U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended JUNE 30, 2000
- 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.
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(Exact Name of Registrant as Specified in its Charter)
UNITED STATES OF AMERICA 23-2986192
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(State or other jurisdiction of (IRS Employee Identification No.)
incorporation or organization)
WELSH AND NORRISTOWN ROADS
MAPLE GLEN, PENNSYLVANIA 19002
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(Address of Principal Executive Offices)
Registrant's telephone number: (including area code) (215) 646-5405
Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
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(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on September 21, 2000 was $20,519,795. (1,803,938 shares at $11.375
per share). Although directors and executive officers of the Registrant and
certain of its employee benefit plans were assumed to be "affiliates" of the
Registrant for purposes of the calculation, the classification is not to be
interpreted as an admission of such status.
As of September 21, 2000 there were 5,093,487 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 2000. (Parts I, II and IV)
2. Portions of the Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
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Willow Grove Bancorp, Inc.
Form 10-K
INDEX
Part I
------
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 27
Item 3 Legal Proceedings................................................ 27
Item 4 Submission of Matters to a Vote of Security Holders.............. 27
Part II
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Item 5 Market for Commom Equity and Related Stockholder Matters......... 28
Item 6 Selected Finacial and Other Data................................. 28
Item 7 Managment's Discussion and Analysis of Finacial Condition
And Results of Operations...................................... 28
Item 7A Quantitative and Qualitative Disclosure about Market Risk........ 28
Item 8 Finacial Statements and Supplementary Data....................... 28
Item 9 Changes and Dissagreements with Accountants on Accounting
And Financial Disclosure....................................... 28
Part III
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Item 10 Directors and Execituve Officers of the Registrant............... 28
Item 11 Executive Compensation........................................... 28
Item 12 Security Ownership of Certain Benificial Owners and Managment.... 28
Item 13 Certain Relationships and Related Transactions................... 28
Part IV
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Item 14 Exhibits, Finacial Statement, Schedules and Reports of Form 8-K.. 29
Signatures....................................................... 30
<PAGE>
PART I
Item 1. Business
General. Willow Grove Bancorp, Inc. (the "Company") is a federal corporation
that completed its initial public offering in December 1998 in the
reorganization of Willow Grove Bank (the "Bank") from a federally chartered
mutual savings bank into a federally chartered stock savings bank in the mutual
holding company form of ownership. Willow Grove Bank is the subsidiary of Willow
Grove Bancorp, Inc., which is the majority-owned subsidiary of Willow Grove
Mutual Holding Company (the "MHC"). Willow Grove Bank was originally organized
in 1909, and is primarily engaged in attracting deposits from the general public
and using those funds to invest in loans and securities. At the present time,
the business of the Company is primarily the business of the Bank.
In recent years, we have concentrated our business plans on three primary
goals, changing operations to a full-service community bank, continuing steady
growth, and maintaining a high level of asset quality.
Our principal sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations, and funds borrowed from outside
sources such as the Federal Home Loan Bank ("FHLB") of Pittsburgh. These funds
are primarily used for the origination of various loan types including,
single-family residential, commercial real estate and multi-family, home equity,
consumer and business. Our major source of income is the interest on our loan
and securities portfolios, while our major expense is interest paid on deposit
accounts.
The Office of Thrift Supervision ("OTS") is our chartering authority and
primary regulator. We are also regulated by the Federal Deposit Insurance
Corporation ("FDIC"), the administrator for the Savings Association Insurance
Fund ("SAIF"). We are also subject to reserve requirements established by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or
"FRB"), and we are a member of the FHLB of Pittsburgh, one of the regional banks
comprising the FHLB System.
The executive offices for Willow Grove Mutual Holding Company, Willow
Grove Bancorp, Inc. and Willow Grove Bank are all at Welsh and Norristown Roads,
Maple Glen, Pennsylvania, and our telephone number is (215) 646-5405.
This Form 10-K contains certain forward-looking statements and information
based upon our beliefs as well as assumptions we have made. In addition, to
those and other portions of this document, the words "anticipate", "believe",
"estimate", "expect", "intend", "should", and similar expressions, or the
negative thereof, as they relate to us are intended to identify forward-looking
statements. Such statements reflect our current view with respect to future
looking events and are subject to certain risks, uncertainties, and assumptions.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of federal, state and
local tax authorities, changes in interest rates, deposit flows, the cost of
funds, demand for loan products, demand for financial services, competition,
changes in the quality or composition of the Company's loan and investment
portfolios, changes in accounting principles, policies or guidelines, and other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and fees. Should one or more
of these risks or uncertainties materialize or should underlying assumptions
prove incorrect, actual results may vary materially from those described herein
as anticipated, believed, estimated, expected, or intended. We do not intend to
update these forward-looking statements.
Market Area and Competition
Our main office is in Montgomery County, Pennsylvania, approximately 20
miles north of downtown Philadelphia. The primary market areas that we serve
are: Montgomery County, Bucks
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County, and the northeast section of Philadelphia that borders these counties.
To a lesser extent, we service areas of Chester and Delaware counties, the
remainder of the City of Philadelphia, and central and southern New Jersey.
We face significant competition in originating loans and attracting
deposits. This competition stems primarily from commercial banks, other savings
banks and savings associations and mortgage-banking companies. Within our market
area, we estimate that we compete with more than 35 other banks and savings
institutions. We face additional competition for deposits from short-term money
market funds and other corporate and government securities funds, mutual funds
and from other non-depository financial institutions such as brokerage firms and
insurance companies.
Lending Activities
General. At June 30, 2000 our net loan portfolio totaled $424.9 million or
75.87% of our total assets. Historically, our primary emphasis has been the
origination of loans secured by first liens on single-family residences. In
recent years, we have changed the focus of our lending to place more emphasis on
home equity loans, commercial real estate and multi-family real estate loans and
commercial business loans. At June 30, 2000, commercial and multi-family real
estate loans amounted to $102.5 million, or 23.87% of our total loan portfolio.
As of that date, commercial business loans totaled $25.7 million or 5.98% of the
total loan portfolio. Loans secured by liens on single-family residential
properties include first mortgage loans totaling $206.3 million or 48.04% of the
loan portfolio; and $72.2 million of home equity loans and lines of credit,
which accounted for 16.81% of the loan portfolio.
The types of loans that we originate are subject to federal and state laws
and regulations. Interest rates and fees charged on these loans are affected
primarily by the demand for loans by borrowers and the supply of funds available
for lending purposes and rates and fees charged by our competitors. Local,
national, and international economic conditions and their effect on the monetary
policies of the Federal Reserve Board; legislative and tax policies; and
budgetary matters of local, state, and federal governmental bodies affect the
supply of funds available and the demand for loans.
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Loan Portfolio Composition. The following table sets forth the composition
of the loan portfolio at the dates indicated. This data does not include single
family loans classified as available for sale which amounted to $35.8 million,
$0, 12.1 million, $6.2 million and $5.1 million at June 30, 2000, 1999, 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
6/30/2000 6/30/1999 6/30/1998 6/30/1997 6/30/1996
----------------- ----------------- ----------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of
(Dollars in thousands) Amount total Amount total Amount total Amount total Amount total
------------------------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $206,340 48.04% $231,498 61.16% $230,979 72.30% $230,659 80.16% $203,737 82.55%
Multi-family &
commercial real estate 102,513 23.87% 65,707 17.36% 31,978 10.01% 23,141 8.04% 19,469 7.89%
Construction 14,973 3.49% 7,773 2.05% 4,772 1.49% 3,776 1.31% 3,405 1.38%
Home equity 72,217 16.81% 54,090 14.29% 41,366 12.95% 25,553 8.88% 16,184 6.56%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 396,043 92.20% 359,068 94.86% 309,095 96.75% 283,129 98.39% 242,795 98.37%
Other consumer loans 7,818 1.82% 6,431 1.70% 4,930 1.54% 2,924 1.02% 2,173 0.88%
Business loans 25,683 5.98% 13,023 3.44% 5,437 1.70% 1,698 0.59% 1,841 0.75%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable $429,544 100.00% $378,522 100.00% $319,462 100.00% $287,751 100.00% $246,809 100.00%
------ ------ ------ ------ ------
Less:
Alowance for loan losses 3,905 3,138 2,665 1,678 1,938
Deferred loan fees 699 800 1,092 1,477 1,536
Loans receivable, net $424,940 $374,584 $315,705 $284,596 $243,335
-------- -------- -------- -------- --------
</TABLE>
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Contractual Principal Repayments and Interest Rates. The following table
sets forth scheduled contractual amortization of the loan portfolio at June 30,
2000, as well as the dollar amount of such loans scheduled to mature after one
year which have fixed or adjustable interest rates. Demand loans, loans having
no schedule of repayments and no stated maturity, and overdraft loans, are
reported as due in one year or less.
<TABLE>
<CAPTION>
At June 30, 2000, the amount due within
1 year 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
(Dollars in thousands) or less years years years years years Total
---------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family
mortgages and home
equity loans $ 680 $ 5,184 $ 18,665 $ 23,597 $ 92,262 $138,169 $278,557
Multi-family &
commercial
mortgages 3,505 5,648 6,456 14,719 59,850 12,335 102,513
Construction loans
(net of undisbursed
proceeds) 11,944 1,779 -- -- 1,250 -- 14,973
Other consumer loans 2,221 2,220 1,606 1,629 90 52 7,818
Business loans 13,755 1,574 1,998 5,898 866 1,592 25,683
-------- -------- -------- -------- -------- -------- --------
Total $ 32,105 $ 16,405 $ 28,725 $ 45,843 $154,318 $152,148 $429,544
-------- -------- -------- -------- -------- -------- --------
</TABLE>
Of the $397.4 million of loan principal repayments due after June 30,
2000, $287.2 million have fixed rates of interest and $110.2 million have
adjustable rates of interest.
Lending Activity. Our lending activities are subject to underwriting
standards and origination procedures which have been approved by our Board of
Directors. In mid-1996, we determined that based upon the significant amount of
standardization in the single-family residential underwriting and documentation
processes, it was more cost effective for us to purchase single-family
residential loans. Since that time, we have developed a network of approximately
40 mortgage brokers and mortgage bankers. These correspondents identify,
process, and close loans on our behalf based upon rates and terms that we
provide to them on a regular basis. Depending upon the various programs we have
with the correspondents, loans will be classified as either purchased or
originated. When the correspondent advances funds for the closing of a loan we
have committed to purchase, it is classified as "purchased". When we provide the
funds for the closing of the loan, it is classified as "originated". In either
case, we may retain the loan in our portfolio or sell it (on either a servicing
released or retained basis) in the secondary market. The correspondents forward
completed loan applications for our review. Based upon our assessment of our
demand for the type of loan, we will determine whether to reject the loan or
acquire the loan for our portfolio or for sale into the secondary market. The
loans generally are required to be underwritten in accordance with Federal Home
Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") guidelines (this facilitates resale into the secondary market). We also
acquire loans that do not conform to FHLMC/FNMA guidelines ("non-conforming"
loans) for the portfolio. Non-conforming loans that we place in the portfolio
include, but are not limited to, sub-prime, investor loans and non-FNMA "A"
paper. Non-conforming loans are underwritten according to the Company's
alternative underwriting guidelines. The Company's underwriting guidelines are
based upon industry standards. These non-conforming loans account for
approximately one-quarter of our single-family loan portfolio.
Our underwriting function for residential, home equity loans, commercial
and multi-family real estate loans, construction, commercial business, and
consumer loans is centralized at our main office. We require a current appraisal
prepared by an independent appraiser on all new mortgage loans. We also require
title insurance on all loans secured by real estate, except home equity loans.
Hazard
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insurance is required on all real estate loans. Flood insurance is also required
for all loans secured by properties located in a designated flood area.
Our loan policy authorizes certain officers to approve loans up to certain
designated amounts, not exceeding $1,000,000 individually and $2,000,000
collectively in the case of the President and Chief Lending Officer. Loans
exceeding individual limits must be approved by: the Management Loan Committee
consisting of the President, the three other executive officers, and a
Vice-President Credit Manager; the Director's Loan Committee, consisting of
three outside directors, the President, and the Chief Lending Officer; or the
full Board of Directors. The Director's Loan Committee and the full Board of
Directors are also provided with summaries of new loan activity on a routine
basis.
As a federal savings bank, we are limited in the amount of loans we make
to any one borrower. This amount is equal to 15% of the Bank's unimpaired
capital and surplus (in our case, this amount would be approximately $8.2
million at June 30, 2000), although there are provisions that would allow us to
lend an additional 10% of unimpaired capital and surplus if the loans are
secured by readily marketable securities. Our aggregate loans to any one
borrower have been within these limits. At June 30, 2000, our three largest
credit relationships with an individual borrower and related entities amounted
to $5.5 million, $5.0 million, and $4.9 million; all the loans included in these
relationships were performing in accordance with their terms and conditions.
Single-Family Residential Loans. We utilize a network of mortgage brokers
and bankers to originate and buy conventional single-family (one-to-four units)
mortgage loans. Conventional loans are loans that are neither insured by the
Federal Housing Administration ("FHA") nor partially guaranteed by the
Department of Veterans Affairs ("VA"). The majority of our single-family
mortgage loans are secured by properties located in our primary lending area
which includes Montgomery, Bucks and Philadelphia Counties, Pennsylvania. Our
residential lending areas have expanded to include northeastern Pennsylvania and
central and southern New Jersey. At June 30, 2000, single family mortgage loans
amounted to $206.3 million, or 48.04% of our total loan portfolio. Due to our
increased focus on other types of lending, the single-family portion of our loan
portfolio has significantly decreased during the past five years and we expect
this trend to continue.
Single-family residential mortgage loans which we purchase or originate
for sale generally are underwritten with terms conforming to FHLMC/FNMA
guidelines. Loans purchased or originated for our portfolio, may conform to
these guidelines, may exceed the conforming loan amount for those agencies, or
may otherwise not comply with the underwriting standards of the agencies for a
variety of reasons, including credit risk.
Interest rates on our residential mortgages either are fixed for the life
of the loan ("fixed-rate") or may change periodically during the life of the
loan ("ARM"). Original maturities of fixed-rate loans are generally 10, 15, 20
or 30 years, and have equal monthly payments to repay the loan with interest by
the end of the loan term. At June 30, 2000, the fixed-rate portion of our
residential mortgage loan portfolio which includes single-family real estate
loans and home equity loans, totaled $253.6 million which was 91.0% of the total
single-family residential loans outstanding at that date.
We offer a variety of ARM loans. These loans have a pre-determined
interest rate for a specified period of time ranging from one to ten years.
After this initial period, the interest rate will adjust on a periodic basis in
accordance with a designated index such as the one-year US Treasury yield
adjusted to a constant maturity ("CMT") plus a stipulated margin. Also, ARM
loans generally carry an annual limit for rate changes of 1% or 2%, and a
maximum amount the rate can increase or decrease from the initial rate of 4% to
6% during the life of the loan. From time to time, we offer ARM loans with an
initial rate less than the fully-indexed rate (the index at the time of
origination plus the stipulated margin). These loans are underwritten based upon
the borrower making payments calculated at the fully-indexed rate. Our ARM loans
require that any payment adjustment caused by a change in the interest rate
result in full amortization of the loan by the end of the original loan term,
and no portion of the payment increase is permitted to be added to the principal
balance of the loan, so-called negative amortization. At June 30,
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2000, $25.0 million or 9.0% of our residential mortgage loan portfolio which
includes single-family real estate loans and home equity loans, were adjustable
rate.
ARM loans decrease some of the risks associated with changing interest
rates. However, increases in the amount of a borrower's payment due to interest
rate increases may affect the borrower's ability to repay the loan increasing
the potential for default. To date, we have not experienced a material impact as
a result of this additional credit risk associated with ARM loans, and believe
that this risk is less than the interest rate risk of holding fixed-rate loans
in a rising interest rate environment.
Such factors as consumer preferences, the general level of interest rates,
competition, and the availability of funds affect the amount of ARM loans we
originate. Although we anticipate that we will continue to offer ARM loans,
there can be no assurance that we can originate a sufficient amount of loans to
increase or maintain the percentage of loans in our portfolio.
Generally the single largest single-family mortgage loan we originate or
purchase does not exceed $400,000. In addition, our maximum loan-to-value ratio
(the rate of the loan amount to the lesser of the appraised value or sales price
- "LTV") is 95%, provided that private mortgage insurance is obtained for the
portion of the loan in excess of 80% of the appraised value.
Home Equity Loans. In recent years, we have increased our emphasis on the
origination of home equity loans and lines of credit, due to their shorter
maturities (the maximum term of an equity loan is 20 years) and higher interest
rates. A home equity loan is a fixed-rate loan where the borrower receives the
total loan amount at a closing and makes monthly payments to repay the loan
within a specific time period. Home equity lines of credit are a revolving line
of credit with a variable rate and no stated maturity date. The borrower may
draw on this account (up to the maximum credit amount) and repay this line at
any time. At June 30, 2000 we had $72.2 million or 16.81% of the total loan
portfolio in home equity loans and lines of credit outstanding. This compares to
$54.1 outstanding at June 30, 1999. Of the $72.2 million outstanding at June 30,
2000, $7.5 million were in lines of credit. The unused portion of equity lines
of credit was $10.0 million at that date.
Home equity loans and lines of credit are secured by the borrower's
residence, and we generally obtain a second mortgage position on these loans. We
offer home equity programs in amounts, when combined with the first mortgage, up
to 100% of the value of their property. In addition to originating home equity
loans through our branch offices, we purchase these loans from a network of
correspondents.
Commercial Real Estate and Multi-Family Residential Real Estate Loans. At
June 30, 2000 commercial and multi-family real estate loans amounted to $102.5
million or 23.87% of the total loan portfolio. This compares to $65.7 million or
17.36% at June 30, 1999.
Our commercial real estate and multi-family real estate loan portfolio
consists primarily of loans secured by office buildings, retail and industrial
use buildings, strip shopping centers, residential properties with five or more
units and other properties used for commercial and multi-family purposes located
in our market area. Our commercial and multi-family real estate loans seldom
exceed $3 million, and as of June 30, 2000, the average commercial and
multi-family real estate loan size was $495,000, and the largest loan
outstanding was $3.6 million. During the year ended June 30, 2000, our
commercial real estate and multi-family loan portfolio grew as the result of
originations, purchases and the conversion of loans from construction to
permanent status, by $36.8 million, or 56.0%. During the past several years, we
have hired commercial lenders, whom we believed are experienced in this area, in
our efforts to increase the size of this portfolio.
Although terms for commercial real estate and multi-family loans vary, our
underwriting standards generally allow for terms up to 25 years with monthly
amortization over the life of the loan and LTV ratios of not more than 80%.
Rates are either fixed or adjustable based upon the 5-year Treasury CMT plus a
margin, and fees ranging from 0.5% to 1.50% are charged to the borrower at the
origination of the loan. Prepayment fees are charged on most loans in the event
of early repayment. Generally we obtain
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personal guarantees of the principals as additional collateral for commercial
real estate and multi-family real estate loans.
Commercial real estate and multi-family real estate lending involves
different risks than single-family residential lending. These risks include
larger loans to individual borrowers and loan payments that are dependent upon
the successful operation of the project or the borrower's business. These risks
can be affected by supply and demand conditions in the project's market area of
rental housing units, office and retail space, warehouses, and other commercial
space. We attempt to minimize these risks by limiting our loans to proven
businesses, only considering properties with existing operating performance
which can be analyzed, using conservative debt coverage ratios in our
underwriting, and periodically monitoring the operation of the business or
project and the physical condition of the property.
Various aspects of a commercial and multi-family loan transaction are
evaluated in our effort to mitigate the additional risk in these types of loans.
In our underwriting procedures, consideration is given to the stability of the
property's cash flow history, future operating projections, current and
projected occupancy levels, location and physical condition. Generally we impose
a debt service ratio (the ratio of net cash flows from operations before the
payment of debt service to debt service) of not less than 115%. We also evaluate
the credit and financial condition of the borrower, and if applicable, the
guarantor. Appraisal reports prepared by independent appraisers are obtained on
each loan to substantiate the property's market value, and are reviewed by us
prior to the closing of the loan.
Construction Loans. We originate construction loans for residential and
commercial uses within our market area. We generally limit construction loans to
builders and developers with whom we have an established relationship, or who
are otherwise known to officers of the Bank. At June 30, 2000, we had $15.0
million, or 3.49% of total loans, in outstanding construction loans.
Construction loans outstanding at June 30, 1999 were $7.8 million.
Our construction loans generally have variable rates of interest, a
maximum maturity of three years, and LTV ratios less than 80%. Residential
construction loans to developers are made on either a pre-sold or speculative
(unsold) basis. Limits are placed on the number of units that can be built on a
speculative basis based upon the reputation and financial position of the
builder, his/her present obligations, the location of the property and prior
sales in the development and the surrounding area. Generally a limit of two to
six model homes is placed per project.
Prior to committing to a construction loan, we require that an independent
appraiser prepare an appraisal of the property. We also review and inspect each
project at its inception and prior to every disbursement of loan proceeds.
Disbursements are made after inspections based upon a percentage of project
completion. Monthly payment of interest is required on all construction loans.
We also make construction loans for the acquisition and development of
land for sale (i.e. roads, sewer and water. We make these loans only in
conjunction with a commitment for a construction loan for the units to be built
on the site. These loans are secured by a lien on the property and are limited
to a LTV ratio of 75% of the appraised value. The loans have a variable rate of
interest and require monthly payments of interest. The principal of the loan is
repaid as units are sold and released. All of our loans of this type are in our
market area and are to developers with whom we have established relationships.
In most cases, we also obtain personal guarantees from the borrowers.
Construction and land loans generally are considered to involve a higher
level of risk than single-family residential lending, due to the concentration
of principal in a limited number of loans and borrowers and the effect of
economic conditions on developers, builders and projects. Additional risk is
also associated with construction lending because of the inherent difficulty in
estimating both a property's value at completion and the estimated cost
(including interest) to complete a project. The nature of these loans is such
that they are more difficult to evaluate and monitor. In addition, speculative
construction loans to a builder are not pre-sold and thus pose a greater
potential risk than construction loans to individuals on their personal
residences.
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In order to mitigate some of the risks inherent to construction lending,
we inspect properties under construction, review construction progress prior to
advancing funds, work with builders who have established relationships, and
obtain personal guarantees from the principals.
Commercial Business Loans. At June 30, 2000, we had $25.7 million in
business loans (5.98% of gross loans outstanding) compared to $13.0 million at
June 30, 1999, an increase of $12.7 million or 97.21%. We began originating
loans to small-to-mid-sized businesses in our market area in May 1997. Since
that time, we have hired commercial lenders, whom we believe are experienced in
this area, to actively solicit commercial business loans as well as commercial
real estate and multi-family real estate loans. As a result of these efforts, we
anticipate this portion of the loan portfolio will continue to increase as a
percentage of the total loan portfolio. We believe that these types of loans
assist in our asset/liability management since they generally provide shorter
maturities and/or adjustable rates of interest in addition to generally having
higher returns to compensate for the additional credit risk associated with the
loan.
Loans which we originate may be either a revolving line of credit or for a
fixed term of generally five years or less. Interest rates are either
adjustable, indexed to a published prime rate of interest, or fixed. Generally,
equipment, machinery, real property or other corporate assets secure the loans.
Personal guarantees from the business principals are generally obtained as
additional collateral. We also provide loans up to 75% of a business' accounts
receivable and up to 50% of its inventory.
Generally, commercial business loans have been characterized as having
higher risks associated with them than single-family loans. This area of lending
is relatively new to us. We have hired individuals, whom we believe are
experienced in this type of lending, and have implemented policies and
procedures which we deem to be prudent.
Other Consumer Lending Activities. In our efforts to provide a full range
of financial services to our customers, we offer various types of consumer loans
such as student loans, loans secured by deposit accounts, automobile loans, and
unsecured personal loans. These loans are originated primarily through existing
and walk-in customers and direct advertising. At June 30, 2000, $7.8 million, or
$1.82% of our total loan portfolio consisted of these types of loans. This
compares to $6.4 million of consumer loans, or 1.70% of the total loan portfolio
at June 30, 1999.
Consumer loans generally have higher interest rates and shorter terms than
residential loans, however they have additional credit risk due to the type of
collateral securing the loan or in some cases the absence of collateral. In the
fiscal year ended June 30, 2000, charge-offs related to other consumer loans
amounted to $31,000.
Asset Quality
General. As a part of our efforts to maintain asset quality, we have
developed and implemented an asset classification system. All of our assets are
subject to this classification system. Loans are periodically reviewed and the
classifications reviewed at least quarterly by the Asset Quality Committee of
the Board of Directors.
When a borrower fails to make a scheduled payment, we attempt to cure the
deficiency by making personal contact with the borrower. Initial contacts are
generally made 16 days after the date the payment is due. In most cases,
deficiencies are promptly resolved. If the delinquency continues, late charges
are assessed and additional efforts are made to collect the deficiency. We
generally work with borrowers to resolve such problems, however, when the
account becomes 90 days delinquent, we institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
On loans which we consider the collection of principal or interest
payments doubtful, we cease the accrual of interest income ("non-accrual"
loans). On loans more than 90 days past due, as to principal and interest
payments, it is our policy to discontinue accruing additional interest and
reverse any interest currently accrued (unless we determine that the loan
principal and interest are fully secured and in the process of collection). On
occasion, we may take this action earlier if the financial condition of the
8
<PAGE>
borrower raises significant concern with regard to his/her ability to service
the debt in accordance with the terms of the loan. Interest income is not
accrued on these loans until the borrower's financial condition and payment
record demonstrate an ability to service the debt.
Real estate which we acquire as a result of foreclosure or deed-in-lieu of
foreclosure is classified as real estate owned until sold. Real estate owned is
recorded at the lower of cost or fair value less estimated selling cost. Costs
associated with acquiring and improving a foreclosed property are usually
capitalized to the extent that the carrying value does not exceed fair value
less estimated selling costs. Holding costs are charged to expense. Gains and
losses on the sale of real estate owned are charged to operations, as incurred.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at the dates indicated. The amounts presented represent the
total outstanding principal balances of the related loans rather than the actual
payment amounts that are past due.
June 30, 2000 June 30, 1999
--------------- ---------------
30 to 60 to 30 to 60 to
(Dollars in thousands) 59 days 89 days 59 days 89 days
------------------------------------------ --------------- ---------------
Mortgage loans
Single-family $2,289 $ 747 $3,534 $ 174
Multi-family and commercial real estate 1,195 1,194 3,389 51
Construction 1,432 -- -- --
Home equity 111 202 163 20
Other consumer loans 37 12 37 13
Business loans 1,570 300 198 250
------ ------ ------ ------
Total 6,634 2,455 $7,321 $ 508
------ ------ ------ ------
Loans delinquent 30 to 89 days amounted to $9.1 million at June 30, 2000
compared $7.8 million at June 30, 1999. This increase of $1.3 million or 16.1%,
is primarily attributed to the growth of our loan portfolio. Management
continues to regularly monitor all delinquent loan activity. Management does not
consider the current level of delinquencies to be of any significant concern as,
based upon past experience, most of such loans will be returning to fully
performing status without going to non-accrual status. In any event, management
believes that these loans are adequately collateralized.
9
<PAGE>
Non-Performing Assets. The following table sets forth information with
respect to non-performing assets we have identified, including non-accrual loans
and other real estate owned.
<TABLE>
<CAPTION>
At June 30,
(Dollars in thousands) 2000 1999 1998 1997 1996
--------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Accruing loans 90 or more days past due
Real estate loans $ 9 $ 4 $ 142 $ 124 $ 101
Other loans -- -- -- -- --
------ ------ ------ ------ ------
Accruing loans 90 or more days past due 9 4 142 124 101
------ ------ ------ ------ ------
Non-accrual loans
Real estate loans
Single family 828 1,006 1,249 374 655
Multifamily and commercial real estate 140 -- -- 54 55
Construction -- -- -- -- --
Home equity 10 37 -- -- 73
Other consumer loans 19 8 2 17 34
Business loans 250 13 96 1,346 1,786
------ ------ ------ ------ ------
Total non-accrual loans 1,247 1,064 1,347 1,791 2,603
Total non-performing loans 1,256 1,068 1,489 1,915 2,704
Other real estate owned, net -- -- -- -- --
Total non-performing assets 1,256 1,068 1,489 1,915 2,704
Performing troubled debt restructurings -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing assets and troubled debt
restructuring $1,256 $1,068 $1,489 $1,915 $2,704
------ ------ ------ ------ ------
Non-performing loans to total loans 0.29% 0.28% 0.45% 0.65% 0.96%
Non-performing assets to total assets 0.22% 0.23% 0.37% 0.54% 0.87%
</TABLE>
Classified and Criticized Assets. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful," and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of current
existing facts, conditions, and values, questionable, and there is a high
probability of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Federal regulations also require another unclassified category
designated "special mention" to be established and maintained for assets that do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful, or loss. At June 30, 2000, we
had $2.8 million in assets classified as substandard; no assets were classified
as doubtful or loss.
Allowance for Loan Losses. The allowance for loan losses is maintained at
a level we believe is adequate to absorb known and inherent losses in the
portfolio. Our determination of the adequacy of the allowance is based upon an
evaluation of the portfolio, loss experience, current economic conditions,
volume, growth, composition of the portfolio, and other relevant factors. Prior
to 1998, the majority of emphasis in our methodology was placed on our past loss
experience as well as the other factors previously mentioned. With the expansion
of our lending activities into commercial real estate, business, and other
consumer loans, we are now including industry-wide loss experience in our
process to determine the adequacy of the allowance for loan losses. We believe
that due to the changing mix of our loan portfolio and our relative lack of loss
experience with these types of loans, considering loan loss data
10
<PAGE>
from other banking institutions with loan portfolios similar to ours and in a
similar geographic setting will provide us with a more representative approach
to evaluating the credit risks in our loan portfolio. The allowance is increased
by provisions for loan losses which are charges against income. As shown in the
table below, at June 30, 2000, our allowance for loan losses amounted to $3.9
million or 310.91% and 0.91% of our non-performing loans and total loans
receivable, respectively. For fiscal year 2000 the increase in the allowance for
loan losses was primarily due to the growth of our loan portfolio, the
diversification of the loan portfolio and recoveries in the amount $146,000
related to charge-offs from prior periods. For fiscal year 1999 the primary
reasons for the increase in our allowance for loan losses were the increase in
our total loan portfolio and the continued shift towards loans other than
single-family residential. We assess our allowance for loan losses at least
quarterly, and make any necessary provision for losses needed to maintain our
allowance for losses at a level deemed adequate. We believe that the allowance
for losses was adequate at June 30, 2000 based upon the facts and circumstances
known to us at that date.
Effective December 21, 1993, the OTS in conjunction with the Comptroller
of the Currency, the FDIC and the Federal Reserve Board issued a Policy
Statement regarding a financial institution's allowance for loan and lease
losses. The Policy Statement, which reflects the position of the regulatory
agencies and does not necessarily constitute generally accepted accounting
principles, includes guidance (i) on our responsibilities for the assessment and
establishment of an adequate allowance; and (ii) for the agencies' examiners to
use in evaluating the adequacy of such allowance and the policies used to
determine such allowance. The Policy Statement also sets forth quantitative
measures for the allowance with respect to assets classified substandard and
doubtful and with respect to the remaining portion of the institution's
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness of
an allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of
the portfolio classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available as of the evaluation date. While the Policy
Statement sets forth this quantitative measure, such guidance is not intended as
a "floor" or "ceiling". Our policy for establishing loan losses is consistent
with the Policy Statement.
The following table sets forth the activity in our Allowance for Loan
Losses for periods indicated.
<TABLE>
<CAPTION>
At June 30,
(Dollars in thousands) 2000 1999 1998 1997 1996
----------------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Allowance for loan loss - beginning of period $ 3,138 $ 2,665 $ 1,678 $ 1,938 $ 1,728
Plus: Provision for loan loss 706 531 993 185 210
Less: Charge-offs for
Mortgage loans 51 32 -- -- --
Other consumer loans 31 23 6 5 --
Business loans 3 3 -- 440 --
------- ------- ------- ------- -------
Total charge-offs 85 58 6 445 --
Plus: Recoveries 146 -- -- -- --
------- ------- ------- ------- -------
Allowance for loan loss - end of period $ 3,905 $ 3,138 $ 2,665 $ 1,678 $ 1,938
------- ------- ------- ------- -------
Allowance for loan loss to total non-performing
loans at the end of the period 310.91% 293.82% 178.98% 87.62% 71.67%
Allowance for loan loss to total loans 0.91% 0.83% 0.80% 0.57% 0.69%
at the end of the period
Charge-offs to average loans 0.02% 0.02% (1) 0.16% (2)
</TABLE>
----------
(1) less than 0.01%
(2) no charge-offs during period
11
<PAGE>
We consider the entire allowance for loan losses to be adequate, however
to comply with regulatory reporting requirements, we have allocated the
allowance for loan losses as shown in the table below into components by loan
types at year end. Through such allocations, we do not intend to imply that
actual future charge-offs will necessarily follow the same pattern or that any
portion of the allowance is restricted.
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999 June 30, 1998
---------------------- ---------------------- ----------------------
Percentage Percentage Percentage
Type of loan Type of loan Type of loan
(Dollars in thousands) Amount to Total loans Amount to Total loans Amount to Total loans
---------------------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans
Single-family $ 591 48.04% $ 598 60.14% $ 630 71.41%
Multifamily and
commercial real estate 1,230 23.87% 695 17.07% 371 9.39%
Construction 299 3.49% 346 3.69% 361 4.00%
Home equity 482 16.81% 359 14.05% 324 12.15%
------ ------ ------ ------ ------ ------
Total mortgage loans 2,602 92.20% 1,998 94.95% 1,686 96.95%
Other consumer loans 38 1.82% 29 1.67% 28 1.45%
Business loans 382 5.98% 186 3.38% 124 1.60%
Unallocated allowance
for loan losses 883 925 827
------ ------ ------
Total $3,905 100.00% $3,138 100.00% $2,665 100.00%
------ ------ ------ ------ ------ ------
<CAPTION>
June 30, 1997 June 30, 1996
---------------------- ----------------------
Percentage Percentage
Type of loan Type of loan
(Dollars in thousands) Amount to Total loans Amount to Total loans
---------------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Mortgage loans
Single-family $ 253 78.09% $ 501 79.64%
Multifamily and
commercial real estate 121 7.63% -- 7.42%
Construction 188 4.33% -- 5.24%
Home equity 128 8.43% 281 6.17%
------ ------ ------ ------
Total mortgage loans 690 98.48% 782 98.47%
Other consumer loans 25 0.96% -- 0.83%
Business loans 138 0.56% -- 0.70%
Unallocated allowance
for loan losses 825 1,156
------ ------
Total $1,678 100.00% $1,938 100.00%
------ ------ ------ ------
</TABLE>
12
<PAGE>
Securities Activities
General. Our investment policy is designed, among other things, to assist
us in our asset/liability management policy. It emphasizes, principal
preservation, favorable returns, maintaining liquidity and flexibility and
minimizing credit risk. The policy permits investments in US Government and
agency securities, investment grade corporate bonds and commercial paper,
municipal bonds, various types of mortgage-backed securities, certificates of
deposit and federal funds sold to financial institutions approved by our Board
of Directors, equity investments in the FHLB of Pittsburgh, the FNMA, and the
FHLMC, and mutual funds with investments in the above described investments.
Currently, we are not participating in hedging programs, interest rate
swaps, caps, collars or other activities involving the use of off-balance sheet
financial derivatives. Also, we do not purchase mortgage-backed derivative
instruments that would be characterized "high-risk" under OTS regulations at the
time of purchase, nor do we purchase corporate obligations, which are not rated
investment grade.
In order to achieve the maximum flexibility with our investment
securities, all of our investment securities were classified as Available For
Sale ("AFS") for more than the past three fiscal years pursuant to Statement of
Financial Accounting Standards No. 115. This accounting pronouncement requires
us to classify a security as AFS, Held to Maturity ("HTM"), or trading, at the
time of acquisition. Securities being classified as HTM must be purchased with
the intent and ability to hold that security until its final maturity, and can
be sold prior to maturity only under rare circumstances. HTM securities are
accounted for based upon the historical cost of the security. AFS securities can
be sold at any time based upon our needs or judgment as to market changes. AFS
securities are accounted for at fair value, unrealized gains and losses on these
securities, net of income tax provisions, are reflected in the stockholders'
equity section of our Statement of Financial Condition.
At June 30, 2000, our investment securities amounted to $70.6 million, or
12.60% of total assets. This includes a $3.7 million unrealized loss, net of
income tax, due to their classification as available for sale. The portfolio
consists primarily of US government agency securities, most with callable
features, mortgage-backed pass-through securities, other investments in
municipal bonds, equity investments in the FHLB of Pittsburgh and FHLMC, and a
mutual fund consisting of adjustable-rate mortgage-backed securities.
The following table sets forth information on the carrying value and the
amortized cost of our securities classified as available for sale at the dates
indicated:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999 June 30, 1998
------------------- --------------------- ---------------------
Amortized Carrying Amortized Carrying Amortized Carrying
(Dollars in thousands) Cost Value Cost Value Cost Value
---------------------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Equity securities $ 7,528 $ 7,451 $11,068 $11,052 $ 9,940 $ 9,937
US Gov't. and agency securities 33,000 31,025 35,000 33,877 20,004 19,999
Mortgage-backed securities 31,162 29,626 34,229 33,236 17,940 18,079
Municipal bonds 2,601 2,475 1,999 1,890 100 96
------- ------- ------- ------- ------- -------
Total $74,291 $70,577 $82,296 $80,055 $47,984 $48,111
------- ------- ------- ------- ------- -------
</TABLE>
Mortgage-Backed Securities. At June 30, 2000, we had mortgage-backed
securities totaling $29.6 million. Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgages.
Mortgages are sold by various originators to intermediaries (generally agencies
of the US Government and government sponsored enterprises) that pool and
repackage the mortgages and sell participation interests in the pools to
investors. The servicer of the mortgage loan collects the principal and interest
payments and passes those payments through to the intermediary who then remits
the payment to the investor. The US Government agencies and government sponsored
enterprises,
13
<PAGE>
primarily the Government National Mortgage Association ("GNMA"), FNMA and FHLMC,
guarantee the timely payment of principal and interest on these securities.
Mortgage-backed securities are issued in stated principal amounts and are
backed by mortgage loans within a specific interest rate range, but may have
varying maturity dates. The underlying pool of mortgages may be comprised of
either fixed-rate or adjustable-rate mortgage loans. Each mortgage-backed
security pool will also differ based upon the actual level of prepayment
experienced by the underlying mortgage loans.
At June 30, 2000, the weighted average life of our mortgage-backed
securities was approximately 7 years, based upon assumptions related to the
future prepayments of the underlying mortgages. Prepayments that are greater
than those projected will shorten the remaining term of the security, while a
decrease in the amount of prepayments will lengthen the amount of time until the
security matures. Prepayments depend on many factors, including the type of
mortgage, the coupon rate, the geographic region, and the general level of
market interest rates. During periods of rising interest rates, if the coupon
rates of the underlying mortgages are less than prevailing market rates offered
on mortgages, refinancings will decrease and prepayments of the underlying
mortgages and the security will also decline. Conversely, when market interest
rates are falling, and the coupon rate on the underlying mortgage exceeds the
prevailing market interest rate for mortgages offered, refinancings tend to
increase which will increase the amount of prepayments of the underlying
mortgages and the security.
Our average yield on these securities was 6.29% at June 30, 2000. This
yield is computed by decreasing/increasing the amount of interest income
collected on the security by the amortization/accretion of the premium/discount
associated with the acquisition of the security. In accordance with generally
accepted accounting principles, premiums/discounts are amortized/accreted over
the estimated remaining life of the security. The yield on the security may vary
if the prepayment assumptions used to determine the remaining life differ from
actual prepayment experiences. These assumptions are reviewed on a periodic
basis to reflect actual prepayments.
US Government and Agency Securities and Municipal Bonds. At June 30, 2000,
we had $31.0 million, which includes approximately $2.0 million in unrealized
loss, in securities issued by US government agencies, primarily the FHLB, FNMA,
FHLMC, and the Federal Farm Credit Bank. Most of these securities have call
features that allow the issuer to redeem these securities at par value prior to
their stated maturity. Generally, if the prevailing market interest rate on new
issue callable agency securities with similar maturities exceeds the coupon rate
of the security with the call feature, the call will not be exercised.
Conversely, if the prevailing market interest rate for new issue agency callable
securities with similar maturities is below the coupon rate of the security with
the call feature, the call will be exercised and the bond will be redeemed. When
calls are exercised and bonds redeemed prior to their maturity, we face the risk
of re-investing those proceeds into other investments with lower yields or
longer terms.
Municipal bonds held at June 30, 2000 had a carrying value of $2.5
million, and a net unrealized loss of $126,000. These municipal bonds include
issues from various townships and school districts located in Pennsylvania.
14
<PAGE>
The following table sets forth certain information regarding the contractual
maturities (without regard to any call provisions) of the carrying value of our
US Government and government agency securities and municipal bonds at June 30,
2000. The yields on tax-exempt bonds have not been adjusted to taxable
equivalent yield.
Carrying Average
(Dollars in thousands) Value Yield
---------------------- -------- -------
Maturing in
One year or less $ 600 4.00%
1 to 5 years 7,684 5.91%
5 to 10 years 14,188 6.56%
Over 10 years 11,028 6.34%
------- ----
Total $33,500 6.29%
------- ----
Other Investments. Other than mortgage-backed securities and US Government
and agency securities, we have investments in various equity securities and
mutual funds. These investments totaled $7.5 million and $11.1 million,
respectively. The equity securities include stock in the FHLB, FNMA, and FHLMC.
The mutual fund investment is backed primarily by investments in adjustable-rate
mortgage-backed securities.
Sources of Funds
General. Deposits are the primary source of funds for our lending and
investment activities. In addition to deposits, we obtain funds from the
amortization and prepayments on our loan and mortgage-backed security portfolio,
maturities of investments, and borrowings. Scheduled loan amortization is a
relatively stable source of funds. However, competition and the general level of
interest rates and market conditions significantly influence deposit inflows and
outflows. Borrowings may be used on a short-term basis to compensate for
reductions in other funding sources. On a longer-term basis, borrowings may be
used for general business purposes.
Deposits
The following table sets forth by various interest rate categories, the
amount of certificates of deposit at the dates indicated.
(Dollars in thousands) June 30, 2000 June 30, 1999 June 30, 1998
---------------------- -------------- -------------- --------------
0.00% to 2.99% $ 28 $ 32 $ 132
3.00% to 3.99% 16,399 21,817 12
4.00% to 4.99% 45,623 67,875 41,261
5.00% to 6.99% 219,471 153,259 180,858
7.00% to 8.99% 11,791 8,149 9,133
9.00% and over -- 25 606
-------------- -------------- --------------
Total $ 293,312 $ 251,157 $ 232,002
-------------- -------------- --------------
15
<PAGE>
At June 30, 2000 the total amount of outstanding certificates of deposit
in amounts greater than or equal to $100,000 was $47.3 million. The following
table provides information regarding the maturity of these certificates of
deposit.
At June 30, 2000, amounts maturing in
3 months 3 to 6 6 to 12 Over 12
(Dollars in thousands) or less months months months Total
---------------------- -------- ------ ------- ------- --------
$ 10,734 4,034 19,526 12,988 $ 47,282
Borrowings.
We use outside borrowings on to supplement our lending needs. We also use
borrowings in a leverage program that allows us to take advantage of arbitrage
opportunities when investment returns exceed the cost of borrowings. At June 30,
2000 we had $37.5 million in borrowings outstanding, all of which were from the
FHLB of Pittsburgh. Advances from the FHLB of Pittsburgh are secured by our
investment in FHLB Stock and a portion of our residential mortgage loan
portfolio. The FHLB of Pittsburgh provides an array of borrowing programs which
include: fixed or variable rate programs; various fixed terms ranging from
overnight to 20 years; and other programs that have callable or putable features
attached to them. We intend to utilize borrowings in the future as an
alternative source of funds.
The following table sets forth certain information regarding our outside
borrowings for the periods indicated.
As of or for the year ended June 30,
(Dollars in thousands) 2000 1999 1998
--------------------------------------------- ---- ---- ----
FHLB Advances
Average balance outstanding $38,820 $14,198 $ 9,532
Maximum amount outstanding at any month end 61,696 19,000 21,000
Balance outstanding at the end of period 37,517 14,986 21,000
Average interest rate for period 6.06% 5.44% 5.55%
Interest rate at end of period 6.61% 5.33% 5.62%
Other borrowings
Average balance outstanding $ -- $ -- $ 263
Maximum amount outstanding at any month end -- -- 500
Balance outstanding at the end of period -- -- --
Average interest rate for period -- -- --
Interest rate at end of period -- -- --
At June 30, 2000 the maturity terms of the FHLB advances ranged from 17
days to ten years. At June 30, 2000 $4.0 million of FHLB advances were callable
at the direction of the FHLB within certain parameters and could be called
within one year.
Subsidiaries. Willow Grove Bank is the wholly owned subsidiary of Willow Grove
Bancorp, Inc. Willow Grove Bancorp, Inc. is the majority owned subsidiary of
Willow Grove Mutual Holding Company.
Employees. At June 30, 2000, we had 146 full-time employees, and 44 part-time
employees. None of our employees are represented by a collective bargaining
group, and we believe that our relationship with our employees is good.
16
<PAGE>
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company, the Bank and the MHC. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
General
The Bank, as a federally chartered savings institution, is subject to
federal regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the FDIC,
which insures the deposits of the Bank to the maximum extent permitted by law,
and requirements established by the Federal Reserve Board. Federally chartered
savings institutions are required to file periodic reports with the OTS and are
subject to periodic examinations by the OTS and the FDIC. The investment and
lending authority of savings institutions is prescribed by federal laws and
regulations, and such institutions are prohibited from engaging in any
activities not permitted by such laws and regulations. Such regulation and
supervision primarily is intended for the protection of depositors and not for
the purpose of protecting shareholders.
The OTS regularly examines the Bank and prepares reports for consideration
by the Bank's Board of Directors on any deficiencies that it may find in the
Bank's operations. The FDIC also has the authority to examine the Bank in its
role as the administrator of the SAIF. The Bank's relationship with its
depositors and borrowers also is regulated to a great extent by both federal and
state laws, especially in such matters as the ownership of savings accounts and
the form and content of the Bank's mortgage requirements. The OTS' enforcement
authority over all savings institutions and their holding companies includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to initiate injunctive actions. In general,
these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Any change in such regulations, whether by the FDIC,
OTS or Congress, could have a material adverse impact on the MHC, the Company
and the Bank and their operations.
Willow Grove Bancorp, Inc.
We are a registered savings and loan holding company within the meaning of
Section 10 of the Home Owners' Loan Act ("HOLA") and are subject to OTS
examination and supervision as well as certain reporting requirements. In
addition, because the Bank's deposits are insured by the SAIF maintained by the
FDIC, the Bank is subject to certain restrictions in dealing with us and with
other persons affiliated with the Bank.
Pursuant to regulations of the OTS and the terms of our federal stock
charter, our purpose and powers are to pursue any or all of the lawful
objectives of a federal mutual holding company and to exercise any of the powers
accorded to a mutual holding company. A mutual holding company is permitted to,
among other things: (i) invest in the stock of a savings institution; (ii)
acquire a mutual institution through the merger of such institution into a
savings institution subsidiary of such mutual holding company or an interim
savings institution of such mutual holding company; (iii) merge with or acquire
another mutual holding company, one of whose subsidiaries is a savings
institution; (iv) acquire non-controlling amounts of the stock of savings
institutions and savings institution holding companies, subject to certain
restrictions; (v) invest in a corporation the capital stock of which is
available for purchase by a savings institution under Federal law or under the
law of any state where the subsidiary savings institution or institutions have
their home offices; (vi) furnish or perform management services for a savings
institution subsidiary of such company; (vii) hold, manage or liquidate assets
owned or acquired from a savings institution subsidiary of such company; (viii)
hold or manage properties used or occupied by a savings institution subsidiary
of such company; and (ix) act as a trustee under deed or trust.
17
<PAGE>
The HOLA prohibits a savings and loan holding company, such as us,
directly or indirectly, from (1) acquiring control (as defined) of a savings
institution (or holding company thereof) without prior OTS approval, (2)
acquiring more than 5% of the voting shares of a savings institution (or holding
company thereof) which is not a subsidiary, subject to certain exceptions,
without prior OTS approval, or (3) acquiring through merger, consolidation or
purchase of assets of another savings institution (or holding company thereof)
or acquiring all or substantially all of the assets, another savings institution
(or holding company thereof) without prior OTS approval or (4) acquiring control
of an uninsured institution. A savings and loan holding company may not acquire
as a separate subsidiary a savings institution which has its principal offices
outside of the state where the principal offices of its subsidiary institution
is located, except (i) in the case of certain emergency acquisitions approved by
the FDIC, (ii) if the holding company controlled (as defined) such savings
institution as of March 5, 1987 or (iii) when the laws of the state in which the
savings institution to be acquired is located specifically authorize such an
acquisition. No director or officer of a savings and loan holding company or
person owning or controlling more than 25% of such holding company's voting
shares may, except with the prior approval of the OTS, acquire control of any
savings institution which is not a subsidiary of such holding company.
The Mutual Holding Company
The MHC as a federal mutual holding company within the meaning of Section
10(o) of the HOLA, is subject to OTS examination and supervision as well as
certain reporting requirements. In addition, the OTS has enforcement authority
over the MHC and its non-savings bank subsidiaries, if any. Among other things,
this authority permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the financial safety, soundness or stability
of a subsidiary savings bank. The MHC will be subject to the same activities
limitations to which we are subject. See " --Willow Grove Bancorp, Inc.."
The Bank
Insurance of Accounts. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under current FDIC regulations, SAIF-insured institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system discussed below. These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging
prior to September 30, 1996 from 23 basis points for well capitalized, healthy
institutions to 31 basis points for undercapitalized institutions with
substantial supervisory concerns.
The deposits of the Bank are currently insured by the SAIF. Both the SAIF
and the BIF are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF achieved a fully funded status
first, and therefore as discussed below, effective January 1, 1996, the FDIC
substantially reduced the average deposit insurance premium paid by BIF-insured
banks. On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their then-current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
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On September 30, 1996 Congress passed, and the President signed, the DIF
Act which mandated that all institutions which have deposits insured by SAIF
were required to pay a one-time special assessment of 65.7 basis points on such
deposits (subject to adjustment for certain types of banks with SAIF deposits)
that were held at March 31,1995 payable by November 27, 1996 to recapitalize the
SAIF. The assessment increased the SAIF's reserve ratio to a comparable level to
that of the BIF at 1.25% of total insured deposits. The Bank's share of this
special assessment totaled $1.5 million and is reflected in the fiscal 1997
operating results. The FDIC, in connection with the recapitalization, also
lowered SAIF premiums from $0.23 per $100 to $0.064 per $100 of insured deposits
beginning in January 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Regulatory Capital Requirements. The OTS capital requirements consist of a
"tangible capital requirement," a "leverage capital requirement" and a
"risk-based capital requirement." The OTS is authorized to impose capital
requirements in excess of those standards on individual institutions on a
case-by-case basis.
Under the tangible capital requirement, a savings bank must maintain
tangible capital in an amount equal to at least 1.5% of adjusted total assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.
Under the leverage capital requirement adopted by the OTS, savings banks
must maintain "core capital" in an amount equal to at least 3.0% of adjusted
total assets. Core capital is defined as common shareholders' equity (including
retained earnings), non-cumulative perpetual preferred stock, and minority
interests in the equity accounts of consolidated subsidiaries, plus purchased
mortgage servicing rights valued at the lower of 90% of fair market value, 90%
of original cost or the current amortized book value as determined under GAAP,
and "qualifying supervisory goodwill," less non-qualifying intangible assets.
Under the risk-based capital requirement, a savings bank must maintain
total capital (which is defined as core capital plus supplementary capital)
equal to at least 8.0% of risk-weighted assets. A savings bank must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors, which range from 0% for cash and securities issued by the
United States Government or its agencies to 100% for repossessed assets or loans
more than 90 days past due. Qualifying one-to-four family residential real
estate loans and qualifying multi-family residential real estate loans (not more
than 90 days delinquent and having an 80% or lower loan-to-value ratio), which
at June 30, 2000, represented 71.6% of the total loans receivable, are weighted
at a 50% risk factor. Supplementary capital may include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and general
allowances for loan losses. The allowance for loan losses includable in
supplementary capital is limited to 1.25% of risk-weighted assets. Supplementary
capital is limited to 100% of core capital.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital, in addition to the adjustments required
for calculating core capital. Such exclusions consist of equity investments (as
defined by regulation) and that portion of land loans and non-residential
construction loans in excess of an 80% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments. However, in calculating regulatory
capital, institutions can add back unrealized losses and
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deduct unrealized gains net of taxes, on debt securities reported as a separate
component of GAAP capital.
The OTS regulations establish special capitalization requirements for
savings banks that own service corporations and other subsidiaries, including
subsidiary savings banks. According to these regulations, certain subsidiaries
are consolidated for capital purposes and others are excluded from assets and
capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks,
engaged solely in mortgage-banking activities, or engaged in certain other
activities solely as agent for its customers are "includable" subsidiaries that
are consolidated for capital purposes in proportion to the Bank's level of
ownership, including the assets of includable subsidiaries in which the Bank has
a minority interest that is not consolidated for GAAP purposes. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 2000, the Bank had no investments subject
to a deduction from tangible capital.
The OTS amended its risk-based capital requirements that would require
institutions with an "above normal" level of interest rate risk to maintain
additional capital. A savings bank is considered to have a "normal" level of
interest rate risk if the decline in the market value of its portfolio equity
after an immediate 200 basis point increase or decrease in market interest rates
(whichever leads to the greater decline) is less than two percent of the current
estimated market value of its assets. The market value of portfolio equity is
defined as the net present value of expected cash inflows and outflows from a
bank's assets, liabilities and off-balance sheet items. The amount of additional
capital that an institution with an above normal interest rate risk is required
to maintain (the "interest rate risk component") equals one-half of the dollar
amount by which its measured interest rate risk exceeds the normal level of
interest rate risk. The interest rate risk component is in addition to the
capital otherwise required to satisfy the risk-based capital requirement.
Implementation of this component has been postponed by the OTS. The final rule
was to be effective as of January 1, 1994, subject however to a three quarter
lag time in implementation. However, in October 1994, the Director of the OTS
indicated that the OTS would waive the capital deductions for institutions with
a greater than "normal" risk until the OTS published an appeals process. On
August 21, 1995, the OTS released Thrift Bulletin 67, which established (i) an
appeals process to handle "requests for adjustments" to the interest rate risk
component and (ii) a process by which "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to determine their
interest rate risk component (See "--Prompt Corrective Action"). The Director of
the OTS indicated, concurrent with the release of Thrift Bulletin 67, that the
OTS will continue to delay the implementation of the capital deduction for
interest rate risk pending the testing of the appeals process set forth in
Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim policy issued in
August 1993 under which savings institutions computed their regulatory capital
in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under the revised OTS policy, savings institutions must
value securities available for sale at amortized cost for regulatory capital
purposes. This means that in computing regulatory capital, savings institutions
should add back any unrealized losses and deduct any unrealized gains, net of
income taxes, on debt securities reported as a separate component of GAAP
capital.
At June 30, 2000, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 9.0%, 9.0%
and 15.7%, respectively.
The OTS and the FDIC generally are authorized to take enforcement action
against a savings bank that fails to meet its capital requirements, which action
may include restrictions on operations and banking activities, the imposition of
a capital directive, a cease-and-desist order, civil money penalties or harsher
measures such as the appointment of a receiver or conservator or a forced merger
into another institution. In addition, under current regulatory policy, a bank
that fails to meet its capital requirements is prohibited from paying any
dividends.
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Prompt Corrective Action. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required
to take prompt corrective action if an insured depository institution fails to
satisfy certain minimum capital requirements, including a leverage limit, a
risk-based capital requirement, and any other measure of capital deemed
appropriate by the federal banking regulator for measuring the capital adequacy
of an insured depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
management fees if the institution would thereafter fail to satisfy the minimum
levels for any of its capital requirements.
Under the FDICIA, which became effective on December 19, 1992, an
institution is deemed to be (i) "well capitalized" if it has total risk-based
capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more,
has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any
order or final capital directive to meet and maintain a specific capital level
for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Under specified
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with its appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions, and the appropriate federal banking agency also may
take any number of discretionary supervisory actions.
At June 30, 2000, the Bank was in the "well capitalized" category for
purposes of the above regulations.
Safety and Soundness Guidelines. The OTS and the other federal bank
regulatory agencies have established guidelines for safety and soundness,
addressing operational and managerial standards, as well as compensation matters
for insured financial institutions. Institutions failing to meet these standards
are required to submit compliance plans to their appropriate federal regulators.
The OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions. The Bank believes that
it is in compliance with these guidelines and standards.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. The Bank consistently has had liquidity well in excess
of the Federal requirements during the past three fiscal years.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a
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savings institution to make capital distributions. Under new regulations
effective April 1, 1999, a savings institution must file an application for OTS
approval of the capital distribution if either (1) the total capital
distributions for the applicable calendar year exceed the sum of the
institution's net income for that year to date plus the institution's retained
net income for the preceding two years, (2) the institution would not be at
least adequately capitalized following the distribution, (3) the distribution
would violate any applicable statute, regulation, agreement or OTS-imposed
condition, or (4) the institution is not eligible for expedited treatment of its
filings. If an application is not required to be filed, savings institutions
which are a subsidiary of a holding company (as well as certain other
institutions) must still file a notice with the OTS at least 30 days before the
board of directors declares a dividend or approves a capital distribution.
In addition, OTS regulations require the MHC to notify the OTS of any
proposed waiver of its right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case-by-case basis, and, in
general, not to object to any such waiver if: (I) the MHC's board of directors
determines that such waiver is consistent with such directors' fiduciary duties
to the MHC members; (ii) the waiver would not be detrimental to the safe and
sound operation of the Bank; (iii) for as long as the Company is controlled by
the MHC, the dollar amount of dividends waived by the MHC is considered as a
restriction on the retained earnings of the Company, which restriction, if
material, is disclosed in the public financial statements of the Company as a
note to the financial statements; (iv) the amount of any dividend waived by the
MHC is available for declaration as a dividend solely to the MHC, and in
accordance with Statement of Financial Accounting Standards No. 5, when the
Company determines that the payment of such dividend to the MHC is probable, an
appropriate dollar amount is recorded as a liability; and (v) the amount of any
waived dividend is considered having been paid to the Company in evaluating any
proposed dividend under the OTS capital distribution regulations. Effective July
12, 2000, the OTS revised its policy that, in the event the MHC converts to
stock form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the MHC. Under the revised OTS policy, in the event the MHC converts to stock
form, the OTS will no longer require dilution for any dividends waived by the
MHC.
Branching by Federal Savings Institutions. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS'
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i)
the branch(es) result(s) from an emergency acquisition of a troubled savings
institution (however, if the troubled savings institution is acquired by a bank
holding company, does not have its home office in the state of the bank holding
company bank subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the state where
the savings institution is located); (ii) the law of the state where the branch
would be located would permit the branch to be established if the federal
savings institution were chartered by the state in which its home office is
located; or (iii) the branch was operated lawfully as a branch under state law
prior to the savings institution's reorganization to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions
have a responsibility under the CRA and related regulations of the OTS to help
meet the credit needs of their communities, including low- and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
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Qualified Thrift Lender Test. All savings institutions are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. Under Section 2303 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, a savings institution can comply with the QTL
test by either qualifying as a domestic building and loan bank as defined in
Section 7701(a)(19) of the Code or by meeting the second prong of the QTL test
set forth in Section 10(m) of the HOLA. A savings institution that does not meet
the QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any new advances from its FHLB,
other than special liquidity advances with the approval of the OTS; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three years from
the date the savings institution ceases to be a QTL, it must cease any activity
and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
Currently, the portion of the QTL test that is based on Section 10(m) of
the HOLA rather than the Code requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); stock issued by the FHLB of Pittsburgh; and direct or indirect
obligations of the FDIC. In a recent amendment to the QTL, small business loans,
credit card loans, student loans and loans for personal, family and household
purposes were allowed to be included without limitation as qualified
investments. In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold within
90 days of origination; 100% of consumer and educational loans (limited to 10%
of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institution's total assets.
At June 30, 2000, substantially all of the portfolio assets of the Bank were
qualified thrift investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. At
June 30, 2000 the Bank had $37.5 million of FHLB advances.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of the members' aggregate amount of outstanding
advances. At June 30, 2000, the Bank had $3.4 million in FHLB stock, which was
in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future.
Federal Reserve System. Federal Reserve Board regulations require all
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and
non-personal time deposits. At June 30, 2000, the Bank was in
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compliance with these reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS.
Savings banks are authorized to borrow from a Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require savings banks
to exhaust other reasonable alternative sources of funds, including FHLB
advances, before borrowing from a Federal Reserve Bank.
Affiliate Restrictions. Section 11 of the HOLA provides that transactions
between an insured subsidiary of a holding company and an affiliate thereof will
be subject to the restrictions that apply to transactions between banks that are
members of the Federal Reserve System and their affiliates pursuant to Sections
23A and 23B of the Federal Reserve Act ("FRA").
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings institution or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the institution's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings institution and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings institution may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings institution
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a savings institution and its subsidiaries may not purchase a
low-quality asset from an affiliate; and covered transactions and certain other
transactions between a savings institution or its subsidiaries and an affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a
savings institution to an affiliate must be secured by collateral with a market
value ranging from 100% to 130% (depending on the type of collateral) of the
amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
institution subsidiaries of savings institutions from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
institutions to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings institutions may
be required to give the OTS prior notice of affiliate transactions.
Federal Securities Law
Our Common Stock is registered with the Securities and Exchange Commission
("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and, under OTS regulations, generally may not be deregistered for at least
three years after the offering. We are subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
TAXATION
Federal Taxation
General. We are subject to federal income taxation in the same general
manner as other corporations with some exceptions listed below. The following
discussion of federal taxation is only intended to summarize certain pertinent
federal income tax matters and is not a comprehensive
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description of the applicable tax rules. Our federal income tax returns have
been closed without audit by the Internal Revenue Service ("IRS") through 1995.
We will file a consolidated federal income tax return which includes the
Bank. Accordingly, it is anticipated that any cash distributions made by us
would be treated as cash dividends, and not as a non-taxable return of capital
to stockholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, we report our
income and expenses on the accrual method of accounting and file our federal
income tax return using a June 30 fiscal year end.
Bad Debt Reserves. The Small Business Protection Act of 1996 (the "1996
Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995. Prior to the 1996 Act, the Bank was permitted to establish a reserve for
bad debts and to make additions to the reserve. These additions could, within
specified formula limits, be deducted in arriving at taxable income. As a result
of the 1996 Act, savings associations must use the specific chargeoff method in
computing their bad debt deduction beginning with their 1996 federal tax return.
In addition, federal legislation requires the recapture (over a six year period)
of the excess of tax bad debt reserves at December 31, 1995 over those
established as of December 31, 1987. The amount of the Bank's reserve subject to
recapture as of June 30, 2000 is approximately $1.6 million.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income if the Bank failed to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or ceases to maintain a bank
charter.
At June 30, 2000, the Bank's total federal pre-1988 reserve was
approximately $6.2 million. The reserve reflects the cumulative effects of
federal tax deductions for which no federal income tax provisions have been
made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. We have not
been subject to the AMT nor do we have any such amounts available as credits for
carryover.
Net Operating Loss Carryovers. We may carry back net operating losses to
the three preceding taxable years and forward to the succeeding 15 taxable
years. This provision applies to losses incurred in taxable years beginning
before August 6, 1997. For net operating losses in years beginning after August
5, 1997, such net operating losses can be carried back to the two preceding
taxable years and forward to the succeeding 20 taxable years. At June 30, 2000,
we had no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. We may exclude from income 100% of
dividends received from a member of the same affiliated group of corporations.
The corporate dividends received deduction is 80% in the case of dividends
received from corporations which a corporate recipient owns less than 80%, but
at least 20% of the distribution corporation. Corporations which own less than
20% of the stock of a corporation distributing a dividend may deduct only 70% of
dividends received.
State and Local Taxation
Pennsylvania Taxation. We are subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Corporation Net Income Tax
rate for 1998 is 9.99% and is imposed on unconsolidated taxable income for
federal purposes with certain adjustments. In general, the
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Capital Stock Tax is a property tax imposed at the rate of approximately 1.2% of
a corporation's capital stock value, which is determined in accordance with a
fixed formula based upon average net income and net worth.
The Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act (the "MTIT"), as amended to include thrift institutions
having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT
exempts the Bank from other taxes imposed by the Commonwealth of Pennsylvania
for state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principles ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on state and federal
obligations, while disallowing a percentage of a thrift's interest expense
deduction in the proportion of interest income on those securities to the
overall interest income of the Bank. Net operating losses, if any, thereafter
can be carried forward three years for MTIT purposes.
26
<PAGE>
Item 2. Properties
We operate from the following locations:
<TABLE>
<CAPTION>
Owned Lease Net Book Deposits
Or Expiration Value at At
Location Leased Date June 30, 2000 June 30, 2000
-------- ------ ---- ------------- -------------
(Dollars In thousands)
<S> <C> <C> <C> <C>
Executive Office:
Welsh & Norristown Roads(1)
Maple Glen, PA 19002-8030 Owned N/a $1,848 $109,626.
Operations Center:
100 Witmer Road(2)
Horsham, PA Leased 08/2004 90
Branch Offices:
1555 West Street Road
Warminster, PA 18974-3103 Leased 01/2001 27 50,414.
1141 Ivyland Road
Warminster, PA 18974-2048 Leased 06/2004 3 19,848.
9 Easton Road
Willow Grove, PA 19090-0905 Owned N/a 628 114,097.
701 Twining Road
Dresher, PA 19025-1894 Owned N/a 792 56,031.
761 Huntingdon Pike
Huntingdon Valley, PA
19006-8399 Owned N/a 343 43,208.
2 N. York Road
Hatboro, PA 19040-3201 Leased 05/2002 100 21,679.
1331 Easton Road
Roslyn, PA 19001 Leased 12/2004 47 6,618.
11730 Bustleton Avenue
Philadelphia, PA 19116 Leased 02/2004 32 15,517.
122 North Main Street(3)
North Wales, PA 19454 Leased 02/2010 119 5,875.
8200 Castor Avenue(4)
Philadelphia, PA 19152 Leased 12/2009 183 9,944.
</TABLE>
----------
(1) Includes adjacent nine acre parcel that could be used for future expansion
(2) Opened in November 1999.
(3) Opened in January 2000.
(4) Opened in March 2000.
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings in the normal course
of business which, in the aggregate, are believed by management to be immaterial
to the financial condition and operating results of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
27
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information required herein, to the extent applicable, is incorporated
by reference from page 18 of the Company's 2000 Annual Report to Stockholders
(the "2000 Annual Report"), and attached hereto as Exhibit 13.0
Item 6. Selected Financial and Other Data
The information required herein is incorporated by reference from page 5
of the Company's 2000 Annual Report and attached hereto as Exhibit 13.0.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from pages 6
to 12 of the Company's 2000 Annual Report and attached hereto as Exhibit 13.0.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
(Asset/Liability Management)
The information required herein is incorporated by reference from pages 13
to 16 of the Company's 2000 Annual Report and attached hereto as Exhibit 13.0.
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference from page 17
and pages 19 to 43 of the Company's 2000 Annual Report and attached hereto as
Exhibit 13.0.
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from pages 3
to 6 of the definitive proxy statement of the Company for the Annual Meeting of
Stockholders to be held on November 9, 2000, which will be filed within 120 days
of June 30, 2000 ("Definitive Proxy Statement").
Item 11. Executive Compensation
The information required herein is incorporated by reference from pages 7
to 10 of the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference from pages 12
to 13 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page 9
of the Definitive Proxy Statement.
28
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K
(A) Documents Filed as Part of this Report.
(1) The following consolidated financial statements are
incorporated by reference from Item 8 hereof (see Exhibit
13.0):
Independent Auditors' Report
Consolidated Statements of Financial Condition as of June 30,
2000 and 1999
Consolidated Statements of Income for the Years Ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income for the Years Ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998
(2) Notes to Consolidated Financial Statements. All schedules for
which provision is made in the applicable accounting
regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the
required information is included in the consolidated financial
statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
Exhibit Index
-------------
2.1 *Plan of Reorganization
2.2 *Plan of Stock Issuance
3.1 *Federal Stock Charter of Willow Grove Bancorp,
Inc.
3.2 *Bylaws of Willow Grove Bancorp, Inc.
4.0 *Form of Stock Certificate of Willow Grove
Bancorp, Inc.
10.1 *Form of Employment Agreement entered into between
Willow Grove Bank and Frederick A.
Marcell, Jr.
10.2 *Form of Employment Agreement entered into
between Willow Grove Bank and each of
Thomas M. Fewer and John T. Powers
10.3 *Supplemental Executive Retirement Agreement
10.4 *Non-Employee Director's Retirement Plan
10.5 **1999 Stock Option Plan
**1999 Recognition and Retention Plan and Trust
10.6 Agreement
13.0 2000 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant - Reference is
made to "Item 1. Business" for the required
information
23.0 Consent of KPMG LLP
27.0 Financial Data Schedule
----------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 filed on September 18, 1998, as amended, and declared effective
on November 12, 1998.
** Incorporated by reference from the Company's Definitive Proxy Statement on
Schedule 14A filed on June 23, 1999.
(b) The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2000.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index.
(d) There are no financial statements or schedules which were excluded from
Item 8 which are required to be reported herein.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Willow Grove Bancorp, Inc.
By: /s/ Frederick A. Marcell, Jr.
-------------------------------------
Frederick A. Marcell, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Elizabeth H. Gemmill September 28, 2000
------------------------------------
Elizabeth H. Gemmill
Director
/s/ Lewis W. Hull September 28, 2000
------------------------------------
Lewis W. Hull
Director
/s/ J. Ellwood Kirk September 28, 2000
------------------------------------
J. Ellwood Kirk
Director
/s/ Charles F. Kremp, 3rd September 28, 2000
------------------------------------
Charles F. Kremp 3rd
Director
/s/ William W. Langan September 28, 2000
------------------------------------
William W. Langan
Chairman of the Board
/s/ Frederick A. Marcell, Jr. September 28, 2000
------------------------------------
Frederick A. Marcell, Jr.
Director, President and Chief Executive Officer
/s/ A. Brent O'Brien September 28, 2000
------------------------------------
A. Brent O'Brien
Director
/s/ Samuel H. Ramsey, III September 28, 2000
------------------------------------
Samuel H. Ramsey, III
Director
/s/ William B. Weihenmayer September 28, 2000
------------------------------------
William B. Weihenmayer
Director
/s/ Christopher E. Bell September 28, 2000
------------------------------------
Christopher E. Bell
Senior Vice President and Chief Financial Officer (principal financial officer)
30
