in the number of employees at the
Company resulting from the operation of two additional banking offices and an
expanding lending function as part of the Company's loan diversification plan.
Furniture and fixture expense increases were the result of management's
continuing efforts to update equipment and facilities and the opening of its
eighth and ninth full-service banking offices. Data processing costs increased
due to general increased levels of numbers of accounts and testing, preparation
and equipment replacement for Year 2000 contingencies. Other operating expenses
increased as a result of a operational expenses of servicing increasing loan and
deposit portfolio's as well as professional costs associated with the operation
of a public company.
Income Tax Expense - The provision for income taxes for the three month
period ended September 30, 1999 was comparable to the first quarter of fiscal
1999.
Liquidity and Commitments
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing, and financing activities. The Company's
primary sources of funds are deposits, amortizations, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
The Company also utilizes borrowings, generally in the form of FHLB advances, as
a source of funds. While scheduled payments from the amortization of loans and
mortgage related securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Company invests excess funds in
short-term interest earning assets which provide liquidity to meet lending
requirements.
Liquidity management is both a daily and long term function of business
management. Excess liquidity is generally invested in short-term investments
such as U.S. Treasury Securities. The Company uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a portfolio
of mortgage backed and mortgage related securities and investment securities. At
September 30, 1999, the total approved investment and loan origination
commitments outstanding amounted to $23.3 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 1999 totaled $167.4
million. Investment securities scheduled to mature in one year or less at
September 30, 1999 totaled $1.0 million. Based on historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company. The Company is required to maintain a minimum of 4% of its
assets in regulatory eligible liquid investments. As of September 30, 1999, the
Company had 20.3% in eligible liquid investments. The Company anticipates that
it will continue to have sufficient funds, together with borrowings, to meet its
current commitments.
15
<PAGE>
Capital
At September 30, 1999 and June 30, 1999, the Bank had regulatory capital
which was well in excess of regulatory limits set by the Office of Thrift
Supervision. The current requirements and the Bank's actual capital levels are
detailed below:
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Capital Purposes Action Provisions
------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Tangible capital
(to tangible assets) $46,590 9.5% $ 7,352 1.5% $ 9,803 2.0%
Core Capital
(to adjusted tangible assets) 46,590 9.5 19,602 4.0 24,502 5.0
Tier 1 capital
(to risk-weighted assets) 46,590 16.2 N/A N/A 17,278 6.0
Risk-based capital
(to risk-weighted assets) 49,934 17.3 23,037 8.0 28,797 10.0
As of June 30, 1999:
Tangible capital
(to tangible assets) $46,180 9.8 $ 7,079 1.5 $ 9,438 2.0
Core capital
(to adjusted tangible assets) 46,180 9.8 18 855 4.0 23,568 5.0
Tier 1 capital
(to risk-weighted assets) 46,180 16.9 N/A N/A 16,352 6.0
Risk-based capital
(to risk-weighted assets) 49,318 18.1 21,803 8.0 27,253 10.0
</TABLE>
Year 2000 Considerations
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 1999. 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 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. 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
16
<PAGE>
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 all of which we believe been
corrected as of September 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 September 30, 1999, all vendors appear to be Year 2000
compliant. As of September 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 75% 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
appear to be 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
17
<PAGE>
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 September 30, 1999, approximately $252,000 has been expended
for the Year 2000 project. It is anticipated that the remaining $48,000 will be
expended over the next three months.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
For a discussion of the Company's asset and liability management policies
as well as the potential impact of interest rate changes upon the market value
of the Company's portfolio equity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation" in the Company's audited financial
statements included in the Company's Annual Report to stockholders for the year
ended June 30, 1999. Management, as part of its regular practices, performs
periodic reviews of the impact of interest rate changes upon the market value of
the Company's portfolio equity. Based on, among other factors, such reviews,
management believes that there are no material change in the market risk of the
Company's asset and liability position since its audited annual report of June
30, 1999.
19
<PAGE>
Part II. OTHER INFORMATION
Item 1. 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 2. Use of Proceeds From Registered Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
a. A Special Meeting of Stockholders ("Special Meeting") of the Company was
held on July 27, 1999.
b. Not applicable.
c. There were 5,143,487 shares of common stock of the Company eligible to be
voted at the Special Meeting, and 4,448,109 shares were represented at the
meeting by the holders thereof, which constituted a quorum. The items
voted upon at the Special Meeting and the vote for each proposal were as
follows:
1. Proposal to approve the Company's 1999 Stock Option Plan:
For Against Abstain
--- ------- -------
4,180,506 238,127 15,796
2. Proposal to adopt the Company's 1999 Recognition and Retention Plan
and Trust Agreement:
For Against Abstain
--- ------- -------
4,153,490 250,238 30,701
d. Not applicable.
Item 5. Other Information
Not applicable.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
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*
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.
(b) Not applicable
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WILLOW GROVE BANCORP, INC.
Date: November 15, 1999 By: /s/ Frederick A. Marcell, Jr.
------------------------------------
Frederick A. Marcell, Jr.
President and Chief Executive Officer
Date: November 15, 1999 By: /s/ John J. Foff, Jr.
-----------------------------------------
John J. Foff, Jr., Senior Vice President,
Chief Financial Officer and Treasurer
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,119
<INT-BEARING-DEPOSITS> 4,890
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,775
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 396,495
<ALLOWANCE> 3,344
<TOTAL-ASSETS> 490,022
<DEPOSITS> 391,477
<SHORT-TERM> 22,000
<LIABILITIES-OTHER> 2,942
<LONG-TERM> 12,914
0
0
<COMMON> 51
<OTHER-SE> 58,161
<TOTAL-LIABILITIES-AND-EQUITY> 490,022
<INTEREST-LOAN> 7,656
<INTEREST-INVEST> 1,242
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,898
<INTEREST-DEPOSIT> 3,932
<INTEREST-EXPENSE> 4,266
<INTEREST-INCOME-NET> 4,632
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,765
<INCOME-PRETAX> 1,859
<INCOME-PRE-EXTRAORDINARY> 1,207
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,207
<EPS-BASIC> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 7.53
<LOANS-NON> 1,140
<LOANS-PAST> 205
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,345
<ALLOWANCE-OPEN> (3,138)
<CHARGE-OFFS> 64
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,344
<ALLOWANCE-DOMESTIC> 3,344
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,018
</TABLE>
