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 December 31, 1998
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 [ ] NO [X]
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 February 16, 1999.
<PAGE>
WILLOW GROVE BANCORP, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 3
Consolidated Statements of Financial Condition at
December 31, 1998 and June 30, 1998 3
Consolidated Statements of Operations - For the Three
and Six-Month Periods Ended December 31, 1998 4
Consolidated Statements of Cash Flows - For the
Six-Months Ended December 31, 1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities and Use of Proceeds 19
Item 3: Defaults upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 20
2
<PAGE>
Willow Grove Bancorp, Inc.
Consolidated Statements of Financial Condition
(In Thousands)
<TABLE>
<CAPTION>
Assets December 31, 1998 June 30, 1998
- -------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Cash and cash equivalents:
Cash on hand and non-interest bearing
deposits $2,738 $2,932
Interest-bearing deposits 16,892 15,359
---------------- ----------------
Total cash and cash equivalents 19,630 18,291
Assets available for sale:
Securities (amortized cost of $75,260 and $47,984,
respectively) 75,487 48,111
Loans 12,152
Loans (net of allowance for loan losses of
$2,895 and $2,665, respectively) 333,838 315,705
Accrued income receivable 1,992 2,109
Property and equipment, net 4,855 4,772
Intangible assets 2,155 2,360
Other assets 1,656 1,874
- ------------------------------------------------------------------------------------------------------
Total Assets $439,613 $405,374
- ------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------
Deposits $364,058 $340,793
Federal Home Loan Bank advances 12,000 21,000
Advance payments from borrowers for taxes 3,107 4,481
Accrued interest payable 365 389
Other liabilities 2,254 2,766
- ------------------------------------------------------------------------------------------------------
Total Liabilities $381,784 $369,429
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; (25,000,000
authorized; 5,143,487 issued and
outstanding as of December 31, 1998) 50 --
Additional paid-in capital 22,295 --
Retained earnings 37,136 35,865
Accumulated other comprehensive income 141 80
Unallocated common stock held by
employee stock ownership plan (ESOP) (1,793) --
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $57,829 $35,945
Total Liabilities and Stockholders' Equity $439,613 $405,374
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements
3
<PAGE>
Willow Grove Bancorp, Inc.
Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 31, December 31,
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable $ 6,697 $ 6,317 $ 13,445 $ 12,334
Securities, primarily taxable 1,058 762 1,914 1,588
- --------------------------------------------------------------------------------------------------------------
Total interest income 7,755 7,079 15,359 13,922
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 3,955 3,659 7,695 7,233
Borrowings 180 87 395 178
Advanced payment from borrowers
for taxes 5 6 12 15
- --------------------------------------------------------------------------------------------------------------
Total interest expense 4,140 3,752 8,102 7,426
- --------------------------------------------------------------------------------------------------------------
Net interest income 3,615 3,327 7,257 6,496
Provision for loan losses 140 90 230 180
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,475 3,237 7,027 6,316
- --------------------------------------------------------------------------------------------------------------
Non-interest income:
Service charges and fees 211 153 425 293
Loss on sale of securities available
for sale -- -- -- (55)
Gain (loss) on sale of loans available
for sale (1) 10 11 5
Loan servicing income, net 69 34 142 114
- --------------------------------------------------------------------------------------------------------------
Total non-interest income 279 197 578 357
- --------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and employee benefits 1,300 1,188 2,564 2,222
Occupancy 136 141 280 263
Furniture and equipment 75 69 143 128
Federal insurance premium 49 49 100 96
Amortization of intangible assets 103 103 205 205
Data processing 105 83 200 165
Advertising 122 100 190 172
Foundation expense 896 0 896 0
Community enrichment 0 89 100 182
Other expense 407 307 719 583
- --------------------------------------------------------------------------------------------------------------
Total non-interest expense 3,193 2,129 5,397 4,016
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 561 1,305 2,208 2,657
Income taxes 226 471 837 956
- --------------------------------------------------------------------------------------------------------------
Net income $ 335 $ 834 $ 1,371 $ 1,701
==============================================================================================================
</TABLE>
See accompanying notes to the consolidated finanical statments
4
<PAGE>
Willow Grove Bancorp, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Net cash flows from operating activities:
Net income $1,371 $1,701
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 192 175
Amortization of premium and accretion of discount, net 42 (72)
Amortization of intangible assets 205 205
Foundation expense 896 --
Provision for loan losses 230 180
Gain on sale of loans available for sale (11) (5)
Loss on sale of securities available for sale -- 55
Decrease in deferred loan fees (228) (28)
Decrease in accrued income receivable 117 123
Decrease (increase) in other assets 485 (78)
Decrease in accrued interest payable (24) (61)
Deferred income tax expense (benefit) (612) --
Increase (decrease) in other liabilities (304) 339
Originations and purchases of loans available for sale (2,865) (10,477)
Proceeds from sale of loans available for sale 15,028 15,768
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $14,522 $7,825
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans ($18,137) ($23,087)
Purchase of securities available for sale 53,521 (23,546)
Proceeds from maturities and calls of securities held to maturity -- 3,999
Proceeds from sales and calls of securities available for sale 17,000 23,175
Principal repayments of securities available for sale 9,203 3,234
Purchase of property and equipment, net (275) (842)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ($45,730) ($17,067)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits $23,265 $14,350
Net increase (decrease) in FHLB advances with
original maturity less than 90 days 7,000 --
Net increase (decrease) in FHLB advances with original maturity
greater than 90 days -- 1,000
Repayment of FHLB advances with original maturity greater
than 90 days (2,000) --
Net increase (decrease) in advance payments from borrowers for
taxes (1,374) (1,213)
Proceeds from stock issuance, net 19,656 --
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 32,547 $14,137
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $1,339 $4,895
Cash and cash equivalents:
Beginning of period $18,291 $4,204
- --------------------------------------------------------------------------------------------------------------
End of period $19,630 $9,099
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash and cash flow information:
Interest paid $8,126 $7,485
Income taxes paid $1,190 $1,066
- --------------------------------------------------------------------------------------------------------------
Noncash items:
Change in unrealized gain (loss) on securities available for sale
(net of taxes of $39 and $210 in 1998 and 1997, respectively) $61 $342
</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
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, 1998 contained in the Company's Prospectus dated
November 12, 1998. The results for the six months ended December 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 1999. In particular, it is noted that during the remainder of
fiscal 1999, the Company will be recording additional charges resulting from the
Reorganization as previously described in the Company's registration statement
on Form S-1, filed on September 18, 1998, as amended. During the second quarter
of fiscal year 1999 the Company recorded a pre-tax expense of $896,000 in
conjunction with the formation of the Foundation.
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 issuance costs generated proceeds of $21.4 million,
including shares issed 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 for quarters current and prior to December 31, 1998 is
not meaningful, as the Bank's Reorganization was not completed until December
23, 1998.
4. Loan Portfolio
The Bank's Loan Portfolio consisted of the following at the dates
indicated:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
------------------------------ ---------------------------
Percent of Percent of
Amount Total Amount Total
----------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single family residential $ 224,243 64.5% $ 230,979 70.3%
Multi-family residential 11,594 3.3 7,500 2.3
Commercial real estate 34,664 10.0 24,478 7.4
Construction 17,170 4.9 13,627 4.2
Home equity 45,060 13.0 41,366 12.6
- -----------------------------------------------------------------------------------------------------------
Total mortgage loans $ 332,731 94.2% $ 317,950 96.8%
- -----------------------------------------------------------------------------------------------------------
Non-mortgage consumer loans $ 5,950 1.7% $ 4,930 1.5%
- -----------------------------------------------------------------------------------------------------------
Commercial business loans $ 9,237 2.7% $ 5,437 1.7%
- -----------------------------------------------------------------------------------------------------------
Total loans receivable $ 347,918 100.0% $ 328,317 100.0%
Less:
Undisbursed portion of loan proceeds (10,321) (8,855)
Allowance for loan losses (2,895) (2,665)
Deferred loan origination fees (864) (1,092)
- -----------------------------------------------------------------------------------------------------------
Loans receivable, net $ 333,838 $ 315,705
- -----------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
5. Securities
The amortized cost of available-for-sale securities and their estimated
fair values at December 31, 1998 and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ---------------- -------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Equity Securities:
Mutual fund $8,010 ($39) $7,971
Federal Home Mortgage
Loan Corporation
preferred stock 100 100
Federal Home Loan
Mortgage Corporation
common stock 89 $32 121
Federal National
Mortgage Association
stock 8 21 29
Federal Home Loan Bank
of Pittsburgh stock 2,733 2,733
U.S. Government and
government agency
securities 28,995 16 (96) 28,915
Mortgage-Backed securities:
Federal Home Loan
Mortgage Corporation 2 2
Federal National Mortgage
Association 17,452 203 (15) 17,640
Government National
Mortgage Association 3,771 106 3,877
Municipal security 100 (1) 99
Federal Home Loan Bank
Certificates of Deposit 14,000 14,000
- -------------------------------------------------------------------------------------------------------------
Total $75,260 $347 ($120) $75,487
- -------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1998
------------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ---------------- -------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Equity Securities:
Mutual fund $7,010 ($25) $6,985
Federal Home Mortgage
Loan Corporation
preferred stock 100 $1 101
Federal Home Loan
Mortgage Corporation
common stock 89 5 94
Federal National
Mortgage Association
stock 8 16 24
Federal Home Loan Bank
of Pittsburgh stock 2,733 2,733
U.S. Government and
government agency
securities 20,004 30 (35) 19,999
Mortgage-Backed Securities:
Federal Home Loan
Mortgage Corporation 3 3
Federal National Mortgage
Association 13,532 112 (100) 13,544
Government National
Mortgage Association 4,405 127 4,532
Municipal security 100 (4) 96
- -------------------------------------------------------------------------------------------------------------
Total $47,984 $291 ($164) $48,111
- -------------------------------------------------------------------------------------------------------------
</TABLE>
6. Recent Accounting Pronouncements
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." 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, 1999, 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 earnings, financial condition or
equity.
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 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. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998 with earlier adoption permitted. This
Statement provides a one-time opportunity for an enterprise to reclassify, based
on 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. The Company has not yet determined the
impact, if any of this Statement, including, if applicable, its provisions for
the potential reclassifications of certain investment securities, on earnings,
financial condition or equity.
9
<PAGE>
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." The statement is effective for
all fiscal quarters of all fiscal years beginning after January 1, 1999. The
statement changes the way mortgage banking firms account for certain securities
and other interests they retain after securitizing mortgage loans that were held
for sale.
In management's opinion SFAS No. 134 when adopted will not have a material
effect on the Company's financial statements.
7. Comprehensive Income
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only component of other comprehensive income is the change in the estimated
fair value of investment securities available-for-sale.
Three Months Ended Six Months Ended
December 31, December 31,
---------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
(Dollars in Thousands)
Comprehensive income:
Net income .............................. $ 335 $ 834 $1,371 $1,701
Other Comprehensive Income net of tax:
Net change in unrealized gain (loss)
on securities available-for-sale ... (82) (4) 61 206
Less: Reclassification adjustments
for losses included in net income .. -- -- -- 136
Other Comprehensive Income (loss)........ (82) (4) 61 342
------ ------ ------ ------
Comprehensive Income: ................... $ 253 $ 830 $1,432 $1,907
====== ====== ====== ======
10
<PAGE>
Item 2. Management's Discussion and Analysis
This Form 10-Q contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. In
addition, the words, "anticipate," "believe," "estimate," "expect," "intent,"
"should" and similar expressions, or the negative thereof, as they relate to the
Company or the Company's management, are intended to identify forward-looking
statements. Such statements reflect the current views of the Company 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. The Company does not intend to update these
forward-looking statements.
Changes in Financial Condition
General. Total assets of the Company increased by $34.2 million or 8.4% to
$439.6 million at December 31, 1998 compared to $405.4 million at June 30, 1998.
This increase is reflected primarily as an increase of $1.3 million in cash and
cash equivalents, an increase of $27.4 million in securities, and an increase of
$18.1 million in loans. The increases in assets were funded by increases of
$23.3 million in deposits and $19.7 million of net stock subscription cash
proceeds (net of Reorganization costs of $960,000).
Cash and cash equivalents. Cash and cash equivalents amounted to $19.6
million and $18.3 million at December 31, 1998 and June 30, 1998, respectively.
Assets Available for Sale. At December 31, 1998, the Company's assets
available for sale consisted of $75.5 million in securities compared to $48.1
million in securities and $12.2 million in loans, respectively, at June 30,
1998. This increase in assets available for sale of $15.2 million or 25.2% was
related to the purchase of additional securities, as a means of deploying a
significant poertion of the recently raised equity capital.
At December 31, 1998 the Company had an unrealized gain, net of taxes, on
securities available for sale of $141,000, which is an increase of $61,000
compared to June 30, 1998.
Loans. The net loan portfolio of the Company increased from $315.7 million
at June 30, 1998 to $333.8 million at December 31, 1998. The increase in the
Bank's net loan portfolio during 1998 was due, in large part, to the Bank's
efforts to expand its lending activities, other than to single-family
residential first mortgage loans.
The following table sets forth information with respect to non-performing
assets identified by the Bank, including non-accrual loans and other real estate
owned.
December 31, 1998 June 30, 1998
----------------- -------------
(Dollars in Thousands)
Accruing loans 90 days or more past due:
Mortgage loans ........................... $ 463 $ 142
Other loans .............................. -- --
------ ------
Total accruing loans ................... $ 463 $ 142
Non-accrual loans:
Mortgage loans:
Single-family residential .............. 1,010 1,249
Multi-family residential ............... -- --
Commercial real estate ................. -- --
Construction ........................... 1 --
Home equity ............................ 1 --
Non-mortgage consumer loans .............. 58 2
Commercial business loans ................ -- 96
------ ------
Total non-accruing loans ............... $1,069 $1,347
------ ------
Total non-performing
loans....... ......................... $1,532 $1,489
------ ------
Other real estate owned, net ................ -- --
------ ------
Total non-performing assets ............ $1,532 $1,489
====== ======
Non-performing loans to total
loans...................................... 0.46% 0.47%
Non-performing assets to total assets ....... 0.35% 0.37%
Intangible Assets. The Company's intangible assets amounted to $2.2 million
and $2.4 million at December 31, 1998 and June 30, 1998, respectively. Such
assets are comprised of goodwill and
11
<PAGE>
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.
Liabilities. The Company's total liabilities increased by $12.4 million, or
3.4%, to $381.8 million at December 31, 1998 compared to $369.4 million at June
30, 1998. The primary reason for such increase was a $23.3 million increase in
deposits, which was partially offset by a $9.0 million decrease in Federal Home
Loan Bank ("FBLB") advances. The Company attributes the growth in deposits to
its increase in certificates of deposit and to its continued efforts in
soliciting non-interest checking and business accounts.
Equity. Total equity of the Company amounted to $57.8 million or 13.1% of
assets at December 31, 1998 compared to $35.9 million or 8.9% of total assets at
June 30, 1998. The primary reason for the significant increase to equity was the
$19.7 million net proceeds raised from the Company's initial public offering.
Total equity of the Company included $141,000 and $80,000 of unrealized gain,
net of taxes on securities available for sale at December 31, 1998 and June 30,
1998, respectively. The increase in retained earnings from June 30, 1998 to
December 31, 1998 reflects the income for the six month period of $1.4 million,
net of capitalization of the MHC.
12
<PAGE>
Results of Operations
General - Net income for the three months and six month periods ended
December 31, 1998 was $335,000 and $1.4 million, respectively. This compares to
net income of $834,000 and $1.7 million for the same respective periods of the
prior year.
Net Interest Income - Net interest income increased during the three and
six months ended December 31, 1998 compared to the prior respective periods.
Increases in the average balances of interest-earning assets during each of the
periods in 1998 more than offset declines in net interest spreads during such
periods.
The following tables set forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Bank from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods. Given that the Company had only nominal amounts of tax-exempt
investments, the date below is shown without tax effects.
<TABLE>
<CAPTION>
Six Months Ended December 31,
----------------------------------------------------------------------------
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:(1)
Mortgage loans ....................... $317,019 $12,924 8.15% $296,701 $12,149 8.19%
Non-mortgage consumer loans .......... 5,522 177 6.36 3,469 110 6.29
Commercial business loans ............ 7,507 344 9.09 2,361 75 6.30
-------- -------- -------- --------
Total loans ........................ $330,048 $13,445 8.08 $302,531 $12,334 8.09
Securities ............................ 41,579 1,222 5.83 43,319 1,431 6.55
Other interest-earning assets ......... 28,424 692 4.83 6,397 157 4.87
-------- -------- -------- --------
Total interest-earning assets ...... $400,051 $15,359 7.62 352,247 $13,922 7.84
-------- --------
Non-interest-earning assets ............. 10,328 10,353
-------- --------
Total assets ....................... $410,379 $362,600
======== ========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts ...... $72,337 $527 1.45 $56,615 $444 1.56
Savings accounts ................... 41,234 440 2.12 35,983 392 2.16
Certificates of deposit ............ 237,926 6,728 5.61 223,434 6,397 5.68
-------- -------- -------- --------
Total deposits ................... $351,497 7,695 4.34 316,032 $7,233 4.54
Total borrowings ...................... 14,185 395 5.52 6,875 178 5.14
Total escrows ......................... 3,048 12 0.78 2,744 15 1.08
-------- -------- -------- --------
Total interest-bearing liabilities .... 368,730 $8,102 4.36 $325,651 $7,426 4.52
-------- --------
Non-interest bearing liabilities ........ 3,803 1,934
-------- --------
Total liabilities ................ 372,533 $327,585
Total equity ............................ 37,846 35,015
-------- --------
Total liabilities and equity ..... $410,379 $362,600
======== ========
Net interest-earning assets ............. $31,321 $26,596
======== ========
Net interest income/interest rate spread $7,257 3.26% $6,496 3.32%
======== ======== ======== ========
Net interest margin ..................... 3.60% 3.66%
======== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.49% 108.17%
======== ========
</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>
<TABLE>
<CAPTION>
Three Months Ended December 31,
----------------------------------------------------------------------------
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:(1)
Mortgage loans ....................... $315,164 $6,414 8.14% $301,647 $6,203 8.23%
Non-mortgage consumer loans .......... 5,780 92 6.31 3,789 61 6.39
Commercial business loans ............ 8,446 191 8.97 2,458 53 8.55
-------- -------- -------- --------
Total loans ........................ $329,390 $6,697 8.07 $307,894 $6,317 8.14
Securities ............................ $39,234 $562 5.68 41,084 $679 6.56
Other interest-earning assets ......... 41,534 496 4.74 7,115 83 4.63
-------- -------- --------
Total interest-earning assets ...... $410,158 $7,755 7.50 $356,093 $7,079 7.89
-------- --------
Noninterest-earning assets .............. 10,632 10,460
-------- --------
Total assets ....................... $420,790 $366,553
======== ========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts ...... $75,647 $272 1.43 $57,663 $222 1.53
Savings accounts ................... 41,454 222 2.12 35,553 188 2.10
Certificates of deposit ............ 245,586 3,461 5.59 226,796 3,249 5.68
-------- -------- -------- --------
Total deposits ................... $362,687 $3,955 4.33 $320,012 $3,659 4.54
Total borrowings ...................... 13,293 180 5.37 6,707 87 5.15
Total escrows ......................... 2,559 5 0.78 2,232 6 1.07
-------- -------- -------- --------
Total interest-bearing liabilities .... $378,539 $4,140 4.34 $328,951 $3,752 4.53
-------- --------
Non-interest bearing liabilities ........ 3,803 1,974
-------- --------
Total liabilities ................ $382,342 $330,925
Total equity ............................ 38,448 35,628
-------- --------
Total liabilities and equity ..... $420,790 $366,553
======== ========
Net interest-earning assets ............. $31,619 $27,142
======== ========
Net interest income/interest rate spread $3,615 3.16% $3,327 3.36%
======== ======= ======== ======
Net interest margin ..................... 3.50% 3.71%
======= ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.35% 108.25%
======= ======
</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.
Interest Income - Interest income increased $676,000 and $1.4 million for
the three and six months ended December 31, 1998. These increases resulted
primarily from increases in the average balances of loans and investments.
Interest Expense - Interest expense on deposits increased $296,000 and
$462,000, respectively, for the three and six month periods ended December 31,
1998. During 1998, management has continued to be competitive with interest
rates paid on deposits. Also, savings balances increased during the three months
ended December 31, 1998 due to the Bank's continuing promotional efforts to
attract new customers during the period.
14
<PAGE>
Provision for Loan Losses - The Company's provision for loan losses was
$140,000 and $230,000 for the three month and six month periods ended December
31, 1998, respectively. This compares to provision for loan losses of $90,000
and $180,000 for the same respective periods of the prior year.
For the Six Months
Ended
December 31, 1998
----------------------
(Dollars in Thousands)
Allowance at beginning of period $ 2,665
---------
Provisions 230
Charge-offs:
Mortgage loans --
Non-mortgage consumer loans --
Commercial business loans --
---------
Total charge-offs --
Recoveries --
---------
Allowance at end of period $ 2,895
=========
Allowance for loan losses to total
nonperforming loans at end of period 188.94%
=========
Allowance for loan losses to total loans
at end of period 0.86%
=========
Ratio of charge-offs to average loans 0.0%
=========
Non-interest Income - Non-interest income increased $82,000 and $221,000,
respectively, for the three and six months ended December 31, 1998 as compared
to the same periods in 1997. This was due to an increase in service charges and
fees and increased net loan servicing income and a loss on sale of securities
available-for-sale in the 1997 six month period.
Non-interest Expense - Non-interest expense increased $1.1 million and $1.4
million, respectively, for the three and six months ended December 31, 1998
compared to the same periods in the prior year. Compensation and employee
benefits expense increased due to general increases in salary levels and
benefits and in number of employees at the Company. Furniture and fixture
expense increases were the result of management's continuing efforts to update
equipment and facilities. Data processing costs increased due to general
increased levels of numbers of accounts and testing and preparation for Year
2000 contingencies. Advertising expense increased due to managements's efforts
to utilize a more targeted approach to marketing. The Company also had a pre-tax
expense of $896,000 as a result of the initial contribution to the Foundation.
Income Tax Expense - The provision for income taxes for the three and six
month periods ended December 31, 1998 decreased from the comparable 1997 periods
due to a lower level of pre-tax earnings.
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,
15
<PAGE>
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
December 31, 1998 the total approved investment and loan origination commitments
outstanding amounted to $40.1 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1998 totaled $73.1 million.
Investment securities scheduled to mature in one year or less at December 31,
1998 totaled $15.0 million. Based on historical experience, management believes
that a significant portion of maturing deposits will remain with the Company.
The Company anticipates that it will continue to have sufficient funds, together
with borrowings, to meet its current commitments.
Capital
At December 31, 1998 and June 30, 1998, 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 December 31, 1998:
Tangible capital
(to tangible assets) $45,402 10.4% 6,608 1.5% N/A N/A
Core Capital
(to adjusted tangible assets) 45,402 10.4 13,146 3.0 21,910 5.0
Tier 1 capital
(to risk-weighted assets) 45,402 18.9 9,783 4.0 14,674 6.0
Risk-based capital
(to risk-weighted assets) 48,303 19.7 19,566 8.0 24,457 10.0
As of June 30, 1998:
Tangible capital
(to tangible assets) $33,505 8.3 $6,038 1.5 N/A N/A
Core capital
(to adjusted tangible assets) 33,505 8.3 12,075 3.0 $20,126 5.0
Tier 1 capital
(to risk-weighted assets) 33,505 13.8 9,719 4.0 14,578 6.0
Risk-based capital
(to risk-weighted assets) 36,170 14.9 19,438 8.0 24,297 10.0
</TABLE>
16
<PAGE>
Year 2000 Considerations
In order to be ready for the year 2000 (the "Year 2000 Issue"), the Company
has developed a Year 2000 Action and Assessment Plan (the "Action Plan") which
was presented to the Board of Directors during February 1998. The Action Plan
was developed using the guidelines outlined in the Federal Financial
Institutions Examination's Council's "The Effect of 2000 on Computer Systems".
The Company's Board of Directors assigned responsibility for the Action Plan to
the Company's Year 2000 Committee which reports to the Board of Directors on a
quarterly basis. The Action Plan recognizes that the Company's operating,
processing and accounting operations are computer reliant and could be affected
by the Year 2000 Issue. The Company's Action Plan addressed the potential impact
of the Year 2000 Issue on both its information technology ("IT") systems and
non-IT systems (such as security systems, elevators, electrical, heating and air
conditioning, telephone, check-signing equipment, etc.). Pursuant to its Action
Plan, the Company has reviewed its IT systems and non-IT systems for the Year
2000 Issue and has tested all of its IT and non-IT systems and equipment for
Year 2000 readiness and believes that it has identified all equipment which
needs to be upgraded or replaced. Commencing in early 1998, the Company began a
program of upgrading or replacing all such equipment in order to ensure that the
Company's equipment is Year 2000 compliant on or before September 30, 1999. The
Company is primarily reliant on third party vendors for its computer output and
processing, as well as other significant non-IT functions and services (i.e.,
securities safekeeping services, securities pricing information, etc.). The Year
2000 Committee is currently working with these third party vendors to assess
their year 2000 readiness. Such vendors generally are reluctant to guarantee or
provide firm assurance that their products will be Year 2000 compliant in a
timely fashion. In addition, the Company believes that it would be difficult to
prevail on legal claims against such vendors with respect to Year 2000 issues.
Instead, the Company's approach has been that it is primarily responsible for
identifying and correcting Year 2000 compliance issues. A major factor in the
Company's operations is the data processing software which is used on a
Company-wide basis. Such software is maintained by a third party vendor. The
Company has been working closely with such vendor, whose clients include many
depository institutions, in an effort to ensure the Company's Year 2000
preparedness. In this respect, the Company has, on two occasions during
non-banking hours, tested essentially all of its operation systems, both IT and
non-IT systems, for Year 2000 readiness. Such tests revealed only minor
problems, which are being corrected, with the Company's systems with respect to
Year 2000. Based upon the initial assessment, management presently believes that
with planned modifications to existing software and hardware and planned
conversions to new software and hardware, the Company's third party vendors are
taking the appropriate steps to ensure critical systems will function properly.
The Company's Action Plan contemplates that all of its software vendors will be
Year 2000 compliant by September 30, 1998. If any of its vendors cannot assure
the Company of their Year 2000 readiness by such date, the Company intends to
evaluate and use alternative vendors and products where possible. As of the date
hereof, the Bank has completed the awareness (i.e., education), assessment
(i.e., assessing the potential Year 2000 problems in its IT and non-IT systems
and software), renovation (i.e., developing plans to remedy Year 2000 issues)
and validation (i.e., testing all critical application units and systems) phases
of its Year 2000 Action Plan. The Company currently is completing the
implementation phase (i.e., replacing certain equipment
17
<PAGE>
identified as not being Year 2000 compliant). The Company is approximately 30%
complete on the implementation phase. To date, the Company's assessment is that
its ATM system and software, its remote flood plain certification software and
its payroll software system are not Year 2000 compliant. The Company does not
believe that any of such non-compliant systems will have a critical effect on
the Company's operations if they are not Year 2000 compliant by the turn of the
century. While no assurance can be given as to actual systems operations upon
the turn of the century, based on information currently known to it and upon
consideration of its testing efforts to date, management believes that in the
worst case scenario, the Company will suffer only a slight interruption of
business as a result of minor application failures of its IT and non-IT systems
and software as the result of the Year 2000. However, if the appropriate
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company.
The Year 2000 mailing to the commercial customers results indicated that
the commercial customers that use software have updated or will update their
software packages by December 31, 1999. Many of the customers use outsource
services such as payroll companies who are assuring the customers that they are
Year 2000 compliant. It has been determined that no Bank customers are facing a
high risk of business disruption because of technological defaults.
The Company has completed its own company-wide Year 2000 contingency plan.
Individual contingency plans concerning specific software and hardware issues
have been formulated for the specific departments of the Company. Such plans
include the identification of Company operations that can be done on a manual
basis or with stand alone personal computers and printers. The Company has
identified phone lines within the Company which should not be affected by any
Year 2000 problems and it also has identified alternative electric power
sources.
The costs of modifications to the existing software are being primarily
absorbed by the third party vendors; however the Company recognized that the
need exists to purchase new hardware and software. Based upon current estimates,
the Bank has identified $300,000 in total costs, including hardware, software,
and other issues, for completing its Year 2000 project. Of that amount,
approximately $126,000 was expensed for the Year 2000 project through December
31, 1998.
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 prospectus
included in the registration statement on Form S-1 filed with the
18
<PAGE>
Securities and Exchange Commission (the "Commission") on September 18, 1998, as
subsequently amended and as declared effective by the Commission by order dated
November 12, 1998.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Use of Proceeds From Registered Securities
The Company's initial registration statement (No. 333-63737) on Form S-1
was declared effective on November 12, 1998. The subscription offering commenced
on November 12, 1998 and terminated on December 15, 1998. Charles Webb & Co., a
division of Keefe, Bruyette & Woods, Inc., assisted the Company, on a best
efforts basis, in the offering. The sale in the offering of 2,240,878 of the
Company's common stock, par value $.01 per share ("Common Stock"), closed on
December 23, 1998 for gross proceeds of $22,408,780. Net of offering costs and
expenses of $960,000, the offering generated net proceeds of $21.4 million. Of
such proceeds, $1.8 million was loaned to the Company's ESOP for the purchase by
the ESOP of 179,270 shares of Common Stock, $9.8 million was paid to the Bank in
exchange for the common stock of the Bank issued in its reorganization from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank, and $11.6 million was invested in investment securities as of December 31,
1998. Of the $9.8 million contributed to the Bank, $9.8 million was invested in
investment securities.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
19
<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
20
<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: February 16, 1999 By: /s/ Frederick A. Marcell, Jr.
------------------------------------------
Frederick A. Marcell, Jr. President and
Chief Executive Officer
Date: February 16, 1999 By: /s/ John J. Foff, Jr.
------------------------------------------
John J. Foff, Jr., Senior Vice President,
Chief Financial Officer and Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,738
<INT-BEARING-DEPOSITS> 16,892
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,487
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 333,838
<ALLOWANCE> 2,895
<TOTAL-ASSETS> 439,613
<DEPOSITS> 364,058
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 2,254
<LONG-TERM> 11,000
0
0
<COMMON> 50
<OTHER-SE> 57,779
<TOTAL-LIABILITIES-AND-EQUITY> 439,613
<INTEREST-LOAN> 13,445
<INTEREST-INVEST> 1,914
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,359
<INTEREST-DEPOSIT> 7,695
<INTEREST-EXPENSE> 8,102
<INTEREST-INCOME-NET> 7,257
<LOAN-LOSSES> 230
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,397
<INCOME-PRETAX> 2,208
<INCOME-PRE-EXTRAORDINARY> 2,208
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,371
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.50
<LOANS-NON> 1,069
<LOANS-PAST> 463
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,532
<ALLOWANCE-OPEN> 2,665
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,895
<ALLOWANCE-DOMESTIC> 2,895
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 724
</TABLE>
