-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FooqVRjC0ieNq5KiDQ0USt+Lnwwn93NVIvMaGAGMph+4QUaYgYhC0RSJkXKLLJsm babgevyNC/MDus2e1OqCPA== 0001005477-99-004516.txt : 19991227 0001005477-99-004516.hdr.sgml : 19991227 ACCESSION NUMBER: 0001005477-99-004516 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLOW GROVE BANCORP INC CENTRAL INDEX KEY: 0001070543 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 232986192 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25191 FILM NUMBER: 99718714 BUSINESS ADDRESS: STREET 1: WELSHAND NORRISTOWN RD CITY: MAPLE GLEN STATE: PA ZIP: 19002 BUSINESS PHONE: 2156465405 10-K405 1 FORM 10-K U. S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K |X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1999 OR |_| Transition report under Section13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from _________________ to ___________________ Commission File No. 0-25191 Willow Grove Bancorp, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) United States 23-2986192 --------------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002 - ---------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): (215) 646-5405 --------------------------- Securities registered under Section 12(b) of the Exchange Act: Not Applicable Securities registered under Section 12(g) of the Exchange Act: Common Stock (par value $0.01 per share) -------------------------------------------------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |X| As of September 10, 1999, the aggregate value of the 1,944,669 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 385,844 shares held by all directors and executive officers of the Registrant and the Registrant's Employee Stock Ownership Plan ("ESOP"), as a group and 2,812,974 shares held by Willow Grove Mutual Holding Company was approximately $19.7 million. This figure is based on the closing sales price of $10.13 per share of the Registrant's Common Stock on September 10, 1999. Although directors and executive officers and the ESOP were assumed to be "Affiliates" of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status. The number of shares of Common Stock outstanding as of September 10, 1999 was 5,143,487. The following documents have been incorporated by reference: Listed below are the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) portions of the Annual Report to Stockholders for the year ended June 30, 1999 are incorporated into Part II, Items 5 through 8 of this Form 10-K; and (2) portions of the definitive proxy statement for the 1999 Annual Meeting of Stockholders are incorporated into Part III, Items 10 through 13 of this Form 10-K. PART I Item 1. Business General. Willow Grove Bancorp, Inc. (the "Company") is a federal corporation that completed its initial public offering in December 1998 in the reorganization of Willow Grove Bank (the "Bank") from a federally chartered mutual savings bank into a federally chartered stock savings bank in the mutual holding company form of ownership. Willow Grove Bank is the subsidiary of Willow Grove Bancorp, Inc., which is the majority-owned subsidiary of Willow Grove Mutual Holding Company (the "MHC"). Willow Grove Bank was originally organized in 1909, and is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. At the present time, the business of the Company is primarily the business of the Bank. In recent years, we have concentrated our business plans on three primary goals, changing operations to a full-service community bank, continuing steady growth, and maintaining a high level of asset quality. Our principal sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, funds provided from operations, and on a limited basis, funds borrowed from outside sources such as the Federal Home Loan Bank ("FHLB") of Pittsburgh. These funds are primarily used for the origination of various loan types including, single-family residential, commercial real estate, home equity, consumer and business. Our major source of income is the interest on our loan and securities portfolio, while our major expense is interest paid on deposit accounts. The Office of Thrift Supervision ("OTS") is our chartering authority and primary regulator. We are also regulated by the Federal Deposit Insurance Corporation ("FDIC"), the administrator for the Savings Association Insurance Fund ("SAIF"). We are also subject to reserve requirements established by the Board of Governors of the Federal Reserve System (the "Fed"), and we are a member of the FHLB of Pittsburgh, one of the regional banks comprising the FHLB System. The executive offices for Willow Grove Mutual Holding Company, Willow Grove Bancorp, Inc. and Willow Grove Bank are all at Welsh and Norristown Roads, Maple Glen, Pennsylvania, and our telephone number is (215) 646-5405. This Form 10-K contains certain forward-looking statements and information based upon our beliefs as well as assumptions we have made. In addition, to those and other portions of this document, the words "anticipate", "believe", "estimate", "expect", "intend", "should", and similar expressions, or the negative thereof, as they relate to us are intended to identify forward-looking statements. Such statements reflect our current view with respect to future looking events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended. We do not intend to update these forward-looking statements. Market Area and Competition Our main office is in Montgomery County, Pennsylvania, approximately 20 miles north of downtown Philadelphia. The primary market areas that we serve are: eastern Montgomery County, southern Bucks County, and the northeast section of Philadelphia that borders these counties. To a lesser extent, we service areas of Chester and Delaware counties, the remainder of the City of Philadelphia, and southern New Jersey. We face significant competition in originating loans and attracting deposits. This competition stems primarily from commercial banks, other savings banks and savings associations and mortgage-banking companies. Within our market area, we estimate that we compete with more than 35 other banks and savings institutions. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies. 1 Lending Activities General. At June 30, 1999 our net loan portfolio totaled $374.6 million or 79.35% of our total assets. Historically, our primary emphasis has been the origination of loans secured by first liens on single-family residences. In recent years, we have changed the focus of our lending to place more emphasis on home equity loans, commercial real estate and multi-family real estate loans and commercial business loans. At June 30, 1999, commercial and multi-family real estate loans amounted to $65.7 million, or 17.07% of our total loan portfolio. As of that date, commercial business loans totaled $13.0 million or 3.38% of the total loan portfolio. Loans secured by liens on single-family residential properties included first mortgage loans totaling $231.5 million or 60.14% of the loan portfolio; and $54.1 million of home equity loans and lines of credit, which accounted for 14.05% of the loan portfolio. The types of loans that we originate are subject to federal and state laws and regulations. Interest rates and fees charged on these loans are affected primarily by the demand for loans by borrowers and the supply of funds available for lending purposes and rates and fees charged by our competitors. Local, national, and international economic conditions and their effect on the monetary policies of the Federal Reserve Board; legislative and tax policies; and budgetary matters of local, state, and federal governmental bodies affect the supply of funds available and the demand for loans. 2 Loan Portfolio Composition. The following table sets forth the composition of the loan portfolio at the dates indicated.
At June 30, --------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total --------------------------------------------------------------------------------------------------------- (Dollars in thousands) Mortgage Loans: Single-family (1) $ 231,498 60.14% $ 243,131 71.41% $ 236,832 78.09% $ 208,877 79.64% $ 192,168 84.76% Multi-family 12,938 3.36 7,500 2.20 7,686 2.53 4,565 1.74 4,203 1.85 Commercial 52,769 13.71 24,478 7.19 15,455 5.10 14,904 5.68 9,411 4.15 Construction 14,219 3.69 13,627 4.00 13,120 4.33 13,746 5.24 8,470 3.74 Home equity 54,090 14.05 41,366 12.15 25,553 8.43 16,184 6.17 10,494 4.63 ------------------------------------------------------------------------------------------------------ Total Mortgage loans 365,514 94.95 330,102 96.95 298,646 98.48 258,276 98.47 224,746 99.13 Non-mortgage consumer 6,431 1.67 4,930 1.45 2,924 0.96 2,173 0.83 1,281 0.57 Commercial business 13,023 3.38 5,437 1.60 1,698 0.56 1,841 0.70 672 0.30 ------------------------------------------------------------------------------------------------------ Total loans receivable 384,968 100.00% 340,469 100.00% 303,268 100.00% 262,290 100.00% 226,699 100.00% ====== ====== ====== ====== ====== Less Undisbursed portion of loan proceeds (6,446) (8,855) (9,344) (10,341) (3,541) Allowance for loan losses (3,138) (2,665) (1,678) (1,938) (1,728) Deferred loan fees (800) (1,092) (1,477) (1,536) (1,848) --------- --------- --------- --------- --------- Loans receivable, net $ 374,584 $ 327,857 $ 290,769 $ 248,475 $ 219,582 ========= ========= ========= ========= =========
- ---------- (1) Includes loans available for sale totaling $12.2 million, $6.2 million, $5.1 million and $9.4 million for the years ended June 30, 1998, 1997, 1996, and 1995. There were no loans available for sale at June 30, 1999. 3 Contractual Principal Repayments and Interest Rates. The following table sets forth scheduled contractual amortization of the loan portfolio at June 30, 1999, as well as the dollar amount of such loans scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans, loans having no schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less.
At June 30, 1999 ----------------------------------------------------------------------------------------------- Loans Secured By ----------------------------------------------------------------------------------------------- Single Multi- Family family Non- Residential Residential Commercial Construction Mortgage Commercial Total Properties(1) Property Real Estate Loans (2) Consumer Business Loans ----------------------------------------------------------------------------------------------- (In thousands) Amounts due in: 1 year or less $ 595 $ -- $ 837 $ 4,350 $ 1,518 $ 6,099 $ 13,399 More than 1 year to 3 years 4,265 785 765 3,001 1,941 841 11,598 More than 3 years to 5 years 14,488 -- 4,919 -- 1,819 1,465 22,691 More than 5 years to 10 years 30,529 1,132 13,254 100 1,054 4,322 50,391 More than 10 years to 20 years 83,597 8,977 25,008 322 45 296 118,245 More than 20 years 152,114 2,044 7,986 -- 54 -- 162,198 -------------------------------------------------------------------------------------------- Total $285,588 $ 12,938 $ 52,769 $ 7,773 $ 6,431 $ 13,023 $378,522 ============================================================================================
- ---------- (1) Includes both first mortgage and home equity loans. (2) Net of undisbursed portion of loan proceeds. Of the $365.1 million of loan principal repayments due after June 30, 2000, $285.6 million have fixed rates of interest and $79.5 million have adjustable rates of interest. 4 Activity in Loans. The following table sets forth the activity in our loan portfolio for the periods indicated.
Year Ended June 30, --------------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands) Total Loans held at the beginning of the period $ 340,469 $ 303,268 $ 262,290 Originations of loans for portfolio Mortgage Loans: Single-family residential $ 52,987 $ 33,653 $ 31,007 Multi-family residential 8,607 -- 1,000 Commercial real estate 20,335 11,591 6,298 Construction 12,769 13,020 4,708 Home equity 26,779 23,400 16,487 Non-mortgage consumer 3,622 3,800 1,717 Commercial business 19,185 6,668 297 Transfer of loans from available for sale to portfolio -- -- 2,089 --------------------------------------- Total originations for and transfers to portfolio $ 144,284 $ 92,132 $ 63,603 --------------------------------------- Origination of available for sale loans 2,875 30,341 16,922 Transfer of loans from available for sale to portfolio -- -- (2,089) --------------------------------------- Total origination of loans $ 147,159 $ 122,473 $ 78,436 --------------------------------------- Purchases of loans for portfolio Single-family residential 18,229 19,836 16,677 Commercial real estate 7,681 600 -- Construction -- -- 956 Home equity 4,342 3,988 -- Purchases of loans available for sale -- 6,055 12,205 --------------------------------------- Total purchases of loans $ 30,252 $ 30,479 $ 29,838 --------------------------------------- Repayments 117,827 85,328 40,841 Charge-offs of loans in portfolio 58 6 445 Sale of available for sale loans 15,027 30,417 26,010 --------------------------------------- Net activity in loans in portfolio $ 44,499 $ 37,201 $ 40,978 --------------------------------------- Total loans at the end of the period $ 384,968 $ 340,469 $ 303,268 =======================================
Our lending activities are subject to underwriting standards and origination procedures, which have been approved by our Board of Directors. In mid-1996, we determined that based upon the significant amount of standardization in the single-family residential underwriting and documentation processes, that it was more cost effective for us to out-source single-family residential origination. Since that time, we have developed a network of approximately 25 correspondent mortgage brokers and mortgage bankers, and no longer have single-family residential loan originators on staff. These correspondents identify, process, and underwrite loans on our behalf based upon rates and terms that we provide to them on a regular basis. Depending upon the various programs we have with the correspondents, loans will be classified as either purchased or originated in the above table. When the correspondent advances funds for the closing of a loan we have committed to purchase, it is classified as "purchase" in the above table. When we provide the funds for the closing of the loan, it is classified as "originated". In either case, we may retain the loan in our portfolio or sell it (on either a servicing released or retained basis) in the secondary market. The correspondents forward completed loan applications for our review. Based upon our 5 assessment of our demand for the type of loan, we will determine whether to reject the loan or acquire the loan for our portfolio or for sale into the secondary market. The loans generally are required to be underwritten in accordance with Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines (this facilitates resale into the secondary market). At times, we do acquire loans that do not conform to FHLMC/FNMA guidelines ("non-conforming" loans). Most non-conforming loans we consider are non-conforming due to either the amount of the loan exceeds the maximum loan amount that FHLMC or FNMA will purchase (commonly referred to as "jumbo" loans), or loans that do not have a monthly amortization schedule, such as bi-weekly mortgage loans. Non-conforming loans are underwritten according to our alternative underwriting standards, which in many respects are similar to FHLMC/FNMA guidelines. These loans account for approximately one-quarter of our single-family loan portfolio. Our underwriting function for home equity loans, commercial and multi-family real estate loans, construction, commercial business, and consumer loans is centralized at our main office. We require a current appraisal prepared by an independent appraiser on all new mortgage loans. We also require title insurance and hazard insurance on all loans secured by real estate, except home equity loans. Flood insurance is also required for all loans secured by properties located in a designated flood area. Our loan policy authorizes certain officers to approve loans on an individual basis up to certain designated amounts, not exceeding $500,000 in the case of the President. Loans exceeding individual limits must be approved by a Loan Committee consisting of the President, the three other executive officers, and a vice-president of lending; the Director's Loan Committee, consisting of three outside directors, the President, and the Chief Credit Officer, or the full Board of Directors. The Director's Loan Committee and the full Board of Directors are also provided with summaries of new loan activity on a routine basis. As a federal savings bank, we are limited in the amount of loans we make to any one borrower. This amount is equal to 15% of the Bank's unimpaired capital and surplus (in our case, this amount would be approximately $7.0 million at June 30, 1999), although there are provisions that would allow us to lend an additional 10% of unimpaired capital and surplus if the loans are secured by readily marketable securities. Our aggregate loans to any one borrower have been within these limits. At June 30, 1999, our three largest credit relationships with an individual borrower and related entities amounted to $5.4 million, $4.2 million, and $3.8 million; all the loans included in these relationships were performing in accordance with their terms and conditions. Single-Family Residential Loans. We utilize a network of correspondent mortgage brokers and bankers to originate and buy conventional single-family (one-to-four units) mortgage loans. Conventional loans are loans that are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Department of Veterans Affairs ("VA"). The majority of our single-family mortgage loans are secured by properties located in Montgomery and Bucks Counties, Pennsylvania. At June 30, 1999, single-family mortgage loans amounted to $231.5 million, or 60.14% of our total loan portfolio. During the year ended June 30, 1999, originations of single-family residential loans were $55.9 million and purchases totaled $18.2 million. Due to refinancing activities that resulted in increased repayments and our increased focus on other types of lending, the single-family portion of our loan portfolio has decreased during the past years. We expect this trend to continue, although single-family mortgage loans are likely to remain the single largest component of our loan portfolio for the foreseeable future. Single-family residential mortgage loans which we purchase or originate for sale generally are underwritten with terms conforming to FHLMC/FNMA guidelines. Loans purchased or originated for our portfolio, may conform to these guidelines, may exceed the conforming loan amount for those agencies, or may otherwise not comply with the underwriting standards of the agencies for a variety of reasons including credit risk. Interest rates on our residential mortgages either are fixed for the life of the loan ("fixed-rate") or may change periodically during the life of the loan ("ARM"). Original maturities of fixed-rate loans are generally 10, 15, 20 or 30 years, and have equal monthly payments to repay the loan with interest by the end of the loan term. At June 30, 1999, the fixed-rate portion of our single-family loan portfolio totaled $201.9 million which was 87.21% the total single-family residential loans outstanding at that date. We offer a variety of ARM loans. These loans have a pre-determined interest rate for a specified period of time ranging from one to ten years. After this initial time period, the interest rate will adjust on a periodic basis in 6 accordance with a designated index such as the one-year US Treasury yield adjusted to a constant maturity ("CMT") plus a stipulated margin. Also, ARM loans generally carry an annual limit for rate changes of 1% or 2%, and a maximum amount the rate can increase or decrease from the initial rate of 4% to 6% during the life of the loan. From time to time, we offer ARM loans with an initial rate less than the fully-indexed rate (the index at the time of origination plus the stipulated margin). These loans are underwritten based upon the borrower making payments calculated at the fully-indexed rate. Our ARM loans require that any payment adjustment caused by a change in the interest rate result in full amortization of the loan by the end of the original loan term, and no portion of the payment increase is permitted to be added to the principal balance of the loan, so-called negative amortization. At June 30, 1999, $29.6 million or 12.79% of our single-family residential loans were adjustable rate. ARM loans decrease some of the risks associated with changing interest rates. However, increases in the amount of a borrower's payment due to interest rate increases may affect the borrower's ability to repay the loan increasing the potential for default. To date, we have not experienced a material impact as a result of this additional credit risk associated with ARM loans, and believe that this risk is less than the interest rate risk of holding fixed-rate loans in a rising interest rate environment. Such factors as consumer preferences, the general level of interest rates, competition, and the availability of funds affect the amount of ARM loans we originate. Although we anticipate that we will continue to offer ARM loans, there can be no assurance that we can originate a sufficient amount of loans to increase or maintain the percentage of loans in our portfolio. Generally the single largest single-family mortgage loan we originate or purchase does not exceed $400,000. In addition, our maximum loan-to-value ratio (the rate of the loan amount to the lesser of the appraised value or sales price - - "LTV") is 95%, provided that private mortgage insurance is obtained for the portion of the loan in excess of 80% of the appraised value. Home Equity Loans. In recent years, we have increased our emphasis on the origination of home equity loans and lines of credit, due to their shorter maturities (the maximum term of an equity loan is 15 years) and higher interest rates. An equity loan is a fixed-rate loan where the borrower receives the total loan amount at a closing and makes monthly payments to repay the loan within a specific time period. Equity lines of credit are a revolving line of credit with a variable rate and no stated maturity date. The borrower may draw on this account (up to the maximum credit amount) and repay this line at any time. At June 30, 1999 we had $54.1 million of equity loans and lines of credit outstanding. This compares to $41.4 million and $25.6 million outstanding at June 30, 1998 and 1997, respectively. Of the $54.1 million outstanding at June 30, 1999, $6.8 million were in lines of credit. The unused portion of equity lines of credit was $9.4 million at that date. Equity loans and lines of credit are secured by the borrower's residence, and we generally obtain a second mortgage position on these loans. We offer equity programs in amounts, when combined with the first mortgage, up to 100% of the value of their property. In addition to originating home equity loans through our branch offices, we purchase these loans from a network of correspondents. During the year ended June 30, 1999, we originated and purchased $25.3 million of equity loans and advanced $5.8 million in equity lines of credit. Commercial Real Estate and Multi-Family Residential Real Estate Loans. At June 30, 1999 commercial and multi-family real estate loans amounted to $52.8 million and $12.9 million respectively. This represents 13.71% and 3.36%, respectively, of our total loan portfolio. Our commercial loan portfolio consists of loans secured by small office buildings, retail and industrial use buildings, strip shopping centers, and other properties used for commercial purposes located in our market area. Our commercial loans seldom exceed $3 million, and as of June 30, 1999, the average commercial and multi-family real estate loan size was $424,000, and the largest loan outstanding was $3.3 million. During the year ended June 30, 1999, our commercial loan portfolio grew as the result of originations, purchases and the conversion of loans from construction to permanent, by $28.3 million, or 115.58%. Originations during fiscal year 1999 totaled $20.3 million. This compares to originations of $11.6 million and $6.3 million in fiscal 1998 and 1997, respectively. We 7 also purchased commercial real estate loans totaling $7.7 million in fiscal 1999 and $600,000 in fiscal 1998. During the past several years, we have hired 3 new commercial lenders in our efforts to increase the size of this portfolio. We also originate loans secured by multi-family (over 5 unit) residential properties. During the year ended June 30, 1999, we originated $8.6 million in loans of this type. In fiscal 1998, we did not originate any multi-family residential loans while originations totaled $1.0 million in 1997. As of June 30, 1999, the amount of multi-family residential loans outstanding was $12.9 million. This represented an increase of $5.4 million, or 72.51%. Although terms for commercial and multi-family loans vary, our underwriting standards generally allow for terms up to 25 years with monthly amortization over the life of the loan and LTV ratios of not more than 80%. Rates are either fixed or adjustable based upon the 5-year Treasury CMT plus a margin, and fees ranging from 0.5% to 1.50% are charged to the borrower at the origination of the loan. Fees are also charged for the prepayment of a loan prior to its maturity. Generally we obtain personal guarantees of the principals as additional collateral for commercial and multi-family real estate loans. Commercial and multi-family real estate lending involves different risks than single-family residential lending. These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower's business. These risks can be affected by supply and demand conditions in the project's market area of rental housing units, office and retail space, warehouses, and other commercial space. We attempt to minimize these risks by limiting our loans to proven businesses, only considering properties with existing operating performance which can be analyzed, using conservative debt coverage ratios in our underwriting, and periodically monitoring the operation of the business or project and the physical condition of the property. Various aspects of a commercial and multi-family loan transaction are evaluated in our effort to mitigate the additional risk in these types of loans. In our underwriting procedures, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 115%. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers are obtained on each loan to substantiate the property's market value, and reviewed by us prior to the closing of the loan. Construction Loans. We originate construction loans for residential and commercial uses within our market area. We generally limit construction loans to builders and developers with whom we have an established relationship or who are otherwise known to bank officers. At June 30, 1999, we had $14.2 million, 3.69% of total loans, in outstanding construction loans, plus an additional $6.4 million in undisbursed construction loans in process at that date. Construction loans outstanding at June 30, 1998 were $13.6 million. In fiscal 1999, we originated $12.8 million in new construction loans compared to originations of $13.0 million in fiscal year 1998. Our construction loans generally have variable rates of interest, a maximum maturity of three years, and LTV ratios less than 90%. Residential construction loans to developers are made on either a pre-sold or speculative (unsold) basis. Limits are placed on the number of units that can be built on a speculative basis based upon the reputation and financial position of the builder, his/her present obligations, the location of the property and prior sales in the development and the surrounding area. Generally a limit of two to six model homes is placed per project. Prior to committing to a construction loan, we require an independent appraiser prepare an appraisal of the property. We also review and inspect each project at its inception and prior to every disbursement. Disbursements are made after inspections based upon a percentage of project completion. Monthly payment of interest is required on all construction loans. We also make construction loans for the acquisition and development of land (i.e. roads, sewer and water) for sale. We make these loans only in conjunction with a commitment for a construction loan for the units on the site. These loans are secured by a lien on the property and are limited to a LTV ratio of 75% of the appraised value. The loans have a variable rate of interest and require monthly payments of interest. The principal of the loan is 8 repaid as units are sold and released. All of our loans of this type are in our market area and are to developers with whom we have established relationships. In most cases, we obtain personal guarantees from the borrowers. Construction and land loans generally are considered to involve a higher level of risk than single-family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effect of economic conditions on developers, builders and projects. Additional risk is also associated with construction lending because of the inherent difficulty in estimating both a property's value at completion and the estimated cost (including interest) to complete a project. The nature of these loans is such that they are more difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not pre-sold and thus pose a greater potential risk than construction loans to individuals on their personal residences. In order to mitigate some of the risks inherent to construction lending, we inspect properties under construction, review construction progress prior to advancing funds, work with builders who have established relationships, and obtain personal guarantees from the principals. Commercial Loans. At June 30, 1999, we had $13.0 million in commercial business loans (3.38% of gross loans outstanding) compared to $5.4 million at June 30, 1998, an increase of $7.6 million or 139.53%. We began originating loans to small-to-mid-sized businesses in our market area in May 1997. Since that time, we have hired 3 commercial lenders to actively solicit commercial business loans as well as commercial and multi-family real estate loans. As a result of these efforts, we anticipate this portion of the loan portfolio will continue to increase as a percent of the total loan portfolio. These types of loans assist in our asset/liability management since generally they provide shorter maturities and/or adjustable rates of interest in addition to generally having higher returns to compensate for the additional credit risk associated with the loan. Loans which we originate may be either a revolving line of credit or for a fixed term of generally five years or less. Interest rates are either adjustable indexed to a published prime rate of interest or fixed. Generally, equipment, machinery, real property or other corporate assets secure the loans. Personal guarantees from the business principals are generally obtained as additional collateral. We also provide loans up to 75% of a business' accounts receivable and up to 50% of its inventory. Generally, commercial business loans have been characterized as having higher risks associated to them than single-family loans. This area of lending is relatively new to us. We have hired individuals experienced in this type of lending and implemented policies and procedures which we deem to be prudent. At June 30, 1999, there were $13,000 in non-performing commercial business loans. Non-Mortgage Consumer Lending Activities. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans such as student loans, loans secured by deposit accounts, automobile loans, and other secured and unsecured personal loans. These loans are originated primarily through existing and walk-in customers and direct advertising. At June 30, 1999, $6.4 million, or $1.67% of our total loan portfolio was in these types of loans. This compares to $4.9 million or 1.45% of the total loan portfolio at June 30, 1998. During fiscal 1999, we originated $3.6 million in consumer loans compared to originations of $3.8 million and $1.7 million in fiscal 1998 and 1997, respectively. Consumer loans generally have higher interest rates and shorter terms than residential loans, however they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. Loan Origination and Loan Fees. In addition to the interest earned on loans, we receive origination fees or "points" on many of the loans we originate. Loan points are a percentage of the loan amount which are charged to the borrower in connection with the origination of the loan. Our origination fees are offset by certain direct loan origination costs, and any remaining amount deferred and amortized as interest income over the contractual life, adjusted for prepayments, of the related loan as an adjustment to the yield on that loan. At June 30, 1999, deferred fees amounted to $800,000. 9 Asset Quality General. As a part of our efforts to maintain asset quality, we have developed and implemented an asset classification system. All of our assets are subject to this classification system. Loans are periodically reviewed and the classifications reviewed at least quarterly by the Asset Quality Committee of the Board of Directors. In addition, we have retained an independent firm to perform periodic, generally every six months, reviews of the asset quality of designated portions of the loan portfolio. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made 16 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. Our efforts are generally to work with borrowers to resolve such problems, however, when the account becomes 90 days delinquent, we institute foreclosure or other proceedings, as necessary, to minimize any potential loss. On loans which we consider the collection of principal or interest payments doubtful, we cease the accrual of interest income ("non-accrual" loans). On loans more than 90 days past due, as to principal and interest payments, it is our policy to discontinue accruing additional interest and reverse any interest currently accrued (unless we determine that the loan principal and interest are fully secured and in the process of collection). On occasion, we may take this action earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan. Interest income is not accrued on these loans until the borrower's financial condition and payment record demonstrates an ability to service the debt. Real estate which we acquire as a result of foreclosure or deed-in-lieu of foreclosure is classified as real estate owned until sold. Real estate owned is recorded at the lower of cost or fair value less estimated selling cost. Costs associated with holding a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sales of real estate owned are charged to operations as incurred. There has been no real estate owned at any of the five most recent fiscal year ends. Delinquent Loans. The following table sets forth information concerning delinquent loans at the dates indicated, in dollar amounts as well as a percent of each category of loans in the respective category of our portfolio. The amounts presented represent the total outstanding principal balances of the related loans rather than the actual payment amounts that are past due.
------------------------------------------------------- June 30, 1999 ------------------------------------------------------- 30 - 59 Days 60 - 89 Days ------------ ------------ Percent of Percent of Amount Loan Category Amount Loan Category (1) (1) ------------------------------------------------------- (Dollars in thousands) Mortgage Loans: Residential Single-family $3,534 1.53% $ 174 0.08% Multi-family -- -- -- -- Commercial real estate 1,025 1.59 51 0.10 Construction -- -- -- -- Home equity 163 0.30 20 0.04 Non-mortgage consumer loans 37 0.58 13 0.20 Commercial business loans 198 1.52 250 1.92 ------ ------ Total $4,957 1.31% $ 508 0.13% ====== ======
10
------------------------------------------------------- June 30, 1998 ------------------------------------------------------- 30 - 59 Days 60 - 89 Days ------------ ------------ Percent of Percent of Amount Loan Category Amount Loan Category (1) (1) ------------------------------------------------------- (Dollars in thousands) Mortgage Loans: Residential Single-family $2,268 0.93% $1,304 0.54% Multi-family -- -- -- -- Commercial real estate 288 1.18 -- -- Construction -- -- -- -- Home equity 92 0.22 35 0.08 Non-mortgage consumer loans 17 0.34 -- -- Commercial business loans -- -- -- -- ------ ------ Total $2,665 0.80% $1,339 0.40% ====== ======
------------------------------------------------------- June 30, 1997 ------------------------------------------------------- 30 - 59 Days 60 - 89 Days ------------ ------------ Percent of Percent of Amount Loan Category Amount Loan Category (1) (1) ------------------------------------------------------- (Dollars in thousands) Mortgage Loans: Residential Single-family $2,659 1.12% $ 519 0.22% Multi-family -- -- -- -- Commercial real estate 136 0.88 310 2.01 Construction -- -- -- -- Home equity 32 0.13 46 0.18 Non-mortgage consumer loans -- -- -- -- Commercial business loans -- -- -- -- ------ ------ Total $2,827 0.96% $ 875 0.30% ====== ======
(1) Net of undisbursed loans in process. 11 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.
At June 30, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Accruing loans 90 days or more past due Mortgage Loans $ 4 $ 142 $ 124 $ 101 $ -- Other loans -- -- -- -- -- ---------------------------------------------------------- Total accruing loans $ 4 $ 142 $ 124 $ 101 $ -- ---------------------------------------------------------- Non-accrual loans Mortgage Loans Single family residential 1,006 1,249 374 655 497 Multi-family residential -- -- -- -- -- Commercial real estate -- -- 54 55 95 Construction -- -- -- -- -- Home equity 37 -- -- 73 -- Non-mortgage consumer 8 2 17 34 -- Commercial business loans 13 96 1,346 1,786 -- ---------------------------------------------------------- Total non-accrual loans $1,064 1,347 1,791 2,603 592 ---------------------------------------------------------- Total non-performing loans $1,068 $1,489 $1,915 $2,704 $ 592 ---------------------------------------------------------- Other real estate owned, net -- -- -- -- -- Total non-performing assets $1,068 $1,489 $1,915 $2,704 $ 592 ========================================================== Performing troubled debt restructurings -- -- -- -- -- Total non-performing assets and troubled debt restructurings $1,068 $1,489 $1,915 $2,704 $ 592 ========================================================== Non-performing loans to total loans (net of undisbursed loans in process) 0.28% 0.45% 0.65% 0.96% 0.27% Non-performing assets to total assets 0.23% 0.37% 0.54% 0.87% 0.20%
Classified and Criticized Assets. Federal regulations require that each insured institution classify its assets on a regular basis. Furthermore, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard"; "doubtful"; and "loss". Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of current existing facts, conditions, and values, questionable, and there is a high probability of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated "special mention" also must be established and maintained for assets that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful, or loss. At June 30, 1999, we had $1.9 million in assets classified as substandard; no assets were classified as doubtful or loss. Allowance for Loan Losses. The allowance for loan losses is maintained at a level we believe is adequate to absorb losses in the portfolio. Our determination of the adequacy of the allowance is based upon an evaluation of the portfolio, past loss experience, current economic conditions, volume, growth, and composition of the portfolio, and other relevant factors. Among other things, we consider the amount of loan origination volume and the risk characteristics of new loans when establishing the appropriate amount of provisions to the allowance for loan losses. The allowance is increased by provisions for loan losses which are charges against income. As shown in the table below, at June 30, 1999, our allowance for loan losses amounted to $3.1 million or 293.82% and 0.83% of our non-performing loans and total loans receivable respectively. The increase in the allowance for loan losses for the year ended June 30, 1999 was primarily due to the growth of our loan portfolio. For fiscal year 1998 the primary reasons 12 for the increase in our allowance for loan losses were the increase in our total loan portfolio and our shift towards loans other than single-family residential. Effective December 21, 1993, the OTS in conjunction with the Comptroller of the Currency, the FDIC and the Federal Reserve Board issued a Policy Statement regarding a financial institution's allowance for loan and lease losses. The Policy Statement, which reflects the position of the regulatory agencies and does not necessarily constitute generally accepted accounting principles, includes guidance (i) on our responsibilities for the assessment and establishment of an adequate allowance; and (ii) for the agencies' examiners to use in evaluating the adequacy of such allowance and the policies used to determine such allowance. The Policy Statement also sets forth quantitative measures for the allowance with respect to assets classified substandard and doubtful and with respect to the remaining portion of the institution's portfolio. Specifically, the Policy Statement sets forth the following quantitative measures which examiners may use to determine the reasonableness of an allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the portfolio classified substandard; and (iii) for the portions of the portfolio that have not been classified (including loans designated special mention), estimated credit losses over the upcoming twelve months based on facts and circumstances available as of the evaluation date. While the Policy Statement sets forth this quantitative measure, such guidance is not intended as a "floor" or "ceiling". Our policy for establishing loan losses is consistent with the Policy Statement. The following table sets forth the activity in our Allowance for Loan Losses for periods indicated.
Year Ended June 30, ------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in thousands) Allowance for Loan Loss at the beginning of the period $2,665 $1,678 $1,938 $1,728 $1,668 Plus: Provisions for loan loss 531 993 185 210 60 Less: Charge-offs for: Mortgage Loans 32 -- -- -- -- Non-mortgage consumer loans 23 6 5 -- -- Commercial business loans 3 -- 440 -- -- ------------------------------------------------------------- Total Charge-offs 58 6 445 -- -- Plus: Recoveries -- -- -- -- -- Allowance for Loan Losses at the end of the period $3,138 $2,665 $1,678 $1,938 $1,728 ============================================================= Allowance for loan losses to total non- performing loans at the end of the period 293.82% 178.98% 87.62% 71.67% 291.89% ============================================================= Allowance for loan losses to total loans at the end of the period (1) 0.83% 0.80% 0.57% 0.69% 0.77% ============================================================= Ratio of charge-offs to average loans 0.02% 0.00%(2) 0.16% N/a(3) N/a(3) =============================================================
- ---------- (1) Total loans are net of undisbursed loans in process (2) Less than 0.01% (3) No charge-offs. 13 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.
At June 30, --------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Percent Percent Percent Percent Percent of Loan of Loan of Loan of Loan of Loan in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans --------------------------------------------------------------------------------------------------- (Dollars in thousands) Mortgage Loans: Single-family $ 598 60.14% $ 630 71.41% $ 253 78.09% $ 501 79.64% $ 661 84.76% Multi-family 32 3.36% 19 2.20% 8 2.53% -- 1.74% -- 1.85% Commercial 663 13.71% 352 7.19% 113 5.10% -- 5.68% -- 4.15% Construction 346 3.69% 361 4.00% 188 4.33% -- 5.24% -- 3.74% Home equity 359 14.05% 324 12.15% 128 8.43% 281 6.17% 58 4.63% --------------------------------------------------------------------------------------------------- Total Mortgage loans 1,998 94.95% 1,686 96.95% 690 98.48% 782 98.47% 719 99.13% Non-mortgage consumer 29 1.67% 28 1.45% 25 0.96% -- 0.83% -- 0.57% Commercial business 186 3.38% 124 1.60% 138 0.56% -- 0.70% -- 0.30% Unallocated 925 827 825 1,156 1,009 --------------------------------------------------------------------------------------------------- Total loans $3,138 100.00% $2,665 100.00% $1,678 100.00% $1,938 100.00% $1,728 100.00% ===================================================================================================
14 Securities Activities General. The investment policy is designed, among other things, to assist us in our asset/liability management policy. It emphasizes, principal preservation, favorable returns, maintaining liquidity and flexibility and minimizing credit risk. The policy permits investments in US Government and agency securities, investment grade corporate obligations and commercial paper, various type of mortgage-backed securities, certificates of deposits and federal funds sold to financial institutions approved by our Board of Directors, equity investments in FHLB of Pittsburgh, the FNMA, and the FHLMC, and mutual funds with investments in the above described investments. Currently, we are not participating in hedging programs, interest rate swaps, caps, or collars or other activities involving the use of off-balance sheet financial derivatives. Also, we do not purchase mortgage-backed derivative instruments that would be characterized "high-risk" under OTS regulations at the time of purchase, nor do we purchase corporate obligations, which are not rated investment grade. In order to achieve the maximum flexibility with our investment securities, all of our investments have been classified as Available For Sale ("AFS") pursuant to Statement of Financial Accounting Standards No. 115. This accounting pronouncement requires us to classify a security as AFS, Held to Maturity ("HTM") or trading at the time of acquisition. Securities being classified as HTM must be purchased with the intent and ability to hold that security until its final maturity, and can be sold prior to maturity only under rare circumstances. HTM securities are accounted for based upon the historical cost of the security. AFS securities can be sold at any time based upon our needs or judgment as to market changes. AFS securities are accounted for at fair value, unrealized gains and losses on these securities, net of income tax provisions, are reflected in the stockholders' equity section of our Statement of Financial Condition. At June 30, 1999, our investment securities amounted to $80.1 million, or 16.96% of total assets. This includes a $2.2 million unrealized loss, net of income tax, due to their classification as available for sale. The portfolio consists primarily of US government agency securities, most with callable features, and mortgage-backed pass-through securities, and other investments in municipal bonds, equity investments in the FHLB of Pittsburgh, FNMA, and FHLMC, and a mutual fund consisting of adjustable-rate mortgage-backed securities. The following table sets forth information on the carrying value and the fair value of our securities classified as available for sale at the dates indicated:
At June 30, ------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value ------------------------------------------------------------------- (In thousands) ------------------------------------------------------------------- Equity Securities $11,068 $11,052 $ 9,940 $ 9,937 $ 6,851 $ 6,682 Municipal Bonds 1,999 1,890 100 96 -- -- US Government and Agency Securities 35,000 33,877 20,004 19,999 7,009 7,050 Mortgage -Related Securities 34,229 33,236 17,940 18,079 32,388 31,854 ------------------------------------------------------------------- Total $82,296 $80,055 $47,984 $48,111 $46,248 $45,766 ===================================================================
At June 30, 1997, we had $4.0 million of US Government and Agency Securities that were classified as held to maturity. These securities matured during fiscal 1998. 15 The following table sets forth the activity in our securities portfolio during the periods indicated.
Year Ended June 30, ------------------------------------ 1999 1998 1997 ------------------------------------ (In thousands) Securities at the beginning of the period $ 48,111 $ 49,765 $ 50,163 Purchases 83,581 55,878 18,296 Sales and calls of securities (38,100) (53,375) (10,076) Repayments, maturities, and amortization (11,169) (4,766) (9,219) Increase (decrease) in unrealized gains and losses on available for sale securities (1) (2,368) 609 601 ------------------------------------ Securities at the end of the period $ 80,055 $ 48,111 $ 49,765 ====================================
(1) At June 30, 1999, the cumulative unrealized loss on securities classified as available for sale was $2.2 million. Mortgage-Backed Securities. At June 30, 1999, we had mortgage-backed securities totaling $33.2 million. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages. Mortgages are sold by various originators to intermediaries (generally agencies of the US Government and government sponsored enterprises) that pool and repackage the mortgages and sell participation interests in the pools to investors. The servicer of the mortgage loan collects the principal and interest payments and passes those payments through to the intermediary who then remits the payment to the investor. The US Government agencies and government sponsored enterprises, primarily the Government National Mortgage Association ("GNMA"), FNMA and FHLMC, guarantee the timely payment of principal and interest on these securities. Mortgage-backed securities are issued in stated principal amounts and are backed by mortgage loans within a specific interest rate range, but may have varying maturity dates. The underlying pool of mortgages may be comprised of either fixed-rate or adjustable-rate mortgage loans. Each mortgage-backed security pool will also differ based upon the actual level of prepayment experienced by the underlying mortgage loans. At June 30, 1999, the weighted average remaining term of our mortgage-backed securities was 18.5 years. This is based upon assumptions related to the future prepayments of the underlying mortgages. Prepayments that are greater than those projected will shorten the remaining term of the security, while a decrease in the amount of prepayments will lengthen the amount of time until the security matures. Prepayments will depend on many factors, including the type of mortgage, the coupon rate, the geographic region, and the general level of market interest rates. During periods of rising interest rates, if the coupon rates of the underlying mortgages are less than prevailing market rates offered on mortgages, refinancings will decrease and prepayments of the underlying mortgages and the security will also decline. Conversely, when market interest rates are falling, and the coupon rate on the underlying mortgage exceeds the prevailing market interest rate for mortgages offered, refinancings tend to increase which will increase the amount of prepayments of the underlying mortgages and the security. Our average yield on these securities was 6.42% at June 30, 1999. This yield is computed by decreasing/increasing the amount of interest income collected on the security by the amortization/accretion of the premium/discount associated with the acquisition of the security. In accordance with generally accepted accounting principles, premiums/discounts are amortized/accreted over the estimated remaining life of the security. The yield on the security may vary if the prepayment assumptions used to determine the remaining life differ from actual prepayment experiences. These assumptions are reviewed on a periodic basis to reflect actual prepayments. US Government and Agency Securities and Municipal Bonds. At June 30, 1999, we had $33.9 million, which includes approximately $1.1 million in unrealized loss, in securities issued by US government agencies, primarily the FHLB, FNMA, FHLMC, and the Federal Farm Credit Bank. Most of these securities have call features that allow the issuer to redeem these securities at par value prior to their stated maturity. Generally if the prevailing market interest rate on new issue callable agency securities with similar maturities exceeds the coupon rate of the security with the call feature, the call will not be exercised. Conversely, if the prevailing market interest 16 rate for new issue agency callable securities with similar maturities is below the coupon rate of the security with the call feature, the call will be exercised and the bond will be redeemed. When calls are exercised and bonds redeemed prior to their maturity, we face the risk of re-investing those proceeds into other investments with lower yields or longer terms. Municipal bonds held at June 30, 1999 had a carrying value of $2.0 million, and a net unrealized loss of $100,000. These municipal bonds include issues from various townships and school districts located in Pennsylvania. The following table sets forth certain information regarding the contractual maturities (without regard to any call provisions) of the carrying value of our US Government and Agency securities and Municipal bonds at June 30, 1999. Amount Weighted Maturing in: (In thousands) Average Yield ------------ -------------------------------- Under 1 year $ 1,000 5.00% 1-5 years 9,002 5.76% 6-10 years 14,998 6.63% Over 10 years (1) 11,999 6.37% ------- Total $36,999 6.20% ======= (1) Includes $1.999 in municipal bonds at their stated rate which have not been adjusted to a taxable equivalent rate. Other Investments. Other than mortgage-backed securities and US Government and agency securities, we have investments in various equity securities and mutual funds. These investments totaled $3.1 million and $7.9 million, respectively. The equity securities include stock in the FHLB, FNMA, and FHLMC. The mutual fund investment is backed by investment in adjustable-rate mortgage-backed securities. Sources of Funds General. Deposits are the primary source of funds for our lending and investment activities. In addition to deposits, we obtain funds from the amortization and prepayments on our loan and mortgage-backed security portfolio, maturities of investments, and borrowings. Scheduled loan amortization is a relatively stable source of funds. However, competition and the general level of interest rates and market conditions significantly influence deposit inflows and outflows. Borrowings may be used on a short-term basis to compensate for reductions in other funding sources. On a longer-term basis, borrowings may be used for general business purposes. Deposits The following table sets forth the activity in our deposit portfolio for the years indicated. Year Ended June 30, ---------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands) Beginning balance $340,793 $309,726 $267,695 Net deposits in excess of withdrawals 37,192 18,985 30,999 Interest credited 12,696 12,082 11,032 ---------------------------------- Total net increase 49,888 31,067 42,031 ---------------------------------- Ending balance $390,681 $340,793 $309,726 ================================== 17 The following table sets forth by various interest rate categories, the amount of certificates of deposits at the dates indicated. June 30, ---------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands) 0.00% to 2.99% $ 32 $ 132 $ 30 3.00% to 3.99% 21,817 12 11 4.00% to 4.99% 67,875 41,261 37,989 5.00% to 6.99% 153,259 180,858 167,923 7.00% to 8.99% 8,149 9,133 9,817 9.00% and over 25 606 1,057 ---------------------------------- Total $251,157 $232,002 $216,827 ================================== The following table sets forth the amount and remaining maturities of the Certificates of Deposit as of June 30, 1999. Over Six Over Over Months One Year Two Years Over Six months Through One Through Two Through Three Three And Less Year Years Years Years -------------------------------------------------------------- (In thousands) 0.00% to 1.99% $ -- $ -- $ -- $ -- $ -- 2.00% to 2.99% 32 -- -- -- -- 3.00% to 3.99% 15,626 6,191 -- -- -- 4.00% to 4.99% 18,098 31,520 14,588 1,303 2,366 5.00% to 6.99% 50,002 34,986 36,737 16,528 15,006 7.00% to 8.99% 587 738 5,682 723 419 9.00% to 10.99% 8 17 -- -- -- 11.00% and over -- -- -- -- -- -------------------------------------------------------------- Total $84,353 $73,452 $57,007 $18,554 $17,791 ============================================================== At June 30, 1999 the total amount of outstanding certificates of deposits in amounts greater than or equal to $100,000 was $37.1 million. The following table provides information regarding the maturity of these certificates of deposits. June 30, 1999 ------------- Amount Maturing in: (In thousands) 3 months or less $ 7,210 Over 3 months through 6 months 6,756 Over 6 months through 12 months 11,351 Over 12 months 11,842 ------- Total $37,159 ======= 18 The following table sets forth the amount of deposits in various categories at the dates indicated.
June 30, ---------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------- (Dollars in thousands) Savings accounts $ 48,773 12.48% $ 40,225 11.80% $ 36,373 11.74% Certificates of Deposits 251,157 64.29 232,002 68.08 216,827 70.01 Money market accounts 28,741 7.36 20,487 6.01 19,715 6.36 NOW Accounts Interest bearing 29,013 7.43 25,638 7.53 23,527 7.60 Non-interest bearing 32,997 8.44 22,441 6.58 13,284 4.29 ---------------------------------------------------------------- Total $390,681 100.00% $340,793 100.00% $309,726 100.00% ================================================================
Borrowings We use outside borrowings on a limited basis to supplement our lending needs. We also use borrowings in a leverage program that allows us to take advantage of arbitrage opportunities when investment returns exceed the cost of borrowings. At June 30, 1999 we had $15.0 million in borrowings outstanding, all of which were from the FHLB of Pittsburgh. Advances from the FHLB of Pittsburgh are secured by our investment in FHLB Stock and a portion of our residential mortgage loan portfolio. The FHLB of Pittsburgh provides an array of borrowing programs which include: fixed or variable rate programs; various fixed terms ranging from overnight to 20 years; and other programs that have callable or putable features attached to them. We intend to utilize borrowings in the future as an alternative source of funds. The following table sets forth certain information regarding our outside borrowings at of for the periods indicated.
As of or For the Year Ended June 30, ------------------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in thousands) FHLB Advances Average balance outstanding $14,198 $ 9,532 $10,349 Maximum amount outstanding at any month- end during the period $19,000 $21,000 $16,120 Balance outstanding at the end of the period $14,986 $21,000 $ 6,000 Average interest rate during the period 5.44% 5.55% 5.36% Average interest rate at the end of the period 5.33% 5.62% 5.50% Other Borrowings Average balance outstanding -- $ 263 $ 218 Maximum amount outstanding at any month- end during the period -- $ 500 $ 500 Balance outstanding at the end of the period -- -- $ 500 Average interest rate during the period -- -- % -- % Average interest rate at the end of the period -- -- % -- %
The majority of FHLB Advances are callable at the direction of the FHLB within certain parameters and substantially all of such advances could be called within one year. Subsidiaries. Willow Grove Bank is the wholly owned subsidiary of Willow Grove Bancorp, Inc. Willow Grove Bancorp, Inc. is the majority owned subsidiary of Willow Grove Mutual Holding Company. 19 Employees. At June 30, 1999, we had 117 full-time employees, and 38 part-time employees. None of our employees are represented by a collective bargaining group, and we believe that our relationship with our employees is good. REGULATION Set forth below is a brief description of certain laws and regulations which are applicable to the Company, the Bank and the MHC. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. General The Bank, as a federally chartered savings institution, is subject to federal regulation and oversight by the OTS extending to all aspects of its operations. The Bank also is subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law, and requirements established by the Federal Reserve Board. Federally chartered savings institutions are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS and the FDIC. The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Such regulation and supervision primarily is intended for the protection of depositors and not for the purpose of protecting shareholders. The OTS regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that it may find in the Bank's operations. The FDIC also has the authority to examine the Bank in its role as the administrator of the SAIF. The Bank's relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage requirements. The OTS' enforcement authority over all savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Any change in such regulations, whether by the FDIC, OTS or Congress, could have a material adverse impact on the MHC, the Company and the Bank and their operations. The Company The Company, as a registered savings and loan holding company within the meaning of Section 10 of the Home Owners' Loan Act ("HOLA") is subject to OTS examination and supervision as well as certain reporting requirements. In addition, because the Bank's deposits are insured by the SAIF maintained by the FDIC, the Bank is subject to certain restrictions in dealing with the Company and with other persons affiliated with the Bank. Pursuant to regulations of the OTS and the terms of the Company's federal stock charter, the purpose and powers of the Company are to pursue any or all of the lawful objectives of a federal mutual holding company and to exercise any of the powers accorded to a mutual holding company. A mutual holding company is permitted to, among other things: (i) invest in the stock of a savings institution; (ii) acquire a mutual institution through the merger of such institution into a savings institution subsidiary of such mutual holding company or an interim savings institution of such mutual holding company; (iii) merge with or acquire another mutual holding company, one of whose subsidiaries is a savings institution; (iv) acquire non-controlling amounts of the stock of savings institutions and savings institution holding companies, subject to certain restrictions; (v) invest in a corporation the capital stock of which is available for purchase by a savings institution under Federal law or under the law of any state where the subsidiary savings institution or institutions have their home offices; (vi) furnish or perform management services for a savings institution subsidiary of such company; (vii) hold, manage or liquidate assets owned or acquired from a savings institution subsidiary of such company; (viii) hold or manage properties used or occupied by a savings institution subsidiary of such company; and (ix) act as a trustee under deed or trust. 20 The HOLA prohibits a savings and loan holding company, such as the Company, directly or indirectly, from (1) acquiring control (as defined) of a savings institution (or holding company thereof) without prior OTS approval, (2) acquiring more than 5% of the voting shares of a savings institution (or holding company thereof) which is not a subsidiary, subject to certain exceptions, without prior OTS approval, or (3) acquiring through merger, consolidation or purchase of assets, another savings institution (or holding company thereof) or acquiring all or substantially all of the assets, another savings institution (or holding company thereof) without prior OTS approval or (4) acquiring control of an uninsured institution. A savings and loan holding company may not acquire as a separate subsidiary a savings institution which has its principal offices outside of the state where the principal offices of its subsidiary institution is located, except (i) in the case of certain emergency acquisitions approved by the FDIC, (ii) if the holding company controlled (as defined) such savings institution as of March 5, 1987 or (iii) when the laws of the state in which the savings institution to be acquired is located specifically authorize such an acquisition. No director or officer of a savings and loan holding company or person owning or controlling more than 25% of such holding company's voting shares may, except with the prior approval of the OTS, acquire control of any savings institution which is not a subsidiary of such holding company. The Mutual Holding Company The MHC as a federal mutual holding company within the meaning of Section 10(o) of the HOLA, is subject to OTS examination and supervision as well as certain reporting requirements. In addition, the OTS has enforcement authority over the MHC and its non-savings bank subsidiaries, if any. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings bank. The MHC will be subject to the same activities limitations to which the Company is subject. See " -- The Company." The Bank Insurance of Accounts. The deposits of the Bank are insured to the maximum extent permitted by the SAIF, which is administered by the FDIC, and are backed by the full faith and credit of the U.S. Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action. Under current FDIC regulations, SAIF-insured institutions are assigned to one of three capital groups which are based solely on the level of an institution's capital--"well capitalized," "adequately capitalized," and "undercapitalized"--which are defined in the same manner as the regulations establishing the prompt corrective action system discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates ranging prior to September 30, 1996 from 23 basis points for well capitalized, healthy institutions to 31 basis points for undercapitalized institutions with substantial supervisory concerns. The deposits of the Bank are currently insured by the SAIF. Both the SAIF and the BIF are required by law to attain and thereafter maintain a reserve ratio of 1.25% of insured deposits. The BIF achieved a fully funded status first, and therefore as discussed below, effective January 1, 1996, the FDIC substantially reduced the average deposit insurance premium paid by BIF-insured banks. On November 14, 1995, the FDIC approved a final rule regarding deposit insurance premiums. The final rule reduced deposit insurance premiums for BIF member institutions to zero basis points (subject to a $2,000 minimum) for institutions in the lowest risk category, while holding deposit insurance premiums for SAIF members at their then-current levels (23 basis points for institutions in the lowest risk category). The reduction was effective with respect to the semiannual premium assessment beginning January 1, 1996. On September 30, 1996 Congress passed, and the President signed, the DIF Act which mandated that all institutions which have deposits insured by SAIF were required to pay a one-time special assessment of 65.7 basis 21 points on such deposits (subject to adjustment for certain types of banks with SAIF deposits) that were held at March 31,1995 payable by November 27, 1996 to recapitalize the SAIF. The assessment increased the SAIF's reserve ratio to a comparable level to that of the BIF at 1.25% of total insured deposits. The Bank's share of this special assessment totaled $1.5 million and is reflected in the fiscal 1997 operating results. The FDIC, in connection with the recapitalization, also lowered SAIF premiums from $0.23 per $100 to $0.064 per $100 of insured deposits beginning in January 1997. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the Bank's deposit insurance. Regulatory Capital Requirements. The OTS capital requirements consist of a "tangible capital requirement," a "leverage capital requirement" and a "risk-based capital requirement." The OTS is authorized to impose capital requirements in excess of those standards on individual institutions on a case-by-case basis. Under the tangible capital requirement, a savings bank must maintain tangible capital in an amount equal to at least 1.5% of adjusted total assets. Tangible capital is defined as core capital less all intangible assets (including supervisory goodwill), plus a specified amount of purchased mortgage servicing rights. Under the leverage capital requirement adopted by the OTS, savings banks must maintain "core capital" in an amount equal to at least 3% of adjusted total assets. Core capital is defined as common shareholders' equity (including retained earnings), non-cumulative perpetual preferred stock, and minority interests in the equity accounts of consolidated subsidiaries, plus purchased mortgage servicing rights valued at the lower of 90% of fair market value, 90% of original cost or the current amortized book value as determined under GAAP, and "qualifying supervisory goodwill," less non-qualifying intangible assets. At June 30, 1999, the Bank's ratio of core capital to total adjusted assets was 9.8%. Under the risk-based capital requirement, a savings bank must maintain total capital (which is defined as core capital plus supplementary capital) equal to at least 8.0% of risk-weighted assets. A savings bank must calculate its risk-weighted assets by multiplying each asset and off-balance sheet item by various risk factors, which range from 0% for cash and securities issued by the United States Government or its agencies to 100% for repossessed assets or loans more than 90 days past due. Qualifying one-to-four family residential real estate loans and qualifying multi-family residential real estate loans (not more than 90 days delinquent and having an 80% or lower loan-to-value ratio), which at June 30, 1999, represented 75.8% of the total loans receivable, are weighted at a 50% risk factor. Supplementary capital may include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock, and general allowances for loan losses. The allowance for loan losses includable in supplementary capital is limited to 1.25% of risk-weighted assets. Supplementary capital is limited to 100% of core capital. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital, in addition to the adjustments required for calculating core capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and non-residential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. However, in calculating regulatory capital, institutions can add back unrealized losses and deduct unrealized gains net of taxes, on debt securities reported as a separate component of GAAP capital. The OTS regulations establish special capitalization requirements for savings banks that own service corporations and other subsidiaries, including subsidiary savings banks. According to these regulations, certain subsidiaries are consolidated for capital purposes and others are excluded from assets and capital. In determining 22 compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks, engaged solely in mortgage-banking activities, or engaged in certain other activities solely as agent for its customers are "includable" subsidiaries that are consolidated for capital purposes in proportion to the Bank's level of ownership, including the assets of includable subsidiaries in which the Bank has a minority interest that is not consolidated for GAAP purposes. For excludable subsidiaries, the debt and equity investments in such subsidiaries are deducted from assets and capital. At June 30, 1999, the Bank had no investments subject to a deduction from tangible capital. The OTS amended its risk-based capital requirements that would require institutions with an "above normal" level of interest rate risk to maintain additional capital. A savings bank is considered to have a "normal" level of interest rate risk if the decline in the market value of its portfolio equity after an immediate 200 basis point increase or decrease in market interest rates (whichever leads to the greater decline) is less than two percent of the current estimated market value of its assets. The market value of portfolio equity is defined as the net present value of expected cash inflows and outflows from a bank's assets, liabilities and off-balance sheet items. The amount of additional capital that an institution with an above normal interest rate risk is required to maintain (the "interest rate risk component") equals one-half of the dollar amount by which its measured interest rate risk exceeds the normal level of interest rate risk. The interest rate risk component is in addition to the capital otherwise required to satisfy the risk-based capital requirement. Implementation of this component has been postponed by the OTS. The final rule was to be effective as of January 1, 1994, subject however to a three quarter lag time in implementation. However, in October 1994, the Director of the OTS indicated that the OTS would waive the capital deductions for institutions with a greater than "normal" risk until the OTS published an appeals process. On August 21, 1995, the OTS released Thrift Bulletin 67, which established (i) an appeals process to handle "requests for adjustments" to the interest rate risk component and (ii) a process by which "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to determine their interest rate risk component. The Director of the OTS indicated, concurrent with the release of Thrift Bulletin 67, that the OTS will continue to delay the implementation of the capital deduction for interest rate risk pending the testing of the appeals process set forth in Thrift Bulletin 67. Effective November 28, 1994, the OTS revised its interim policy issued in August 1993 under which savings institutions computed their regulatory capital in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the revised OTS policy, savings institutions must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings institutions should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on debt securities reported as a separate component of GAAP capital. At June 30, 1999, the Bank exceeded all of its regulatory capital requirements, with tangible, core and risk-based capital ratios of 9.8%, 9.8% and 18.1%, respectively. The OTS and the FDIC generally are authorized to take enforcement action against a savings bank that fails to meet its capital requirements, which action may include restrictions on operations and banking activities, the imposition of a capital directive, a cease-and-desist order, civil money penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. In addition, under current regulatory policy, a bank that fails to meet its capital requirements is prohibited from paying any dividends. Prompt Corrective Action. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure of capital deemed appropriate by the federal banking regulator for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. Under the FDICIA, which became effective on December 19, 1992, an institution is deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet 23 and maintain a specific capital level for any capital measure, (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). An institution generally must file a written capital restoration plan which meets specified requirements with its appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions. At June 30, 1999, the Bank was in the "well capitalized" category for purposes of the above regulations. Safety and Soundness Guidelines. The OTS and the other federal bank regulatory agencies have established guidelines for safety and soundness, addressing operational and managerial standards, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards are required to submit compliance plans to their appropriate federal regulators. The OTS and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions. The Bank believes that it is in compliance with these guidelines and standards. Liquidity Requirements. All savings institutions are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings institutions. At the present time, the required minimum liquid asset ratio is 4%. The Bank consistently has had liquidity well in excess of the Federal requirements during the past three fiscal years. Capital Distributions. OTS regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. Under new regulations effective April 1, 1999, a savings institution must file an application for OTS approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution's net income for that year to date plus the institution's retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OTS-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions which are a subsidiary of a holding company (as well as certain other institutions) must still file a notice with the OTS at least 30 days before the board of directors declares a dividend or approves a capital distribution. Branching by Federal Savings Institutions. OTS policy permits interstate branching to the full extent permitted by statute (which is essentially unlimited). Generally, federal law prohibits federal savings institutions from establishing, retaining or operating a branch outside the state in which the federal institution has its home office unless the institution meets the IRS' domestic building and loan test (generally, 60% of a thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i) the branch(es) result(s) from an 24 emergency acquisition of a troubled savings institution (however, if the troubled savings institution is acquired by a bank holding company, does not have its home office in the state of the bank holding company bank subsidiary and does not qualify under the IRS Test, its branching is limited to the branching laws for state-chartered banks in the state where the savings institution is located); (ii) the law of the state where the branch would be located would permit the branch to be established if the federal savings institution were chartered by the state in which its home office is located; or (iii) the branch was operated lawfully as a branch under state law prior to the savings institution's reorganization to a federal charter. Furthermore, the OTS will evaluate a branching applicant's record of compliance with the Community Reinvestment Act of 1977 ("CRA"). An unsatisfactory CRA record may be the basis for denial of a branching application. Community Reinvestment Act and the Fair Lending Laws. Savings institutions have a responsibility under the CRA and related regulations of the OTS to help meet the credit needs of their communities, including low-and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. Qualified Thrift Lender Test. All savings institutions are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings institution can comply with the QTL test by either qualifying as a domestic building and loan bank as defined in Section 7701(a)(19) of the Code or by meeting the second prong of the QTL test set forth in Section 10(m) of the HOLA. A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any new advances from its FHLB, other than special liquidity advances with the approval of the OTS; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). Currently, the portion of the QTL test that is based on Section 10(m) of the HOLA rather than the Code requires that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); stock issued by the FHLB of Pittsburgh; and direct or indirect obligations of the FDIC. In a recent amendment to the QTL, small business loans, credit card loans, student loans and loans for personal, family and household purposes were allowed to be included without limitation as qualified investments. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At June 30, 1999, substantially all of the portfolio assets of the Bank were qualified thrift investments. Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs that administers the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived 25 from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. At June 30, 1999, the Bank had $15.0 million of FHLB advances. As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At June 30, 1999, the Bank had $3.0 million in FHLB stock, which was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future. Federal Reserve System. Federal Reserve Board regulations require all depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. At June 30, 1999, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. Savings banks are authorized to borrow from a Federal Reserve Bank "discount window," but Federal Reserve Board regulations require savings banks to exhaust other reasonable alternative sources of funds, including FHLB advances, before borrowing from a Federal Reserve Bank. Thrift Charter. Congress has been considering legislation in various forms that would require federal thrifts, such as the Bank, to convert their charters to national or state bank charters. Recent legislation required the Treasury Department to prepare for Congress a comprehensive study on the development of a common charter for federal savings institutions and commercial banks; and, in the event that the thrift charter was eliminated by January 1, 1999, would require the merger of the BIF and the SAIF into a single Deposit Insurance Fund on that date. The Bank cannot determine whether, or in what form, such legislation may eventually be enacted and there can be no assurance that any legislation that is enacted would not adversely affect the Bank and its parent holding company. Affiliate Restrictions. Section 11 of HOLA provides that transactions between an insured subsidiary of a holding company and an affiliate thereof will be subject to the restrictions that apply to transactions between banks that are members of the Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, Sections 23A and 23B and OTS regulations issued in connection therewith limit the extent to which a savings institution or its subsidiaries may engage in certain "covered transactions" with affiliates to an amount equal to 10% of the institution's capital and surplus, in the case of covered transactions with any one affiliate, and to an amount equal to 20% of such capital and surplus, in the case of covered transactions with all affiliates. In addition, a savings institution and its subsidiaries may engage in covered transactions and certain other transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings institution or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" is defined to include a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. 26 In addition, under the OTS regulations, a savings institution may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; a savings institution may not purchase or invest in securities of an affiliate other than shares of a subsidiary; a savings institution and its subsidiaries may not purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings institution or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings institution to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit. The OTS regulation generally excludes all non-bank and non-savings institution subsidiaries of savings institutions from treatment as affiliates, except to the extent that the OTS or the Federal Reserve Board decides to treat such subsidiaries as affiliates. The regulation also requires savings institutions to make and retain records that reflect affiliate transactions in reasonable detail, and provides that certain classes of savings institutions may be required to give the OTS prior notice of affiliate transactions. Federal Securities Law The Common Stock of the Company is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, under OTS regulations, generally may not be deregistered for at least three years after the offering. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act. TAXATION Federal Taxation General. The Company is subject to federal income taxation in the same general manner as other corporations with some exceptions listed below. The following discussion of federal taxation is only intended to summarize certain pertinent federal income tax matters and is not a comprehensive description of the our applicable tax rules. The Company's federal income tax returns have been closed without audit by the Internal Revenue Service ("IRS") through 1995. The Company will file a consolidated federal income tax return, which includes the Bank. Accordingly, it is anticipated that any cash distributions made by the Company would be treated as cash dividends, and not as a non-taxable return of capital to stockholders for federal and state tax purposes. 27 Method of Accounting. For federal income tax purposes, the Company reports its income and expenses on the accrual method of accounting and files its federal income tax return using a June 30 fiscal year end. Bad Debt Reserves. The Small Business Protection Act of 1996 (the "1996 Act") eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995. Prior to the 1996 Act, the Bank was permitted to establish a reserve for bad debts and to make additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of he 1996 Act, savings associations must use the specific chargeoff method in computing its bad debt deduction beginning with their 1996 federal tax return. In addition, federal legislation requires the recapture (over a six year period) of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987. The amount of such reserve subject to recapture as of June 30, 1999 is approximately $2.4 million. Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if the Bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the Bank make certain non-dividend distributions or cease to maintain a bank charter. At June 30, 1999, the total federal pre-1988 reserve was approximately $6.2 million. The reserve reflects the cumulative effects of federal tax deductions for which no federal income tax provisions have been made. Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in excess of an exemption amount. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Company has not been subject to the AMT nor does it have any such amounts available as credits for carryover. Net Operating Loss Carryovers. The Company may carry back net operating losses to the three preceding taxable years and forward to the succeeding 15 taxable years. This provision applies to losses incurred in taxable years beginning before August 6, 1997. For net operating losses in years beginning after August 5, 1997, such net operating losses can be carried back to the two preceding taxable years and forward to the succeeding 20 taxable years. At June 30, 1999, the Company had no net operating loss carryforwards for federal income tax purposes. Corporate Dividends-Received Deduction. The Company may exclude from income 100% of dividends received from a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received. State and Local Taxation Pennsylvania Taxation. The Company is subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax. The Corporation Net Income Tax rate for 1998 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock Tax is a property tax imposed at the rate of approximately 1.2% of a corporation's capital stock value, which is determined in accordance with a fixed formula based upon average net income and net worth. The Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act (the"MTIT"), as amended to include thrift institutions having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT exempts the Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with generally accepted accounting principles ("GAAP") with certain adjustments. The MTIT, in computing GAAP income, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of thrift's interest expense deduction in the proportion of interest 28 income on those securities to the overall interest income of the Bank. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes. Item 2. Properties We operate from the following locations:
Owned Lease Net Book Deposits Or Expiration Value at At Location Leased Date June 30, 1999 June 30, 1999 - -------- ------ ---- ------------- ------------- (In thousands) Executive Office: Welsh & Norristown Roads(1) Owned N/a $1,901 $106,016. Maple Glen, PA 19002-8030 Branch Offices: 1555 West Street Road Leased 01/2001 6 $ 48,469. Warminster, PA 18974-3103 1141 Ivyland Road Leased 06/2004 33 $ 15,958. Warminster, PA 18974-2048 9 Easton Road Owned N/a 659 $110,304. Willow Grove, PA 19090-0905 701 Twining Road Owned N/a 807 $ 50,833. Dresher, PA 19025-1894 761 Huntingdon Pike Owned N/a 350 $ 39,532. Huntingdon Valley, PA 19006-8399 2 N. York Road Leased 05/2002 148 $ 12,752. Hatboro, PA 19040-3201 1331 Easton Road(2) Leased 12/2004 52 $ 4,085. Roslyn, PA 19001 11730 Bustleton Avenue(3) Leased 02/2004 32 $ 2,874. Philadelphia, PA 19116
(1) Includes adjacent nine acre parcel that could be used for future expansion (2) Opened in February 1999. (3) Opened in May 1999. On July 8, 1999, we entered into an agreement to lease 7,725 square feet at 101 Witmer Road, Horsham, Pennsylvania to be used as an Operations Center. Item 3. Legal Proceedings The Company is involved in routine legal proceedings in the normal course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of the Company. Item 4. Submission of Matters to a Vote of Security Holders Not applicable 29 PART II Item 5. Market for Common Equity and Related Stockholder Matters The information required herein, to the extent applicable, is incorporated by reference from the inside back cover of the Company's 1999 Annual Report, and attached hereto as Exhibit 13.0 Item 6. Selected Financial and Other Data The information required herein is incorporated by reference from page 12 of the Company's 1999 Annual Report and attached hereto as Exhibit 13.0 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required herein is incorporated by reference from pages 13 to 21 of the Company's 1999 Annual Report and attached hereto as Exhibit 13.0 Item 7A. Quantitative and Qualitative Disclosure About Market Risk The information required herein is incorporated by reference from pages 22 to 24 of the Company's 1999 Annual Report nd attached hereto as Exhibit 13.0 Item 8. Financial Statements and Supplementary Data The information required herein is incorporated by reference from pages 25 to 60 of the Company's 1999 Annual Report and attached hereto as Exhibit 13.0 30 Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information required herein is incorporated by reference from pages 3 to 6 of the definitive proxy statement of the Company for the Annual Meeting of Stockholders to be held on November 9, 1999, which will be filed within 120 days of June 30, 1999 ("Definitive Proxy Statement"). Item 11. Executive Compensation The information required herein is incorporated by reference from pages 7 to 10 of the Definitive Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required herein is incorporated by reference from pages 11 to 12 of the Definitive Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required herein is incorporated by reference from pages 9 of the Definitive Proxy Statement. 31 PART IV Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K (A) Documents Filed as Part of this Report. (1) The following consolidated financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13): Report of Independent Auditors Consolidated Statements of Financial Condition as of June 30, 1999 and 1998 Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997. Consolidated Statements of Changes in Equity and Comprehensive Income for the Years Ended June 30, 1999, 1998, and 1997 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997. Notes to Consolidated Financial Statements (2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. (3) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index. Exhibit Index 2.1 *Plan of Reorganization 2.2 *Plan of Stock Issuance 3.1 *Federal Stock Charter of Willow Grove Bancorp, Inc. 3.2 *Bylaws of Willow Grove Bancorp, Inc. 4.0 *Form of Stock Certificate of Willow Grove Bancorp, Inc. 10.1 *Form of Employment Agreement entered into between Willow Grove Bank and Frederick A. Marcell, Jr. 10.2 *Form of Employment Agreement entered into between Willow Grove Bank and each of Thomas M. Fewer, John J. Foff, Jr. and John T. Powers 10.3 *Supplemental Executive Retirement Agreement 10.4 *Non-Employee Director's Retirement Plan 10.5 **1999 Stock Option Plan 10.6 **1999 Recognition and Retention Plan and Trust Agreement 13.0 1999 Annual Report to Stockholders 21.0 Subsidiaries of the Registrant - Reference is made to "Item 2. Business" for the required information 23.0 Consent of KPMG LLP 27.0 Financial Data Schedule - ---------- * Incorporated by reference from the company's Registration Statement on Form S-1 filed on September 18, 1998, as amended, and declared effective on November 12, 1998. ** Incorporated by reference from the Company's Special Meeting of Stockholders Proxy Statement on Schedule 14A filed on June 23, 1999. (b) The Company did not file any reports on Form 8-K during the quarter ended June 30, 1999 (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) There are no financial statements or schedules which were excluded from Item 8 which are required to be reported herein. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized Willow Grove Bancorp, Inc. By: /s/ Frederick A. Marcell, Jr. ------------------------------------- Frederick A. Marcell, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Elizabeth H. Gemmill - --------------------------------- Elizabeth H. Gemmill Director /s/ Lewis W. Hull - --------------------------------- September 28, 1999 Lewis W. Hull Director /s/ J. Ellwood Kirk - --------------------------------- September 28, 1999 J. Ellwood Kirk Director /s/ Charles F. Kremp 3rd - --------------------------------- September 28, 1999 Charles F. Kremp 3rd Director /s/ William W. Langan - --------------------------------- September 28, 1999 William W. Langan Chairman of the Board /s/ Frederick A. Marcell, Jr. - --------------------------------- September 28, 1999 Frederick A. Marcell, Jr. Director, President and Chief Executive Officer /s/ A. Brent O'Brien - --------------------------------- September 28, 1999 A. Brent O'Brien Director /s/ Samuel H. Ramsey, III - --------------------------------- September 28, 1999 Samuel H. Ramsey, III Director /s/ William B. Weihenmayer - --------------------------------- September 28, 1999 William B. Weihenmayer Director /s/ John J. Foff, Jr. - --------------------------------- September 28, 1999 John J. Foff, Jr. Senior Vice President and Chief Financial Officer (principal financial officer) 33 EX-13.0 2 ANNUAL REPORT EXHIBIT 13.0 (cover) (eyebrow) FIRST ANNUAL REPORT, 1999 WILLOW GROVE BANCORP, Inc. (headline) The road to prosperity begins with family, friends, and your community bank. (graphic---site map) (map of Willow Grove, PA area. Has 9 bank icons, labeled as Maple Glen, Warminster Shopping Area, Warminster K-Mart, Hatboro, Dresher, Willow Grove, Huntingdon Valley, Roslyn, and Somerton. There are also various farm icons.) (lower right corner) Willow Grove Bancorp, Inc. logo (inside front cover) FINANCIAL HIGHLIGHTS Three bar charts, one showing Asset Growth, one showing Loan Growth and one for Deposit Growth. One plotted point graph showing Branch Office Growth. TABLE OF CONTENTS President's Letter 1 History: The Road Traveled 2 Services for Today & Tomorrow 4 Investing in Our Community 6 Listening to the Needs of Every Customer 8 Management's Discussion & Analysis of Financial Condition and Results of Operations 13 Report of Independent Public Accountants 26 Financial Statements 27 Corporate Information back cover [President's Letter] (Picture of the President, Frederick A. Marcell, Jr.) To Our Shareholders: Less than a year ago we converted Willow Grove Bank (the "Bank") from a federally chartered mutual savings bank to a federally chartered stock savings bank, and established a mid-tier holding company, Willow Grove Bancorp, Inc. ("WGBC") and the Willow Grove Mutual Holding Company("MHC"). This move, we reasoned, would provide growth opportunities, open the way for additional capital, and enhance the ability to expand the products and services we offer to our customers. It would give our customers the chance to invest IN the Bank, even while they deposited their funds WITH the Bank. The reasoning was correct. It's been a productive year for your Bank; a worthwhile addition to our ninety-year history of success. When we look around at our growing establishment of nine community banking offices, our family of depositors and investors, our increases in value and our ever-expanding community investment, we feel the satisfaction of a job well done. A job we hope to continue doing for at least the next ninety years! The new capital allows us to expand our services and our hours, stay current in technology, and increase the number of banking offices. Meanwhile, an amazing 78% of our public shareholders (that is, shareholders other than MHC, our parent mutual holding company) are depositors holding shares in their own name. In our very first quarter as a public company, WGBC paid a cash dividend amounting to $.08 per share, and it is our goal to continue to issue quarterly dividends. These developments, coupled with a focused Board of Directors, professional management team and highly competent staff, have enabled your Bank to double in size over the last five years: we've doubled assets, deposits, loans, and customer base. On the horizon we expect continued growth, along with the continued development of competitive products and services. Long-standing community roots are an important part of the Willow Grove Bank story. We have always endeavored to be an active member of the communities in which 1 our banking offices are located; Eastern Montgomery, Bucks, and Philadelphia Counties. Your Bank has made a firm commitment to "giving back" over the years, culminating in charitable contributions totaling more than one million dollars in the last fiscal year. To uphold this worthwhile tradition we have established the Willow Grove Foundation, which is equally committed to investing in the people and projects that impact our towns and neighborhoods. From little leagues and libraries to senior citizen centers and ecological trusts, the Willow Grove Foundation will continue to offer support. Caring about our neighbors is indeed a grand American tradition, and we take enormous pride in reporting that the people who work with us share our passion for investing in the community: more than 60 Bank employees are active in 180 different volunteer organizations. We've proven that the words "local" and "community," when associated with a bank, can also mean comprehensive and committed. Our ongoing relationships and excellent financial performance are testimonials to the strength of our governing principles: to develop and adhere to sound financial practices; to provide an outstanding portfolio of products and services; and to reinvest in the community. We believe that the Bank's mission is only fulfilled when we are in tune with the people and the needs of those around us. In the truest possible sense, we intend to remain Your Community Bank. (signature) Frederick A. Marcell Jr. President and CEO 2 History---The Road Traveled (Bank icon with Willow Grove banner) How does a small community bank evolve into a big-service bank with assets totaling almost half a billion dollars? By meeting the needs of the public. Like any service organization, the one sure way to grow is to attract business. Willow Grove Bank expanded upon this traditional model by formulating and executing a series of three-year plans. These plans were designed to move the Bank into the position of offering added value through more products and services, greater diversification of loans and investments, and the cost-effective utilization of financial services technology. The result was a more competitive bank, one with the structure and profile of a large financial institution, while preserving our identity as "The Bank Next Door." How we spent the last 90 years Since its initial charter in 1909, Willow Grove Bank has maintained a healthy and progressive financial statement, primarily based upon the lending secured by first mortgages for residential homes in our market. As recently as 1995, this type of loan constituted 77% of our portfolio. The benefit of such a long and steady presence in the community meant that our name became associated with a willingness to invest in the growth of the surrounding area. This in turn contributed to the growth of the Bank. (house icon) The transformation In recent years, we made the decision to diversify the products and services offered to our community, and to grow and expand without sacrificing the quality and continuity of our investments. The move to a publicly held mid-tier holding company structure in December 1998 helped achieve this by generating new capital. Equally important was the diversification of our lending practices into home equity loans, consumer loans, business loans, construction loans and other commercial loans. The continued pursuit of (tree icon) deposits from individuals and businesses and a host of new services has promoted our growth. Over the last five years, the Bank increased its total assets by more than 100%, 3 from $232 million to $472 million. Along with this growth of assets has been an increase in profitability, and Willow Grove Bancorp, Inc. is pleased to report our net earnings reached $3.6 million in fiscal 1999. We have continuously exceeded all regulatory capital requirements, currently maintaining a total capital position of $58 million, with capital ratios that exceed protective levels mandated by the Federal banking agencies. [SIDEBAR BOX] Willow Grove Bank's Variety of Services Passbook, CDs & Statement Savings Commercial and Money Market Accounts Real Estate Loans Personal & Business Checking Construction Financing Individual Retirement Accounts Student Loans Residential Mortgages Auto Loans Home Equity Loans Telephone Banking ATM/Debit Cards Our depositors (boat icon) Our neighbors are the people who make this possible. We reach out for their business, and because of our commitment to provide both a range of services and a consistent responsiveness to their needs, they have indeed made Willow Grove Bank a resounding success. Currently we boast a family of more than 60,000 accounts, encompassing a variety of loans, mortgages, money markets, savings and checking accounts, IRAs, and more. We believe delivering traditional banking services has served us well and will continue to do so as we grow. 4 Our shareholders Many shareholders in Willow Grove Bancorp, Inc. are the same people who comprise our customer deposit base. More than 2,200 depositors took advantage of the December 1998 stock offering by WGBC of 2.2 million shares; in fact, the average investor purchased 1,000 shares. We believe this community support is a reflection of the roots we have maintained in our community, and the additional equity capital enables the Bank to accelerate its plans for diversification, growth, and community investment. The additional capital also enables us to consider acquisitions that would fit within our current roster of financial holdings, and expand our banking office network. (paper and envelope icon) Our success Even a bank with a solid track record, steadily rising performance, loyal customer base and outstanding regulatory compliance must look to the future to sustain the drive to excellence. For Willow Grove Bank, the success we have engendered thus far is only a prelude to the next steps. Our plan is to sustain our success and continue our growth in assets, with a goal to double in size again. Success, to the Bank, need not be repeated; it should always be surpassed. The can-do spirit and relationships we created have brought us this far. We expect those same qualities to carry us into the next century. (golf hole icon) [CHART: More Services Increase Customer Base-4 bars] Actual numbers for this chart are: June-93, 25,144 June-95, 34,255 June 97, 48,083 June 99, 59,800 (caption) The expanding variety and number of banking services offered leads to a concurrent increase in depositors, with an increase in one leading to an increase in another. [end of spread] 5 Services for Today & Tomorrow Making it easier to bank, borrow, and thrive (checkbook icon) The expansion of products and services became the driving force for the evolution of Willow Grove Bank. The steps we took to serve our communities represent the essential reason we have maintained profitability. As just one illustrative example, we can now report that our Free Checking product resulted in over 10,000 new accounts. From our deliberate beginnings as a banking institution committed to making residential mortgage loans, we have moved forward in a number of quietly aggressive yet financially sound ways. Customers have come to expect traditional products like passbook and statement savings accounts along with personal and business checking, but we have added a considerable number of options to our list of services. Conservative investment choices are provided through savings, certificates of deposit, IRAs and Keoghs, which look to the long term, while the needs of today are being met through home equity and consumer loans and lines of credit. Our expanded products, including business, construction and commercial lending, are designed to address the needs of our business sector. In addition, we've added many other services long associated with larger banking institutions. Availability of these services is another key factor in the continuing drive to meet the needs of our customers. To that end, we have steadily expanded the number of banking offices, selecting new locations based on careful studies of community need. We have established our presence in the marketplace with advertising and public relations efforts, as well as our ongoing community support programs. At all times, though, our goal remains to provide a complete, convenient, and responsive banking experience for our customers. 6 Our products and practices reflect a dedication to service that we deem an indispensable part of our mission. We have established Willow Grove Bank as a safe and sound bank which is committed to meeting the needs of our communities. Constant improvements, consistent innovation "More for the customer" is a successful creed all by itself. It entails repeated examination of the ways in which we serve our customers, and has resulted in longer hours on weekdays, nights, and Saturdays, along with other innovative, flexible programs and services designed around busy schedules. The pie charts below illustrate the continuing diversification that is ongoing in our loan programs, which effectively extends our market for lending and enhances our status in the community. (1999 Deposit Portfolio pie chart and 1999 Loan Portfolio pie chart) Regulatory compliance (building icon) Solid banking practices and judicious decisions are also contributing factors in the consistently high rate of loan repayments and profitability the Bank experiences. Willow Grove Bank is subject to the mandates of Federal bank regulatory agencies, and we are committed to remaining in total compliance with Federal regulations, regardless of the type or extent of banking services we provide. Deposits at the Bank are FDIC insured up to applicable limits and Willow Grove Bank is a member in good standing of both the Federal Reserve Bank and the Federal Home Loan Bank System. We strive to ensure that the technology we use to transmit, store and process financial data, such as our Voice Response Unit, is always on the cutting edge of sophistication and reliability. Sheshunoff Information Services, a leader in financial data and analysis, has recognized the Bank's success by giving us its highest rating, based upon capital adequacy, asset quality, earnings, and liquidity. 7 A strong and sure course (map icon with a bank) Our long history reflects the solidity and consistency of the Bank's management and goals. The Bank's financial position is stronger than ever. In an era of mergers and multiple ownerships, we have positioned ourselves in the marketplace as a distinctly independent entity. The Bank is now a wholly-owned subsidiary of a publicly-held corporation, yet we have made sure that our parent mutual holding company retains ownership of more than a majority of the shares. Our current Charter and Bylaws contain provisions that discourage takeover attempts, while Federal law establishes specific restrictions on acquisition of the holding company or Bank. Collectively, these safeguards further protect our ability to continue our successful banking practices. We intend to remain a unique, independent, community-focused institution, providing quality financial products and services to those within our area. Expanding to meet demand (computer icon) Our future plans involve strategic decisions that will build our community relationships even further. We are committed to continually exploring the newest technological advances as they become available. Securities and annuities brokerage services began through Willow Financial Services within the past year and are expected to grow along with demand. In the near future, we will examine internet banking, insurance and trust services. Finding new products and services to bring to the marketplace is a Willow Grove Bank tradition. Giving back (awards icon) Supporting our community with investment, contributions, and sponsorship has been an integral part of the way we do business. At our corporate headquarters in Maple Glen, we proudly display plaques and awards honoring our commitment to giving back. Among these are business achievement, community support, and service awards. An essential element in our reorganization and the incorporation of Willow Grove Bancorp, Inc. involved the establishment and endowment of the Willow Grove Foundation. The Foundation was established as part of our effort to continue and broaden those activities that deepen our connection to the communities in which we live and work. [end of spread] 8 (headline) Investing in our Community (picture of around 15 people and man on right holding a check) (caption) Shade trees are planted in Cherry Street Park, located in Willow Grove, thanks to the generosity of Willow Grove Bank. (picture of clowns holding a "Willow Grove Presents Clowning Around" banner) (caption) Willow Grove Bank brightens the spirits of young and old alike by participating in and sponsoring carnivals and parades throughout the areas we serve. (picture of 10 people standing in front of a school, 2 are holding big ribbons) (caption) When McKinley Elementary School, located in Abington Township, became one of 20 public schools in the 1998-1999 National Elementary Blue Ribbon Schools Program, Willow Grove Bank was prouder than ever of our contributions to the "Community of Learners" collaborative approach to education. (9 people holding a check made out to the American Red Cross) (caption) Willow Grove Bank joined with the American Red Cross in funding a program in Community Disaster Education at Sandy Run Middle School in Dresher and at other locations in Bucks and Montgomery Counties. 9 (picture of 6 people standing near a railing) (caption) Founded with a gift of over a million dollars from Willow Grove Bank, Willow Grove Foundation is dedicated to investing in all the communities serviced by the bank. Pictured here is The Board of Directors of the Foundation. From left to right; Robert Abel, Frederick A. Marcell Jr., Senator Stewart J. Greenleaf, Sandra Fields Henley, Senator Joe Conti, Charles F. Kremp, III, Chairman. (picture of 3 men holding a check and three baseball players in front of them) (caption) New bleachers for the Hatboro Little League mean there will be more cheering from the stands, thanks to Willow Grove Bank. (picture of 3 people holding a check made out to the Interfaith of Ambler) (caption) Inter-Faith of Ambler, an organization increasingly active in services to the homeless, received a generous check from Willow Grove Bank. The funds will be used in the Hospitality Network Program for Emergency Shelters. (picture of 6 people standing in front of Willow Grove Bank sign with a big check) (caption) Willow Grove Bank recently donated $7,000 to restore heating systems in Mather Mill, near historic Hope Lodge in Whiemarsh Township. 10 Listening to the Needs of Every Customer (Photo of Donna Hamm with baby, and Thomas F. Powers, VP/Banking Office Coordinator) Donna Hamm and family, including Patrick, 15 months, arrived in Maple Glen two years ago. "We were delighted to discover better hours, better service, and genuinely helpful tellers at Willow Grove Bank. I'm telling all my new friends about them, and young Patrick already has savings and Christmas club accounts with the bank. It's a simple truth: you go where you feel wanted." (photo of Agnes M. Jester) Agnes M. Jester of Maple Glen, PA, has been a loyal customer of Willow Grove Bank for 20 years. "I love that they know my name when I walk in the door and I'm always greeted with a smile. And they really do care, you know. I was seriously ill last year and the bank sent me flowers! Imagine that. It's the extra touch of kindness I really appreciate. I'll bank with Willow Grove forever." (Photo of Paul Wagner standing next to Yankee Coach) Paul Wagner reports a terrific experience with the loan department of Willow Grove Bank. "This is how I like to be treated by a bank! Everyone was on the ball. I met with the decision makers and they had a real can-do attitude. The loan I got from Willow Grove Bank enabled me to acquire a business in Orlando, Florida. They really know how to make things happen." (Photo of Adina Ardman) Adina Ardman of Allied Hobbies took the advice of her family and her accountant and brought her business to Willow Grove Bank. "We're not a huge corporation, just a small local company. I was thrilled by the attention I received from Willow Grove Bank---much more than I ever got from the larger banking institutions. Thanks to a timely loan, my computer systems are ready for Y2K. 11 Selected Financial and Other Data The following selected historical financial data is derived in part form. It should be read in conjunction with, and is qualified in its entirety by, our historical financial statements, including the related notes.
At June 30, ---------------------------------------------------- 1999 1998 1997 1996 1995 ---------------------------------------------------- (Dollars in thousands, except per share data) Selected Financial Condition Data Total Assets $472,039 $405,374 $354,679 $312,236 $293,589 Cash and Cash Equivalents 4,889 18,291 4,204 4,282 6,871 Investment securities held to maturity -- -- 3,999 -- 55,480 Securities available for sale 80,055 48,111 45,766 50,163 742 Loans Available for sale -- 12,152 6,173 5,140 9,370 Loans receivable, net 374,584 315,705 284,596 243,310 210,212 Real estate held for investment, net -- -- 180 204 206 Deposits 390,681 340,793 309,729 267,695 237,645 Borrowings 14,986 21,000 6,500 10,120 22,620 Total equity 58,442 35,945 33,122 30,374 28,420 Year Ended June 30, ---------------------------------------------------- 1999 1998 1997 1996 1995 ---------------------------------------------------- Selected Operating Data Interest income $ 32,015 $ 28,604 $ 25,423 $ 22,105 $ 19,848 Interest expense 16,164 15,097 13,817 12,370 10,207 Net interest Income 15,851 13,507 11,606 9,735 9,641 Provision for loan losses 531 993 185 210 60 Net interest income after provision for loan losses 15,320 12,514 11,421 9,525 9,581 Non-interest income 1,009 760 786 1,245 1,553 Non-interest expense 10,652 9,462 8,284 6,024 5,598 Income before income taxes 5,677 3,812 3,923 4,746 5,536 Provision for income taxes 2,044 1,367 1,548 1,744 2,108 Net Income 3,633 2,445 2,375 3,002 3,428 Earnings per share - basic and diluted (1) $ 0.46 n/a n/a n/a n/a Cash dividends declared (per share) $ 0.08 n/a n/a n/a n/a Dividend payout ratio (2) 8.31% N/a N/a N/a N/a Key Operating Ratios (3) At or For the Year Ended June 30, ---------------------------------------------------- 1999 1998 1997 1996 1995 ---------------------------------------------------- Performance Ratios: Return on average assets 0.84% 0.65% 0.71% 1.02% 1.28% Return on average equity 7.63% 6.81% 7.54% 10.11% 12.73% Average interest-earning assets to average interest-bearing liabilities 120.60% 108.22% 108.06% 108.74% 108.78% Interest rate spread (4) 2.97% 3.36% 3.21% 3.02% 3.35% Net interest margin (4) 3.76% 3.71% 3.56% 3.40% 3.69% Asset Quality Ratios:(end of period) Non-performing assets to total assets (5) 0.23% 0.37% 0.54% 0.87% 0.20% Allowance for loan losses to non- performing loans 293.82% 178.98% 87.62% 71.67% 291.89% Allowance for loan losses to total loans (6) 0.83% 0.80% 0.57% 0.69% 0.77% Capital and Other Ratios Average equity to average assets 11.02% 9.59% 9.39% 10.09% 10.02% Tangible equity to end of period assets 9.80% 8.32% 8.70% 9.00% 8.60% Total risk-based capital to risk-weighted assets (7) 18.10% 14.89% 15.87% 16.06% 18.17%
- ---------- (1) Our initial public offering was completed on December 23, 1998. Earnings per share data presented for 1999 represents the period January 1, 1999 to June 30, 1999. Earnings per share data prior to January 1, 1999 are not applicable. (2) Dividend payout ratio for 1999 equals dividends declared divided by net income for the period January 1, 1999 though June 30, 1999. The data for the period December 23, 1998 through December 31, 1998 is not meaningful, and not available for the prior years in which we were not a public company. (3) With the exception of end of period ratios for the year ended June 30, 1995 ratios are based on average daily balances during the respective periods. Ratios for the year ended June 30, 1995 are based upon month-end balances. (4) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, net interest margin represents net interest income as a percentage of average interest earning assets. (5) Non-performing assets consist of non-accrual loans and accruing loans 90 days or more past due. We had no real estate acquired through foreclosure or by deed-in-lieu thereof ("REO") at any year-end. (6) Total loans are net of the undisbursed portion of loans in process. (7) Bank only 12 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist in understanding our financial condition and the results of operation for Willow Grove Bancorp, Inc. (the "Company") and its subsidiary for the fiscal years ended June 30, 1999, 1998 and 1997. The information in this section should be read in conjunction with the Company's Financial Statements and the accompanying Notes included elsewhere herein. General This Annual Report contains certain forward-looking statements and information based upon our beliefs as well as assumptions we have made. In addition, to those and other portions of this document, the words "anticipate", "believe", "estimate", "expect", "intend", "should", and similar expressions, or the negative thereof, as they relate to us are intended to identify forward-looking statements. Such statements reflect our current view with respect to future looking events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended. We do not intend to update these forward-looking statements. Our earnings are primarily based upon our net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest-bearing liabilities and the relative amount of our interest-earning assets to interest-bearing liabilities. Non-interest income and expenses, the provision for loan losses, and income tax expense also affect our results of operations. Changes in Financial Condition General. Our total assets increased by $66.7 million, or 16.45%, to $472.0 million at June 30, 1999 compared to $405.4 million at June 30, 1998. This increase was primarily due to increases in loans receivable and securities available for sale, which increases were partially offset by a decrease in loans available for sale and a decrease in cash and cash equivalents. Cash and Cash Equivalents. Cash and cash equivalents, which consist of cash on hand and in other banks in interest-earning and non-interest earning accounts, amounted to $4.9 million and $18.3 million at June 30, 1999 and 1998, respectively. The decrease was due to the reduction of funds maintained in interest-earning accounts, which were primarily used to originate and purchase loans and securities available for sale. Assets Available for Sale. At June 30, 1999, assets that were classified available for sale ("AFS") consisted solely of securities totaling $80.1 million. This compares to $60.3 million in the aggregate of assets available for sale at June 30, 1998, of which $48.1 million were securities available for sale and $12.2 million were loans. This increase was primarily due to the investment of funds acquired through our initial public offering, deposit inflows and transfers of funds from cash and cash equivalents. Throughout the past three fiscal years, all of our securities have been classified as available for sale. This classification provides the flexibility to sell securities prior to maturity, if, for example, we determine that our interest rate risk profile should be modified, or a sale would be desirable to change our liquidity position, or for other asset/liability management reasons. Securities classified as AFS are accounted for at fair value with unrealized gains and losses, net of tax, reflected as an adjustment to equity. As a result of changes in market interest rates, at 13 June 30, 1999, we have recorded $1.4 million in cumulative unrealized losses net of income taxes. This compares to an $80,000 net gain at June 30, 1998. Mortgage loans that are originated with the intention to be sold into the secondary market are classified as AFS and are carried at the lower of cost or market value with any unrealized loss reflected in the statement of operations. At June 30, 1999, we had no mortgage loans classified as AFS. Loans. Our net loan portfolio grew to $374.6 million at June 30, 1999 from $327.9 million at June 30, 1998, which 1998 amount included $12.2 million in loans held for sale. This increase of $46.7 million, or 14.24% was due to strong loan demand throughout our market area, and our desire to expand our lending efforts into consumer, home equity, business, and commercial real estate areas. During the year ended June 30, 1999, total mortgage loans increased by $35.4 million, or 10.73%, of which commercial real estate loans increased $28.3 million (115.58%), home equity loans increased by $12.7 million (30.76%), multi-family mortgages increased $5.4 million (72.51%) and single-family first mortgages decreased by $11.6 million (4.78%). Commercial business loans increased by $7.6 million (139.53%) The Company's allowance for loan losses amounted to $3.1 million at June 30, 1999. This represented a net increase of $473,000 (17.75%) from the allowance of $2.7 million at June 30, 1998. Intangible Assets. At June 30, 1999 the amount of our intangible assets totaled $2.0 million. This compares to $2.4 million at June 30, 1998. These assets are comprised of goodwill and a core deposit intangible, which resulted from the purchase of three branch offices in 1994. The goodwill is being amortized on a straight-line basis over a 15-year period. The core deposit intangible is being amortized on an accelerated basis over a 10-year period. Deposits. Total deposits increased by $49.9 million or 14.64% to $390.7 million at June 30, 1999 compared to $340.8 million at June 30, 1998. During the year ended June 30, 1999, NOW accounts grew by $13.9 million, this was an increase of 28.98% from the June 30, 1998 balance of $48.1 million. Certificates of deposit comprise the largest component of our deposit portfolio and, at June 30, 1999, these accounts totaled $251.2 million. However, given the growth in the Company's NOW, money market and savings accounts, certificates of deposit amounted to 64.29% of the Company's total deposits at June 30, 1999 compared to 68.08% and 70.01%, at June 30, 1998 and 1997, respectively. Federal Home Loan Bank Advances. From time to time, we use advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh as an additional source of funds to meet our loan demand. At June 30, 1999, the outstanding amount of these borrowings was $15.0 million, which is a $6.0 million reduction from the $21.0 million outstanding at June 30, 1998. We have established a leveraging program with limits approved by our Board of Directors. This program allows us to obtain FHLB Advances and at the same time purchase securities with estimated average lives corresponding to the terms of the advances. At June 30, 1999, $10.0 million in borrowings were outstanding under this program. This compares to $16.0 million outstanding at June 30, 1998. Equity. At June 30, 1999, our total stockholder's equity was $58.4 million compared to $35.9 million at June 30, 1998. This increase of $22.5 million, or 62.59%, was due primarily to our issuance of common stock, which added $20.6 million to stockholder's equity, $19.7 million was raised in our initial public offering and $896,000 in common stock was issued to the Willow Grove Foundation. Net income for the fiscal year added $3.6 million to stockholder's equity. These increases were partially offset by $100,000 for the initial capitalization of our mutual holding company pursuant to our reorganization, the payment of a cash dividend totaling $187,000 and accounting for $1.4 million of unrealized losses, net of income taxes, on securities classified as available for sale. 14 Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods. Yields and costs at June 30, 1999 are shown for our interest earning assets and interest-bearing liabilities. No adjustment has been made to reflect after tax yields on municipal bonds which were outstanding ($2.0 million at June 30, 1999 and $100,000 at June 30, 1998).
For the Year Ended June 30, At ------------------------------------------------- June 30, 1999 1999 ------------- ------------------------------------------------- Average Average Yield/ Yield/Cost Balance Interest Cost ------------- ------------------------------------------------- Interest-earning assets: Loans receivable Mortgage loans 7.69% $325,710 $26,141 8.03% Non-mortgage consumer 8.32 5,795 402 6.94 Commercial business loans 8.91 8,995 857 9.53 ------------------------------- Total loans 7.75 340,500 27,400 8.05 Securities 6.22 63,460 3,860 6.08 Other interest-earning assets 5.36 17,410 755 4.34 ------------------------------- Total interest-earning assets 7.48 421,370 32,015 7.60 --------- Non-interest-earning assets 10,507 ---------- Total assets $431,877 ========== Interests-bearing liabilities: Deposits NOW and money market accounts 1.45 $46,955 $1,111 2.37 Savings accounts 2.04 43,032 896 2.08 Certificates of deposit 5.34 241,795 13,359 5.52 ------------------------------- Total deposits 4.03 331,782 15,366 4.63 Borrowings 5.33 14,198 772 5.44 Advance payments by borrowers for taxes and insurance 2.00 3,423 26 0.76 ------------------------------- Total interest-bearing liabilities 4.05 349,403 16,164 4.63 --------- Non-interest bearing liabilities 34,863 ---------- Total Liabilities 384,266 Stockholders' equity 47,611 ---------- Total liabilities and equity $431,877 ========== Net interest earning assets $71,967 Net interest income/interest rate spread 3.43% $15,851 2.97% =========================== Net interest margin 3.76% ======= Ratio of average interest earning assets to average interest bearing liabilities 120.60% ======= For the Year Ended June 30, ----------------------------------------------------------------------------- 1998 1997 ----------------------------------- ----------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ----------------------------------- ----------------------------------- (Dollars in thousands) Interest-earning assets: Loans receivable Mortgage loans $303,458 $24,824 8.18% $273,423 $22,208 8.12% Non-mortgage consumer 4,038 254 6.29 2,635 164 6.22 Commercial business loans 3,423 278 8.12 1,743 2 0.11 ----------------------- ----------------------- Total loans 310,919 25,356 8.16 277,801 22,374 8.05 Securities 46,335 2,923 6.31 44,811 2,877 6.42 Other interest-earning assets 6,961 325 4.67 3,641 172 4.72 ----------------------- ----------------------- Total interest-earning assets 364,215 28,604 7.85 326,253 25,423 7.79 --------- --------- Non-interest-earning assets 9,572 9,121 ---------- ---------- Total assets $373,787 $335,374 ========== ========== Interests-bearing liabilities: Deposits NOW and money market accounts $42,991 $916 2.13 $47,784 $803 1.68 Savings accounts 36,984 787 2.13 34,690 768 2.21 Certificates of deposit 226,340 12,833 5.67 205,792 11,653 5.66 ----------------------- ----------------------- Total deposits 306,315 14,536 4.75 288,266 13,224 4.59 Borrowings 9,532 529 5.55 10,567 555 5.25 Advance payments by borrowers for taxes and insurance 3,274 32 0.98 3,091 38 1.23 ----------------------- ----------------------- Total interest-bearing liabilities 319,121 15,097 4.73 301,924 13,817 4.58 --------- --------- Non-interest bearing liabilities 19,548 1,948 --------- --------- Total Liabilities 338,669 303,872 Stockholders' equity 35,118 31,502 ---------- ---------- Total liabilities and equity $373,787 $335,374 ========= ========= Net interest earning assets $45,094 $24,329 Net interest income/interest rate spread $13,507 3.12% $11,606 3.21% ===================== ====================== Net interest margin 3.71% 3.56% ======== ======== Ratio of average interest earning assets to average interest bearing liabilities 114.13% 108.06% ======== ========
15 Rate/Volume Analysis The following table shows the effects of changing rates and volumes on our net interest income. Information is provided with respect to (1) the effects on interest income attributable to changes in volume (change in volume multiplied by prior rate); (2) effects on interest income attributed to changes in rate (changes in rate multiplied by prior volume); and (3) changes in rate/volume (change in rate times the change in volume).
Year Ended June 30, ------------------------------------------------------------------------------------- 1999 compared to 1998 1998 compared to 1997 ----------------------------------------- ------------------------------------------ Increase (decrease) due to Increase (decrease) due to ----------------------------------------- ------------------------------------------ Total Net Total Net Rate/ Increase Rate/ Increase Rate Volume Volume (Decrease) Rate Volume Volume (Decrease) ----------------------------------------- ------------------------------------------ (In thousands) Interest-earning assets: Loans receivable: Mortgage loans $ (469) $ 1,820 $ (34) $ 1,317 $ 164 $ 2,439 $ 13 $ 2,616 Non-mortgage consumer loans 26 111 11 148 2 87 1 90 Commercial business loans 48 453 78 579 140 2 134 276 ----------------------------------------- ------------------------------------------ Total loans receivable (395) 2,384 55 2,044 306 2,528 148 2,982 Securities (105) 1,080 (38) 937 (49) 98 (3) 46 Other interest-earning assets (23) 488 (35) 430 (2) 157 (2) 153 ----------------------------------------- ------------------------------------------ Total net change in income on interest-earning assets (523) 3,952 (18) 3,411 255 2,783 143 3,181 ----------------------------------------- ------------------------------------------ Interest-bearing liabilities: Deposits NOW and money market accounts 101 84 10 195 (76) 208 (19) 113 Savings accounts (17) 129 (3) 109 (28) 51 (4) 19 Certificates of deposit (328) 876 (22) 526 21 1,163 (4) 1,180 ----------------------------------------- ------------------------------------------ Total deposits (244) 1,089 (15) 830 (83) 1,422 (27) 1,312 Borrowings (11) 259 (5) 243 16 (41) (1) (26) Advances by borrowers for taxes and insurance (7) 1 -- (6) (8) 2 -- (6) ----------------------------------------- ------------------------------------------ Total net change in income on interest-bearing liabilities (262) 1,349 (20) 1,067 (75) 1,383 (28) 1,280 ----------------------------------------- ------------------------------------------ Net change in net interest income $ (261) $ 2,603 $ 2 $ 2,344 $ 330 $ 1,400 $ 171 $ 1,901 ========================================= ==========================================
16 Results of Operations General. Our net income for the year ended June 30, 1999 was $3.6 million compared to $2.4 million for each of the years ended June 30, 1998 and 1997. In fiscal 1999, the increase in net interest income was the primary reason for the increase in net income compared to fiscal 1998, but this increase in net interest income was partially offset by higher non-interest expenses. In fiscal 1998, the increase in net interest income compared to fiscal 1997 was offset by increases in non-interest expenses and provisions for loan losses. In fiscal 1999, $896,000 of expense was incurred with the establishment of the Willow Grove Foundation, and in fiscal 1997, a one-time special SAIF assessment of $1.5 million was incurred. Net Interest Income. Net Interest Income is determined by our interest rate spread (i.e., the difference between the yields on interest-earning assets and the rates paid on interest-bearing liabilities) and also the amount of interest-earning assets relative to interest-bearing liabilities. Our average interest rate spread for the years ended June 30, 1999, 1998 and 1997 was 2.97%, 3.12%, and 3.21%, respectively. Our net interest margin (i.e., net interest income expressed as a percentage of average interest-earning assets) was 3.76%, 3.71%, and 3.56% for the same three years. The reduction in our interest spread has been due to the changes in market interest rates whereby rates on longer-term financial instruments declined to a greater degree than rates on shorter-term financial instruments creating a flattening of the yield curve. Proceeds received from our various sources of funds were reinvested in new interest-earning assets with yields that were closer to costs paid on our interest-bearing liabilities causing the declining spread. Net interest margins increased because the percentage of interest-earning assets to interest-bearing liabilities has been increasing. For fiscal year 1999, the average balance of interest-earning assets to interest-bearing liabilities was 120.60%, compared to 114.13% and 108.06% for fiscal 1998 and 1997, respectively. The primary reasons for these increases are the investment of funds raised through our initial public offering being invested in interest-earning assets and the growth of our non-interest bearing checking accounts. For the year ended June 30, 1999, net interest income totaled $15.9 million compared to $13.5 million and $11.6 million in fiscal 1998 and 1997, respectively. The increase in fiscal 1999 of $2.4 million, or 17.35%, was primarily due to increases in the average balances of interest-earning assets. The increase in fiscal 1998 of $1.9 million, or 16.38%, was also due to higher average balances of interest-earning assets, in particular mortgage loans. Interest Income. Interest income includes the interest earned on our various loans and securities, as well as yield adjustments for the premiums, discounts, and deferred fees recorded in connection with the acquisition of these assets. Our total interest income for the year ended June 30, 1999 was $32.0 million compared to $28.6 million and $25.4 million for fiscal 1998 and 1997, respectively. The increase in interest income in fiscal 1999 compared to 1998 was $3.4 million, or 11.92%. Increases in the average balances of loans outstanding ($29.6 million), particularly mortgage loans ($22.3 million), and increases in the average balances of securities ($17.1 million) and other interest-earning assets ($10.4 million) were the primary reasons for the increase in interest income. This increase was partially offset by a reduction in the yield earned on average interest-earning assets, particularly mortgage loans. For fiscal 1999, the yield on average interest-earning assets fell to 7.60% from 7.85%; the major contributing factor for this decrease was the decline in the average yield on mortgage loans, which fell to 8.03% in fiscal 1999 from 8.18% in fiscal 1998. The $3.2 million, or 12.6%, increase in interest income in fiscal 1998 compared to fiscal 1997 was primarily due to a $3.0 million increase in interest on loans. This was primarily attributed to a $30.0 million increase in the average balance of real estate loans outstanding. Interest Expense. Interest expense consists of the interest paid to our depositors on their interest-bearing accounts with us, and to a lesser extent, interest paid on funds borrowed from the FHLB and certain escrow accounts. For the year ended June 30, 1999, our total interest expense was $16.2 million, of which $15.4 million was interest on deposits. For the years ended June 30, 1998 and 1997, total interest expense was $15.1 million and $13.8 million, respectively. For the year ended June 30, 1999, interest expense increased by $1.1 million, or 7.07%. The increase in interest expense for fiscal 1999 was primarily due to an $830,000 increase in interest on deposits to $15.4 million. The increase in interest on deposits was mainly due to a larger average balance of deposits outstanding, offset 17 slightly by a reduction of the average rate paid on deposits. Interest on borrowings increased due to a higher average balance of borrowings outstanding during the fiscal year. The primary reason for the $1.3 million, or 9.26%, increase in interest expense for the year ended June 30, 1998 compared to fiscal 1997 was the increased cost associated with the higher volume of our certificates of deposit ("CDs"), which constitute the largest potion of our deposit portfolio. During fiscal year 1999, the average balance of CDs increased $15.5 million to $241.8 million, a 6.83% increase. At June 30, 1999, CDs made up 64.29% of our deposits, this compares to 68.08% at June 30, 1998. Money Market and NOW accounts, which both increased as a percentage of total deposits at June 30, 1999, comprise an aggregate of 23.23% of the portfolio compared to 20.12% at June 30, 1998. Currently interest rates on CDs are in excess of rates paid on money market and NOW accounts. Increasing money market and NOW accounts as a percentage of total deposits should decrease our weighted average cost of funds in a stable interest rate environment. Provision for Loan Losses. We establish provisions for loan losses, which are charges to our operations, in order to maintain a level of total allowance for losses that we deem adequate to absorb potential future losses on loans or other interest-earning assets we may consider uncollectible. In determining the appropriate level of allowance for losses, we consider industry-wide loss experience, our past loss experience, current and anticipated economic conditions, real estate and other forms of collateral, the volume and type of lending and the level of non-performing and classified assets. The amount of our allowance for loan loss is only an estimate, and actual losses may vary from these estimates. We assess our allowance for loan losses at least quarterly, and make any necessary provision for losses needed to maintain our allowance for losses at a level deemed adequate. For the years ended June 30, 1999, 1998, and 1997, our provisions for losses were $531,000, $993,000, and $185,000, respectively. In fiscal year 1999, the amount of our provision for loan losses declined to $500,000 compared to $1.0 million in fiscal 1998. At June 30, 1999, the amount of our allowance for losses was $3.1 million compared to $2.7 million at June 30, 1998. Management believed that a $500,000 provision for loan losses in fiscal 1999 was appropriate given, among other things, the continuing growth in the Company's loan portfolio. The percentage of the allowance for losses to loans increased slightly to 0.83% at June 30, 1999 compared to 0.80% at June 30, 1998. The primary reason for the $808,000 increase in the year ended June 30, 1998 compared to fiscal 1997 was the addition of industry-wide loss experience in the factors used to determine the adequacy of our allowance for losses. Prior to that time, our major emphasis was placed on our past loss experience as well as the other factors previously mentioned. With the expansion of our lending activities into commercial real estate, business, and consumer, including industry-wide loss experience provides a better representation of the inherent risks in our loan portfolio due to the changing mix of our loan portfolio. We believe that the allowance for losses was adequate at June 30, 1999 based upon the facts and circumstances known to us at that date. No assurance can be made that additional provisions may be needed in future periods, which could adversely affect our results of operations. Regulatory agencies, in the course of their regular examinations, review the allowance for loss and carrying value of non-performing assets. No assurance can be given that these agencies might require changes to the allowance for losses in the future. Non-Interest Income. Non-interest income is comprised of service fees and charges, loan servicing fees, and gains and losses on assets available or held for sale. Total non-interest income for the years ended June 30, 1999, 1998, and 1997 was $1.0, million, $760,000, and $786,000, respectively. The increase in non-interest income for fiscal 1999 was due to losses on the sales of assets incurred during fiscal 1998, not incurred in 1999, and increases in service fees and charges due to increases in the number of accounts, particularly checking accounts. Non-Interest Expense. The primary components of non-interest expense are: compensation and employee benefits, occupancy expense, federal deposit insurance premiums, data processing, and a variety of other expenses. For the years ended June 30, 1999, 1998, and 1997, non-interest expense totaled $10.7 million, $9.5 million, and $8.3 million, respectively. The primary reason for the increase in non-interest expenses in fiscal 1999 was due to $896,000 in expense for the establishment of and one-time contribution of stock to the Willow Grove Foundation. 18 Compensation and benefits totaled $5.5 million, $5.4 million, and $3.4 million respectively for the years ended June 30, 1999, 1998, and 1997. The major reason for the increases has been increases in the number of employees due to our growth. Expenses of $90,000 attributed to the ESOP are included in fiscal 1999. Fiscal year 1998 expenses included $566,000 in the aggregate in expenses with respect to the implementation of a directors' retirement plan and a supplemental executive retirement plan. In accordance with our reorganization plan and our commitment to our communities, in fiscal 1999, we established the Willow Grove Foundation by issuing 89,635 shares of stock to the Foundation and incurring an expense of $896,000. Occupancy and furniture and equipment expenses were $918,000, $964,000, and $734,000 for the years ended June 30, 1999, 1998, and 1997, respectively. The $230,000 increase in fiscal 1998 compared to fiscal 1997 was primarily due to opening two new branches. Federal deposit insurance premiums were $206,000, $195,000 and $1,829,000 for fiscal 1999, 1998, and 1997, respectively. A special one-time SAIF assessment was included in fiscal 1997. Amortization of intangible assets was constant at $410,000, while advertising was $436,000, $413,000 and $297,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Other expenses, which include miscellaneous operating items, were $1.7 million, $1.3 million, and $1.0 million, respectively for the fiscal years ended June 30, 1999, 1998 and 1997, respectively, with increases primarily attributable to our growth and diversification efforts. Income Taxes. Provisions for income taxes amounted to $2.0 million, $1.4 million, and $1.5 million for the years ended June 30, 1999, 1998 and 1997, respectively. The effective tax rates for these periods were 36.00%, 35.86%, and 39.46%. Liquidity and Commitments Our primary sources of funds are from deposits, amortization, prepayments and the maturity of loans, mortgage-backed securities and other investments, and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity. We have also utilized outside borrowings, primarily from the FHLB of Pittsburgh, on a limited basis as an additional funding source. We use our liquidity resources to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At June 30, 1999, we had outstanding approved loan commitments totaling $13.5 million and certificates of deposit maturing within the next twelve months amounting to $157.8 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificate of deposits will be reinvested in the bank. We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments. Impact of Inflation and Changing Prices The financial statements, accompanying notes, and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Most of our assets and liabilities are monetary in nature; therefore the impact of interest rates has a greater impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and service. Year 2000 Consideration In order to be ready for the year 2000 (the "Year 2000 Issue"), we have developed a Year 2000 Action and Assessment Plan (the "Action Plan") which was presented to the Board of Directors in February 1998. The Action Plan was developed using the guidelines outlined in the Federal Financial Institutions Examination's Council's "The Effect of 2000 on Computer Systems". Our Board of Directors assigned responsibility for the Action Plan to our 19 Year 2000 Committee which reports to the board on a quarterly basis. The Action Plan recognizes that our operating, processing and accounting operations are computer reliant and could be affected by the Year 2000 Issue. Our Action Plan addressed the potential impact of the Year 2000 Issue on both our Information Technology ("IT") systems and non-IT systems (such as security, elevators, heating and air-conditioning, telephone, check-signing equipment, etc.) Pursuant to our Action Plan, we have reviewed our IT systems and non-IT systems and equipment for Year 2000 readiness and believe that we have identified all equipment which needs to be upgraded or replaced. Commencing in early 1998, we began a program of upgrading or replacing all such equipment in order to ensure that our equipment is Year 2000 compliant on or before December 31, 1999. We are primarily reliant on third party vendors for our computer output and processing, as well as other significant non-IT functions and services (i.e. securities safekeeping services, securities pricing information, etc.) The Year 2000 Committee is currently working with these third party vendors to assess their Year 2000 readiness. Such vendors generally are reluctant to guarantee or provide firm assurance that their products will be Year 2000 compliant in a timely fashion. In addition, we believe that it would be difficult to prevail on legal claims against such vendors with respect to Year 2000 Issues. Instead, our approach has been that we are primarily responsible for identifying and correcting Year 2000 compliance issues. A major factor in our operations is the data processing software which is used on a company-wide basis. A third party vendor maintains such software. We have been working closely with this vendor, whose clients include many depository institutions, in an effort to ensure Year 2000 preparedness. In this respect, we have on three occasions during non-banking hours, tested our operation systems, both IT and non-IT system for Year 2000 readiness. These tests revealed only minor problems which have all been corrected as of June 30, 1999. Based upon our initial assessment, we presently believe that with the planned modifications to existing software and hardware and planned conversions to new software and hardware, our third party vendors are taking the appropriate steps to ensure critical systems will function properly. Our Action Plan calls for monitoring all of the software vendors and as of June 30, 1999, all vendors are Year 2000 compliant. As of June 30, 1999, we have completed the awareness, assessment, renovation and validation phases of our Year 2000 Action Plan. We currently are completing the implementation phase which includes replacing certain equipment identified as not being Year 2000 compliant. We are approximately 65% complete on this implementation phase. While no assurance can be given as to actual systems operations upon the turn of the century, based upon information currently known to us and upon consideration of our testing efforts to date, we believe that in the worst case scenario, we will suffer only a slight interruption of business practices as a result of minor application failures of our IT and non-IT systems and software as a result of the Year 2000. However, if appropriate modifications and conversions are not made, or not completed on a timely basis, the Year 2000 Issue could have a material impact on our operations. The results from the Year 2000 mailing to our commercial customers indicated that commercial customers that use software have or will update their software packages by December 31, 1999. Many of the customers use outsource services such as payroll companies who are assuring their customers that they are Year 2000 compliant. It has been determined that none of our customers are facing a high risk of business disruption because of technological defaults. We have completed a company-wide Year 2000 contingency plan. Individual contingency plans concerning specific software and hardware issues have been formulated for specific departments. These plans include the identification of our operations that can be done on a manual basis or with stand-alone personal computers and printers. We have identified telephone lines which should not be affected by any Year 2000 problems and have also identified alternative power sources. Additionally, we have established a Year 2000 Business Resumption Plan to specifically address a situation where telephone communication is not available for whatever reason. This plan is divided into three contingencies. Contingency A makes the assumption we are able to complete all banking functions "as usual" utilizing normal procedures and security measures. Contingency B prepares for a situation in which we have no communication with our primary third-party service bureau for a period of from one hour to one day. Contingency C addresses the situation in which we have no communication with our primary third-party service bureau for more than one day. Third party vendors are primarily absorbing the costs of modifications to our existing software; however we have recognized the need to purchase new software and hardware. Currently, we estimate that the total cost including hardware, software and other issues will be $300,000 to complete the Year 2000 project. Through June 30, 1999, approximately $244,000 has been expensed for the Year 2000 project. It is anticipated that the remaining $56,000 will be expensed over the next six months. 20 Impact of Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. According to the statement, all items of comprehensive income are to be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is defined as the change in the equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Along with net income, examples of comprehensive income include foreign currency translation adjustments, unrealized holding gains and losses on available for sale securities, changes in the market value of a futures contract that qualifies as a hedge of an asset reported at fair value, and minimum pension liability adjustments. Currently, our comprehensive income consists of net income and the net change in unrealized holding gains and losses on available for sale securities. This statement is effective for fiscal years beginning after December 15, 1997. We adopted SFAS No. 130 effective July 1, 1998. In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. This statement, which supersedes SFAS No. 14, requires public companies to report financial and descriptive information about their reportable operating segments on both an annual and interim basis. SFAS No. 131 mandates disclosure of a measure of segment profit/loss, certain revenue and expense items and segment assets. In addition, the statement requires reporting information on the entity's products and services, countries in which the entity earns revenues and holds assets, and major customers. We adopted SFAS No. 131 effective July 1, 1998. In February 1998 the FASB issued SFAS No. 132, Employer's Disclosures About Pensions and Other Post Retirement Benefits. This statement revises employer's disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. We adopted SFAS No. 132 effective July 1, 1998. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of certain exposure to changes in the value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of an exposure to variable cash flows of a forecasted transaction, or (c) a hedge of a foreign currency exposure. This statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We have not yet determined the impact, if any, of this statement, including its provision for potential reclassifications of investment securities, on operations, financial condition and equity. However, we currently have no derivatives covered by this statement and currently we do not conduct any hedging activity. In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This statement requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify any retained mortgage-backed security based upon the ability and intent to sell or to hold those investments, except that a mortgage banking enterprise must classify as trading any retained mortgage-backed security that it commits to sell before or during the securitization process. This statement is effective for the first fiscal quarter beginning after December 15, 1998 with early adoption permitted. This statement provides a one-time opportunity for an enterprise to reclassify, based upon the ability and intent on the date of adoption of this statement, mortgage-backed securities and other beneficial interests retained after securitization of mortgage loans held for sale from the trading category, except for those with commitments in place. 21 Quantitative and Qualitative Disclosure About Market Risk Market Risk Analysis - Asset and Liability Management Qualitative Risk Analysis. The ability to maximize net interest income is largely dependent upon the achievement of a positive interest spread that can be maintained during fluctuations in prevailing interest rates. Interest rate sensitivity gap ("gap") is a measure of the difference between interest-earning assets and interest-bearing liabilities that either mature or re-price within a specified time period. A gap is considered positive when the amount of interest-earning assets exceeds the amount of interest-bearing liabilities, and is considered negative when interest-bearing liabilities exceed interest-earning assets. Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income. During a period of falling interest rates, a negative gap within shorter maturities would generally result in an increase in net interest income, and a positive gap within shorter maturities would result in a decrease in net interest income. This is generally the case, however, interest rates on differing financial instruments will not always change at the same time or to the same extent. At June 30, 1999, the ratio of the cumulative interest-earning assets maturing or re-pricing in one-year or less to interest-bearing liabilities maturing or re-pricing in one-year or less is 50.89%, which results in a cumulative one-year gap to total assets ratio of minus 22.19%. We have adopted asset/liability management policies designed to better match the maturities and re-pricing of our interest-earning assets and interest-bearing liabilities. These interest rate risk and asset/liability management actions are taken under the guidance of the Asset/Liability Management Committee ("ALCO"), which is comprised of directors Langan, Kremp, and Ramsey, our President, and three executive officers. The ALCO's purpose is to communicate, coordinate, and control asset/liability management consistent with our business plan and Board approved policies. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The ALCO meets at least quarterly and establishes and monitors the volume and mix of assets and funding sources taking into account the relative costs and spreads, the interest rate sensitivity gap and liquidity needs. The ALCO also reviews economic conditions and interest rate projections, current and projected liquidity needs and capital positions, anticipated changes in the mix of assets and liabilities, and interest rate exposure limits versus current projections pursuant to gap analysis and interest income simulations. At each meeting, the ALCO will recommend changes in strategy as appropriate. In recent years, in order to manage our assets and liabilities and improve our interest rate risk position, we have emphasized the origination of assets with shorter maturities or adjustable rates such as commercial and multi-family real estate loans, construction loans, commercial business loans, and home equity loans. At the same time, we have attempted to increase our core deposits and emphasize longer-term certificates of deposit. We also use FHLB Advances as an additional source of funds. Quantitative Risk Analysis. The ALCO regularly reviews interest rate risk by, among other things, examining the impact of alternative interest rate environments on net interest income and net portfolio value ("NPV" - the difference between the market value of our assets and the market value of our liabilities and off-balance sheet items under various interest rate scenarios), and comparing such impacts to maximum potential changes in net interest income and NPV authorized by the Board of Directors. Presented below, as of June 30, 1999 and 1998, is an analysis of our interest rate risk position as measured by changes in NPV for instantaneous and parallel shifts in the yield curve of plus/minus 100, 200, and 300 basis points and changes in net interest income for the same interest rate environments. NPV is more sensitive and may be more negatively impacted by rising interest rates than by declining rates. This occurs primarily because as rates rise, the market value of long-term fixed rate assets, like fixed rate mortgage loans, declines due to both the rate increase and slowing prepayments. When rates decline, these assets do not experience a similar appreciation in value due to the increases in prepayments. The value of deposits and borrowings tend to change in approximately the same proportions in rising and falling rate environments. 22 June 30, 1999 --------------------------------------------------- Estimated Changes in --------------------------------------------------- Interest rate change Net Interest Income NPV in basis points (1) (Next four quarters) --- - -------------------- -------------------- (Dollars in thousands) +300 (23)% $(4,042) (55)% $(29,439) +200 (14) (2,462) (36) (19,280) +100 (6) (1,026) (17) (9,141) 0 -100 7 1,272 11 5,939 -200 8 1,312 17 9,382 -300 15 2,584 23 12,480 June 30, 1998 --------------------------------------------------- Estimated Changes in --------------------------------------------------- Interest rate change Net Interest Income NPV in basis points (1) (Next four quarters) --- - -------------------- -------------------- (Dollars in thousands) +300 (24)% $(3,355) (48)% $(21.254) +200 (25) (2,055) (30) (13,523) +100 (6) (858) (13) (5,917) 0 -100 8 1,089 8 3,607 -200 8 1,182 11 4,955 -300 16 2,271 16 7,480 (1) Assumes an instantaneous uniform change in interest rates at all maturities. Our NPV at June 30, 1999, for a plus 200 basis point rate change declined to -36% compared to -30% at June 30, 1998. This is as a result of increases in the general level of interest rates which caused a decline in the market value of our assets. 23 The following table summarizes the anticipated maturities or repricing of our interest-earning assets and interest-bearing liabilities as of June 30, 1999 based upon the information and assumptions set forth in the notes below.
More More Than Than One Three Within Three to Year to Years to Three Twelve Three Five Over Five Months Months Years Years Years Total ----------------------------------------------------------------------------- (Dollars in thousands) Interest-earning assets Cash and interest-earning deposits $ 4,889 $ -- $ -- $ -- $ -- $ 4,889 Investment Securities (1) 7,769 1,000 5,001 13,998 18,961 46,729 Mortgage-backed securities (2) 600 1,797 15,424 7,200 8,305 33,326 Loans (2) (3) (4) 53,030 67,097 105,372 91,782 60,173 377,454 ----------------------------------------------------------------------------- Total interest-earning assets $ 66,288 $ 69,894 $ 125,797 $ 112,980 $ 87,439 $ 464,639 ----------------------------------------------------------------------------- Interest-bearing liabilities Escrow accounts $ 2,862 $ 1,541 $ -- $ -- $ -- $ 4,403 Money market accounts (5) 21,556 5,389 1,347 337 112 28,741 Savings accounts (5) 7,316 6,218 5,286 4,493 25,460 48,773 NOW accounts (5) 20,463 13,710 9,186 6,155 12,496 62,010 Certificates of deposit 47,310 110,494 75,562 16,355 1,436 251,157 Borrowings (6) 4,000 -- 6,000 986 4,000 14,986 ----------------------------------------------------------------------------- Total interest bearing-liabilities $ 103,507 $ 137,352 $ 97,381 $ 28,326 $ 43,504 $ 410,070 ----------------------------------------------------------------------------- Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ (37,219) $ (67,458) $ 28,416 $ 84,654 $ 43,935 $ 52,328 Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities $ (37,219) $(104,677) $ (76,261) $ 8,393 $ 53,328 Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities as a percent of total assets (7.89)% (22.19)% (16.17)% 1.78% 11.09% Ratio of interest-earning assets to interest-bearing liabilities 64.04% 50.89% 129.18% 398.86% 200.99% 112.76%
- ---------- (1) The expected repayment of callable agency securities is based upon our estimates given the interest rate environment at June 30, 1999. Investments at fair market value. (2) The level of prepayments is based upon our estimate given the level of interest rates at June 30, 1999. Mortgage backed securities are stated at fair market value. (3) Adjustable rate loans are included in the period in which the interest rate is next scheduled to change rather than in the period they are scheduled to be repaid. Fixed rate loans are included in the period they are scheduled to be repaid. Both have been adjusted for our estimated prepayments. (4) Deferred loan fees and allowance for loan losses have been added back to the balances shown. Non-performing loans totaling approximately $1.1 million are not included. (5) Although NOW, savings, and MMD accounts are available for immediate withdrawal, we estimate that a substantial amount of these accounts are core deposits. As such, their maturity is distributed based upon our estimates and are not indicative of actual withdrawals that may be experienced. (6) FHLB Advances are stated at their contractual maturity. A substantial amount of these advances have provisions that may require repayment within one year. 24 The following table presents selected unaudited quarterly financial information for the past two years: Quarterly Selected Financial Data
----------------------------------------------------------------------- For the Quarter Ending June 30, March 31, December 31, September 30, 1999 1999 1998 1998 ----------------------------------------------------------------------- (Dollars in thousands, except per share data) Total interest income $8,586 $8,070 $7,755 $7,605 Total interest expense 4,101 3,961 4,140 3,962 ----------------------------------------------------------------------- Net interest income 4,485 4,109 4,615 3,643 Provision for loan loss 180 121 140 90 Total non-interest income 215 214 279 300 Total non-interest expense 2,764 2,491 3,193 2,204 Income tax expense (benefit) 628 578 226 611 ----------------------------------------------------------------------- Net income $1,128 $1,133 $ 335 $1,038 ======================================================================= Per share data Basic and diluted (1) $ 0.23 $ 0.23 N/a N/a
----------------------------------------------------------------------- For the Quarter Ending June 30, March 31, December 31, September 30, 1998 1998 1997 1997 ----------------------------------------------------------------------- (Dollars in thousands, except per share data) Total interest income $ 7,435 $ 7,247 $ 7,079 $ 6,810 Total interest expense 3,914 3,757 3,752 3,674 ----------------------------------------------------------------------- Net interest income 3,521 3,490 3,327 3,136 Provision for loan loss 723 90 90 90 Total non-interest income 202 200 197 194 Total non-interest expense 3,409 2,037 2,129 1,887 Income tax expense (benefit) (132) 543 471 486 ----------------------------------------------------------------------- Net income $ (277) $ 1,020 $ 834 $ 867 ======================================================================= Per share data Basic and diluted (1) N/a N/a N/a N/a
(1) Earnings per share data prior to January 1, 1999 is not applicable. The primary reason for the decrease in net income for the quarter ended December 31, 1998 was the increse in non-interest expense. This was the result of the $896,000 expense incurred with the formation of the Willow Grove Foundation. The primary reasons for the decline in net income for the quarter ended June 30, 1998 were the $633,000 increase in the provision for loan loss and increases in non-interest expense associated with the implementation of a directors retirement benefit ($800,000), Year 2000 testing and replacement of obsolete equipment, ($105,000), and costs relating to the relocation of a branch office ($85,000). 25 [LETTERHEAD OF KPMG LLP] Independent Auditors' Report The Board of Directors Willow Grove Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Willow Grove Bancorp, Inc. and subsidiary as of June 30, 1999 and 1998, and the related consolidated statements of operations, changes in equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Willow Grove Bancorp, Inc. and subsidiary as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania July 23, 1999, except as to note 18, which is as of July 27, 1999 26 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition June 30, 1999 and 1998 (Dollars in thousands, except share data)
================================================================================================================ Assets 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents: Cash on hand and non-interest bearing deposits $ 3,447 $ 2,932 Interest bearing deposits 1,442 15,359 --------- --------- Total cash and cash equivalents $ 4,889 $ 18,291 Assets available for sale: Securities (amortized cost of $82,296 and $47,984, respectively) $ 80,055 $ 48,111 Loans -- 12,152 Loans (net of allowance for loan losses of $3,138 and $2,665, respectively) 374,584 315,705 Accrued income receivable 2,519 2,109 Property and equipment, net 5,135 4,772 Intangible assets 1,950 2,360 Other assets 2,907 1,874 - ---------------------------------------------------------------------------------------------------------------- Total assets 472,039 $ 405,374 ================================================================================================================ Liabilities and Stockholder's Equity - ---------------------------------------------------------------------------------------------------------------- Deposits $ 390,681 $ 340,793 Federal Home Loan Bank advances 14,986 21,000 Advance payments from borrowers for taxes 4,403 4,481 Accrued interest payable 706 389 Other liabilities 2,821 2,766 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities 413,597 369,429 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; (25,000,000 authorized; 5,143,487 issued; 5,143,487 outstanding as of June 30, 1999) 51 -- Additional paid-in capital 22,295 -- Retained earnings - substanially restricted 39,211 35,865 Accumulated other comprehensive income (1,412) 80 Unallocated common stock held by employee stock ownership plan (ESOP) (1,703) -- - ---------------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 58,442 $ 35,945 Total liabilities and stockholders' equity $ 472,039 $ 405,374 ================================================================================================================
See accompanying notes to consolidated financial statements. 27 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended June 30, 1999, 1998 and 1997 (Dollars in thousands, except per share data)
====================================================================================================================== 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Interest and dividend income: Loans $ 27,400 $ 25,356 $ 22,374 Securities primarily taxable 4,615 3,248 3,049 - ---------------------------------------------------------------------------------------------------------------------- Total interest income $ 32,015 $ 28,604 $ 25,423 - ---------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits $ 15,366 $ 14,536 $ 13,224 Borrowings 772 529 555 Advance payment from borrowers for taxes 26 32 38 - ---------------------------------------------------------------------------------------------------------------------- Total interest expense $ 16,164 $ 15,097 $ 13,817 - ---------------------------------------------------------------------------------------------------------------------- Net interest income $ 15,851 $ 13,507 $ 11,606 Provision for loan losses 531 993 185 - ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses $ 15,320 $ 12,514 $ 11,421 - ---------------------------------------------------------------------------------------------------------------------- Non-interest income: Service charges and fees $ 846 $ 618 $ 409 Gain (loss) on sale of real estate held for investment -- (25) 16 Loss on sale of securities available for sale -- (105) (8) Gain on sale of loans available for sale 10 69 29 Loan servicing income, net 153 203 340 - ---------------------------------------------------------------------------------------------------------------------- Total non-interest income $ 1,009 $ 760 $ 786 - ---------------------------------------------------------------------------------------------------------------------- Non-interest expense: Compensation and employee benefits $ 5,475 $ 5,386 $ 3,440 Occupancy 599 636 470 Furniture and equipment 319 328 264 Federal insurance premium 206 195 1,829 Amortization of intangible assets 410 410 410 Data processing 426 388 319 Advertising 436 413 297 Foundation expense 896 -- -- Community enrichment 175 373 259 Other expenses 1,710 1,333 996 - ---------------------------------------------------------------------------------------------------------------------- Total non-interest expense $ 10,652 $ 9,462 $ 8,284 - ---------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 5,677 $ 3,812 $ 3,923 Income taxes 2,044 1,367 1,548 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 3,633 $ 2,445 $ 2,375 - ---------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.46(1) (1) (1) Diluted $ 0.46(1) (1) (1) ======================================================================================================================
(1) Earnings per share is presented in the 1999 financial statements from January 1, 1999 to June 30, 1999. Earnings per share prior to January 1, 1999 are not applicable. See accompanying notes to consolidated financial statements. 28 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Equity and Comprehensive Income Years ended June 30, 1999, 1998, and 1997
Unallocated Accumulated Common Additional Other Stock Total Comprehensive Common Paid in Retained Comprehensive Held by Stockholders' (Dollars in thousands) Income Stock Capital Earnings Income (Loss) ESOP Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 $31,045 ($671) $30,374 Comprehensive Income: Net income $2,375 $2,375 $2,375 Other Comprehensive Income net of tax: Net change in unrealized loss on securities available for sale $329 Less: Reclassification adjustments for losses included in net income $44 ------------- Other Comprehensive Income $373 $373 $373 Comprehensive Income $2,748 ============= - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 - - $33,420 ($298) - $33,122 =================================================================================================================================== Comprehensive Income: Net income $2,445 $2,445 $2,445 Other Comprehensive Income net of tax: Net change in unrealized loss on securities available for sale $242 Less: Reclassification adjustments for losses included in net income $136 ------------- Other Comprehensive Income $378 $378 $378 Comprehensive Income $2,823 ============= - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 - - $35,865 $80 - $35,945 =================================================================================================================================== Comprehensive Income: Net income $3,633 $3,633 $3,633 Other Comprehensive Income net of tax: Net change in unrealized gain on securities available for sale ($1,492) Other Comprehensive Loss ($1,492) ($1,492) ($1,492) ------------- Comprehensive Income $2,141 ============= Issuance of stock $51 $22,295 $22,346 Unallocated common stock held by ESOP ($1,793) ($1,793) Capitalization of Mutual Holding Company ($100) ($100) ESOP shares committed to be released $90 $90 Dividend paid - $0.08 per share ($187) ($187) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 $51 $22,295 $39,211 ($1,412) ($1,703) $58,442 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 29 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended June 30, 1999, 1998 and 1997 (Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities: Net income $ 3,633 $ 2,445 $ 2,375 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 409 453 313 Amortization of premium and accretion of discount, net 94 85 46 Amortization of intangible assets 410 410 410 Foundation contribution expense 896 -- -- Provision for loan losses 531 993 185 Loss (gain) on sale of real estate held for investment -- 25 (16) Gain on sale of loans available for sale (10) (69) (29) Loss on sale of securities available for sale -- 105 8 Decrease in deferred loan fees (292) (385) (59) Increase in accrued income receivable (410) (172) (272) Decrease in real estate held for investment -- -- 24 Decrease (increase) in other assets 325 (147) (10) Increase in accrued interest payable 317 101 -- Deferred income tax (benefit) expense (446) (738) 30 (Decrease) increase in other liabilities (45) 1,919 733 Expense of allocated ESOP shares 90 -- -- Originations and purchases of loans available for sale (2,865) (36,396) (29,127) Proceeds from sale of loans available for sale 15,027 30,486 26,039 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ 17,664 ($ 885) $ 650 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net increase in loans ($59,153) ($31,706) ($39,323) Purchase of securities available for sale (83,581) (55,878) (14,296) Purchase of securities held to maturity -- -- (3,999) Proceeds from maturities and calls of securities -- 3,999 -- held to maturity Proceeds from sales and calls of securities available 38,100 53,270 10,067 for sale Principal repayments of securities available for sale 11,075 682 9,170 Proceeds from sale of real estate held for investment -- 155 16 Purchase of property and equipment, net (772) (1,401) (1,234) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities ($94,331) ($30,879) ($39,599) - --------------------------------------------------------------------------------------------------------------------------
30 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued (Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits $ 49,888 $ 31,067 $ 42,030 Net increase in FHLB advances with 4,000 11,000 (5,000) original maturity less than 90 days Increase in FHLB advances with 1,000 4,000 11,000 original maturity greater than 90 days Repayment of FHLB advances with original maturity (11,014) -- (10,120) greater than 90 days Net increase (decrease) in advance payments from (78) 284 461 borrowers for taxes Issuance (repayment) of notes payable (500) 500 Dividends paid (187) -- -- Proceeds from stock issuance, net 19,656 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities $ 63,265 $ 45,851 $ 38,871 ============================================================================================================================ Net increase (decrease) in cash and cash equivalents ($13,402) $ 14,087 ($78) Cash and cash equivalents: Beginning of year $ 18,291 $ 4,204 $ 4,282 - ---------------------------------------------------------------------------------------------------------------------------- End of year $ 4,889 $ 18,291 $ 4,204 ============================================================================================================================ Supplemental disclosures of cash and cash flow information: Interest paid $ 15,847 $ 14,966 $ 13,718 Income taxes paid $ 2,085 $ 1,854 $ 1,109 ============================================================================================================================ Noncash items: Change in unrealized gain (loss) on securities available for sale (net of taxes of $912, ($233) and ($1,492) $ 378 $ 373 ($229) in 1999, 1998 and 1997, respectively) Loans transferred from loans available for sale to loans receivable -- -- $ 2,089 Foundation contribution $ 896 -- -- ============================================================================================================================
See accompanying notes to financial statements. 31 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (1) Summary of Significant Accounting Policies Description of Business Willow Grove Bancorp, Inc. (the "Company") provides a full range of banking services through its wholly-owned subsidiary, Willow Grove Bank (the "Bank" or "Willow Grove") which has nine branches in Dresher, Willow Grove, Maple Glen, Warminster (2), Hatboro, Huntingdon Valley, Roslyn and Somerton (Philadelphia), Pennsylvania. All of the branches are full-service and offer commercial and retail products. These products include checking accounts (interest and non-interest bearing), savings accounts, certificates of deposit, commercial and consumer loans, real estate loans, and home equity loans. The Company is subject to competition from other financial institutions and other companies that provide financial services. The Company is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. On December 23, 1998, the Company completed the reorganization of the Bank into the federal mutual holding company form of ownership, whereby the Bank converted into a federally chartered stock savings bank as a wholly owned subsidiary of the Company, and the Company became a majority-owned subsidiary of Willow Grove Mutual Holding Company (the "MHC"), a federally chartered mutual holding company (collectively, the "Regorganization"). In connection with the Reorganization, the Company sold 2,240,878 shares of Company common stock, par value $0.01 per share at $10.00 per share which, net of issuance costs, generated proceeds of $21.4 million, including shares issued to the employee stock ownership plan ("ESOP"). The Company also issued 2,812,974 shares of Company Common Stock to the MHC. As an integral part of the Reorganization and in furtherance of Willow Grove's commitment to the communities that it serves, Willow Grove and the Company have established a charitable foundation known as the Willow Grove Foundation (the "Foundation") and have contributed 89,635 shares to the Foundation. Earnings per share is presented in the 1999 financial statements from January 1, 1999 to June 30, 1999. Earnings per share presentation for the period from December 23, 1998 to December 31, 1998 is not meaningful. Basis of Financial Statement Presentation The Company has prepared its accompanying consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and general practice within the banking industry. Certain amounts in prior years have been reclassified for comparative purposes. Such reclassification had no effect on net income. The consolidated financial statements include the balances of the Company and its wholly owned subsidiary. All material inter-company balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenue and expense for the period. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change in the near-term relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. 32 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Risks and Uncertainties In the normal course of its business, the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis from its interest-earning assets. The Company's primary credit risk is the risk of default on the Company's loan portfolio that results from the borrowers inability or unwillingness to make contractually required payments. The Company's lending activities are concentrated in Pennsylvania. The largest concentration of the Company's loan portfolio is located in Eastern Pennsylvania. The ability of the Company's borrowers to repay amounts owed is dependent on several factors, including the economic conditions in the borrower's geographic region and the borrower's financial condition. Market risk reflects changes in the value of collateral underlying loans, the valuation of real estate held by the Company, the valuation of loans held for sale, securities available for sale and mortgage servicing assets. The Company is subject to certain regulations as further described herein and in note 12. Compliance with regulations causes the Company to incur significant costs. In addition, the possibility of future changes to such regulation presents the risk that future costs will be incurred which may materially impact the Company. Cash and Cash Equivalents For purposes of the statements of cash flows, cash and cash equivalents include cash and interest-bearing deposits with original maturities of three months or less. The Company is required to maintain certain daily average balances in accordance with Federal Reserve Bank requirements. The reserve balances maintained in accordance with such requirements at June 30, 1999 and 1998 were $2.3 million and $1.2 million, respectively. Such reserve requirement is satisfied through vault cash balances. Loans Available for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market calculated on an aggregate basis, with any unrealized losses reflected in the statement of operations. Loans transferred from loans available for sale to loans receivable are transferred at the lower of cost or market value at the date of transfer. Securities The Company divides its securities portfolio into two segments: (a) held to maturity and (b) available for sale. Securities in the held to maturity category are accounted for at cost, adjusted for amortization of premiums and accretion of discounts, using the level yield method, based on the Company's intent and ability to hold the securities until maturity. Marketable securities included in the available for sale category are accounted for at fair value, with unrealized gains or losses, net of taxes, being reflected as adjustments to equity. The fair value of marketable securities available for sale is determined from publicly quoted market prices. Securities available for sale which are not readily marketable, which include Federal Home Loan Bank of Pittsburgh stock, are carried at cost which approximates liquidation value. 33 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- At the time of purchase, the Company makes a determination of whether or not it will hold the securities to maturity, based upon an evaluation of the probability of future events. Securities, which the Company believes may be involved in interest rate risk, liquidity, or other asset/liability management decisions, which might reasonably result in such securities not being held to maturity, are classified as available for sale. If securities are sold, a gain or loss is determined by specific identification method and is reflected in the operating results in the period the trade occurs. Allowance for Loan Losses The allowance for loan losses is maintained at a level that management considers adequate to provide for inherent loan losses based on an evaluation of known and inherent risks in the loan portfolio. Management's judgment is based upon periodic evaluation of the portfolio, past loss experience, current economic conditions, and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. A loan is considered to be impaired when, based on current information, it is probable that the Company will not receive all amounts due in accordance with the contractual terms of the loan agreement. For purposes of applying the measurement criteria for impaired loans, the Company excludes large groups of smaller balance homogeneous loans, primarily consisting of residential real estate and consumer loans, as well as commerical loans with balances of less than $100,000. Interest income recognition on impaired loans ceases and any accrued interest is reversed. Cash receipts on impaired loans are applied to principal. Impaired loans are charged off when the Company determines that foreclosure is probable, and the fair value of the collateral is less than the recorded investment of the impaired loan. Mortgage Servicing Rights The Company recognizes mortgage servicing rights as assets, regardless of how such assets were acquired. Impairment of mortgage servicing rights is assessed based upon a fair market valuation of those rights on a disaggregated basis. Impairment, if any, is recognized in the statement of operations. There was no impairment in the mortgage servicing rights at June 30, 1999 and 1998. Real Estate Owned Real estate acquired through foreclosure is recorded at the lower of cost or fair value less estimated selling costs. Costs of improving foreclosed property are usually capitalized to the extent that carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on such sales are charged to operations as incurred. The Company had no real estate owned as of June 30, 1999 and 1998. 34 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Loans, Loan Origination Fees, and Uncollected Interest Loans are recorded at cost net of unearned discounts, deferred fees, and allowances. Discounts or premiums on purchased loans are amortized using the interest method over the remaining contractual life of the portfolio, adjusted for actual prepayments. Loan origination fees and certain direct origination costs are deferred and amortized using the level yield method over the contractual life of the related loans as an adjustment of the yield on the loans. Interest receivable on loans is accrued to income as earned. Non-accrual loans are loans on which the accrual of interest has ceased because the collection of principal or interest payments is determined to be doubtful by management. It is the policy of the Company to discontinue the accrual of interest and reverse any accrued interest when principal or interest payments are delinquent more than 90 days (unless the loan principal and interest are determined by management to be fully secured and in the process of collection), or earlier if the financial condition of the borrower raises significant concern with regard to the ability of the borrower to service the debt in accordance with the terms of the loan. Interest income on such loans is not accrued until the financial condition and payment record of the borrower demonstrates the ability to service the debt. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets which range from 5 to 40 years. Significant renovations and additions are capitalized. Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the related lease term. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Intangible Assets Intangible assets include a core deposit intangible and goodwill, which represents the excess cost over fair value of assets acquired and liabilities assumed. The core deposit intangible is being amortized to expense over a ten-year life on an accelerated basis and goodwill is being amortized to expense using the straight-line method over a period of fifteen years. The carrying amount of intangible assets at June 30, 1999 and 1998 is net of accumulated amortization of $2.2 million and $1.7 million, respectively. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 35 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Earnings Per Share Basic and diluted earnings per share are computed based on the weighted average number of common shares outstanding during the year plus the weighted average number of committed to be released ESOP shares during the year. Recent Accounting Pronouncements Reporting Comprehensive Income In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. According to the statement, all items of comprehensive income are to be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Along with net income, examples of comprehensive income include foreign currency translation adjustments, unrealized holding gains and losses on available-for-sale securities, changes in the market value of a futures contract that qualifies as a hedge of an asset reported at fair value, and minimum pension liability adjustments. Currently, the comprehensive income of the Company consists primarily of net income and the net change in unrealized holding gains and losses on available-for-sale securities. This statement is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 effective July 1, 1998, and made the required disclosure in these consolidated financial statements. Disclosures About Segments of an Enterprise and Related Information In June 1997 the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. This statement, which supersedes SFAS No. 14, requires public companies to report financial and descriptive information about their reportable operating segments on both an annual and interim basis. SFAS No. 131 mandates disclosure of a measure of segment profit/loss, certain revenue and expense items and segment assets. In addition, the statement requires reporting information on the entity's products and services, countries in which the entity earns revenues and holds assets, and major customers. The Company adopted SFAS No. 131 on July 1, 1998. The Company determined that it has no segment other than the banking segment. The Company was not required to make additional disclosures in these consolidated financial statements. Employer's Disclosures About Pensions and Other Post Retirement Benefits In February 1998 the FASB issued SFAS No. 132, Employer's Disclosures About Pensions and Other Post Retirement Benefits. This statement revises employer's disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. The Company adopted the SFAS No. 132 on July 1, 1998. There was no impact on financial condition, operating results or equity of the Company upon adoption. 36 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Accounting for Derivative Instruments and Hedging Activities In June 1998 the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of certain exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of an exposure to variable cash flows of a forecasted transaction, or (c) a hedge of a foreign currency exposure. This statement, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier adoption is permitted. The Company has not yet determined the impact, if any, of this statement, including its provisions for the potential reclassifications of investment securities, on operations, financial condition, and equity. However, the Company currently has no derivatives covered by this statement and currently conducts no hedging activities. In October 1998, The FASB issued SFAS No. 134 Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This statement requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify any retained mortgage-backed securities based on the ability and intent to sell or to hold those investments, except that a mortgage banking enterprise must classify as trading any retained mortgage-backed securities that it commits to sell before or during the securitization process. The Company adopted SFAS No. 134 on January 1, 1999. There was no impact on operations, financial condition or equity upon adoption of this statement since the Company does not currently engage in the securitization of mortgage loans held for sale. (2) Earnings Per Share Earnings per share, basic and diluted, were $0.46 and $0.46, respectively for the six months ended June 30, 1999. Due to the Bank's recent conversion and formation of the Company, earnings per share figures for prior periods are not applicable. 37 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (2) Continued The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations.
For the Six Months Ended June 30, 1999 --------------------------------------------- (Dollars in thousands, except per share data) Per share Net income Shares Amount ======================================================================================= Weighted average common stock outstanding $ 2,261 4,964,217 $ 0.46 Allocated ESOP shares -- 4,482 -- - --------------------------------------------------------------------------------------- Basic earnings per share $ 2,261 4,968,699 $ 0.46 Per share Net income Shares Amount ======================================================================================= Weighted average common stock outstanding $ 2,261 4,964,217 $ 0.46 Allocated ESOP shares -- 4,482 -- - --------------------------------------------------------------------------------------- Diluted earnings per share $ 2,261 4,968,699 $ 0.46 =======================================================================================
38 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (3) Securities Available for Sale Securities available for sale at June 30, 1999 and 1998 consisted of the following (dollars in thousands):
1999 --------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ---------------------------------------------------------------------------------------- Equity securities: Mutual fund $ 8,010 -- ($ 63) $ 7,947 Federal Home Loan Mortgage 89 27 -- 116 Corporation common stock Federal National Mortgage 8 20 -- 28 Association stock Federal Home Loan Bank 2,961 -- -- 2,961 of Pittsburgh stock U.S. Government and government 35,000 -- (1,123) 33,877 agency securities Mortgage-backed securities: Federal Home Loan Mortgage Corporation 2 -- -- 2 Federal National Mortgage Association 25,065 -- (740) 24,325 Government National Mortgage Association 9,162 56 (309) 8,909 Municipal security 1,999 -- (109) 1,890 - ---------------------------------------------------------------------------------------- Total $82,296 $ 103 ($2,344) $80,055 ======================================================================================== 1998 --------------------------------------------------- Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - ---------------------------------------------------------------------------------------- Equity securities: Mutual fund $ 7,010 -- ($ 25) $ 6,985 Federal Home Loan Mortgage 100 1 -- 101 Corporation preferred stock Federal Home Loan Mortgage 89 5 -- 94 Corporation common stock Federal National Mortgage 8 16 -- 24 Association stock Federal Home Loan Bank 2,733 -- -- 2,733 of Pittsburgh stock U.S. Government and government 20,004 30 (35) 19,999 agency securities Mortgage-backed securities: Federal Home Loan Mortgage 3 -- -- 3 Corporation Federal National Mortgage 13,532 112 (100) 13,544 Association Government National 4,405 127 -- 4,532 Mortgage Association Municipal security 100 -- (4) 96 - ---------------------------------------------------------------------------------------- Total 47,984 291 (164) 48,111 ========================================================================================
39 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (3) Continued Proceeds from sales and calls of securities available for sale for the years ended June 30, 1999, 1998 and 1997 were $38.1 million, $53.3, and $10.1 million, respectively. Gross gains of $0, $24,000 and $44,000 were realized in fiscal 1999, 1998 and 1997, respectively. There were gross losses of $0, $129,000, and $52,000 in fiscal 1999, 1998 and 1997, respectively. Accrued interest receivable on securities amounted to $753,000 and $492,000 at June 30, 1999 and 1998, respectively. The amortized cost and estimated fair value of securities available for sale at June 30, 1999, by contractual maturity, are shown below.
Maturing Maturing after one after 5 Maturing year but years but Maturing within one within within 10 after 10 (Dollars in thousands) year 5 years years years Total - ---------------------------------------------------------------------------------------------------- U.S. Gov't/Gov't agency securities $998 $8,815 $14,540 $9,524 $33,877 Municipal securities: PA school district -- -- -- 1,890 1,890 ---------------------------------------------------------- Total debt securities $998 $8,815 $14,540 $11,414 $35,767 Equity securities $11,052 Mortgage backed securities $33,236 ---------------------------------------------------------- Total securities at fair value $998 $8,815 $14,540 $11,414 $80,055 ========================================================== Total securities at amortized cost $1,000 $9,002 $14,998 $11,999 $82,296 ========================================================== Weighted Average Yield 5.00% 5.76% 6.63% 6.37%
The Company must maintain stock as a member of the Federal Home Loan Bank of Pittsburgh ("FHLB") of $3.0 million and $2.7 million as of June 30, 1999 and 1998, respectively. For mortgage- backed securities, expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Substantially all of the U.S. Government and Government agency securities are callable within one year. Weighted average yields are based on market value. As described in note 10, certain securities available for sale are maintained to collateralize advances from the FHLB. 40 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (4) Loans Loans receivable as of June 30, 1999 and 1998 consisted of the following: ========================================================================== 1999 1998 -------------------------------------------------------------------------- (Dollars in thousands) First mortgage loans: Single family residential $231,498 $230,979 Multiple family residential 12,938 7,500 Commerical real estate 52,769 24,478 Construction 7,773 4,772 Home equity 54,090 41,366 -------------------------------------------------------------------------- Total real estate loans $359,068 $309,095 Non-mortgage consumer loans 6,431 4,930 Commerical business loans 13,023 5,437 -------------------------------------------------------------------------- Total Loans $378,522 $319,462 Less: Allowance for loan losses (3,138) (2,665) Deferred loan fees (800) (1,092) -------------------------------------------------------------------------- -------------------------------------------------------------------------- Total loans receivable, net $374,584 $315,705 ========================================================================== As described in note 10, certain loans are maintained to collateralize advances from the FHLB. Included in loans receivable are loans on nonaccrual status in the amounts of $1.1 million and $1.3 million at June 30, 1999 and 1998, respectively. Interest income that would have been recognized on such nonaccrual loans during the years ended June 30, 1999, 1998 and 1997 had they been current in accordance with their original terms is $143,000, $90,000 and $111,000, respectively. Interest income that was recognized on these nonaccrual loans during the years ended June 30, 1999, 1998 and 1997 totaled $4,000, $46,000 and $15,000, respectively. As of June 30, 1999 and 1998, the Company had impaired loans with a total recorded investment of $13,000 and $96,000, respectively, and an average recorded investment for the years ended June 30, 1999, 1998, and 1997 of $37,000, $464,000, and $1.6 million, respectively. As of June 30, 1999 and 1998, the amount of recorded investment in impaired loans for which there is a related allowance for credit losses and the amount of related allowance is $13,000 and $96,000, respectively, and $1,000 and $10,000, respectively. There were no impaired loans for which there was no related allowance for credit losses at June 30, 1999 and 1998. Cash of $83,000, $1.2 million, and $0 was collected on these impaired loans during the year ended June 30, 1999, 1998 and 1997, respectively. No interest income was recognized on such loans during the year ended June 30, 1999, 1998 and 1997. 41 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (4) Continued The following is a summary of the activity in the allowance for loan losses for the years ended June 30, 1999, 1998 and 1997: Years ended June 30, ========================================================================== 1999 1998 1997 -------------------------------------------------------------------------- (Dollars in thousands) Balance, beginning of year $ 2,665 $ 1,678 $ 1,938 Provision for loan losses 531 993 185 Charge-offs (58) (6) (445) Recoveries -- -- -- -------------------------------------------------------------------------- Balance, end of year $ 3,138 $ 2,665 $ 1,678 ========================================================================== (5) Mortgage Servicing Activity A summary of mortgage servicing rights activity follows: Years ended June 30, -------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 -------------------------------------------------------------------------- Balance, beginning of year $ 251 $ 213 -- Originated servicing rights 119 144 $ 265 Amortization (134) (106) (52) -------------------------------------------------------------------------- Balance, end of year $ 236 $ 251 $ 213 ========================================================================== At June 30, 1999, 1998 and 1997, the Company serviced loans for others of $67.0 million, $66.4, and $58.8 million, respectively. Loans serviced by others for the Company as of June 30, 1999, 1998 and 1997 were $2.8 million, $2.9 and $3.5 million, respectively. 42 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) Deposits Deposit balances by type with related interest rates consisted of the following at June 30, 1999, 1998 and 1997: ================================================================================ 1999 1998 ------------------- ------------------- Percent Percent Amount of Total Amount of Total - -------------------------------------------------------------------------------- (Dollars in thousands) Savings accounts (passbook, $48,773 12.5% $40,225 11.8% statement, clubs) Money market accounts 28,741 7.4 20,487 6.0 Certificates of deposit less than 213,998 54.8 193,533 56.8 $100,000 Certificates of deposit greater than 37,159 9.5 38,469 11.3 $100,000 (1) NOW accounts 29,013 7.4 25,638 7.5 Non-interest bearing deposits 32,997 8.4 22,441 6.6 - -------------------------------------------------------------------------------- $390,681 100.0% $340,793 100.0% ================================================================================ (1) Deposit balances in excess of $100,000 are not federally insured. While the certificates frequently are renewed at maturity rather than paid out, a summary of certificates by contractual maturity at June 30, 1999 is as follows: Years ended June 30, ----------------------------------------------------------- (Dollars in thousands) 2000 $157,805 2001 57,007 2002 18,554 2003 11,460 2004 4,895 2005 and thereafter 1,436 ----------------------------------------------------------- $251,157 =========================================================== 43 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) Continued Interest expense on deposits for the years ended June 30, 1999 and 1998 consisted of the following: 1999 1998 1997 -------------------------------------------------------------------------- (Dollars in thousands) Savings accounts $896 $787 $768 NOW accounts 1,111 916 803 Certificates 13,359 12,833 11,653 -------------------------------------------------------------------------- Total $15,366 $14,536 $13,224 ========================================================================== (7) Property and Equipment ========================================================================== June 30, Depreciable ----------------------- Lives 1999 1998 -------------------------------------------------------------------------- (Dollars in thousands) Land $1,323 $1,323 Buildings 15 to 40 yrs. $4,178 $3,928 Furniture, fixtures, and equipment 5 to 7 yrs. $2,952 $2,430 -------------------------------------------------------------------------- Total $8,453 $7,681 Less accumulated depreciation ($3,318) ($2,909) -------------------------------------------------------------------------- Property and equipment, net $5,135 $4,772 ========================================================================== Amounts charged to operating expense for depreciation for the years ended June 30, 1999, 1998 and 1997 amounted to $409,000, $453,000, and $313,000, respectively. (8) Income Taxes The Small Business Job Protection Act of 1996, enacted on August 20, 1996, provides for the repeal of the tax bad debt deduction computed under the percentage of taxable income method. The repeal of the use of this method is effective for tax years beginning after December 31, 1995. Prior to the change in law, the Company had qualified under the provisions of the Internal Revenue Code which permitted it to deduct from taxable income an allowance for bad debts based on 8% of taxable income. Upon repeal, the Company is required to recapture into income, over a six-year period, the portion of its tax bad debt reserves that exceed its base year reserves (i.e., tax reserves for tax years beginning before 1988). The base year tax reserves, which may be subject to recapture if the Company ceases to qualify as a bank for federal income tax purposes, are restricted with respect to certain distributions. The Company's 44 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (8) Continued total tax bad debt reserves at June 30, 1999 are approximately $8.2 million, of which $6.2 million represents the base year amount and $2.0 million is subject to recapture. The Company has previously recorded a deferred tax liability for the amount to be recaptured; therefore, this recapture does not impact the statement of operations. Income tax expense (benefit) for the years ended June 30, 1999, 1998 and 1997 consisted of the following: ========================================================================== Current Deferred Total -------------------------------------------------------------------------- (Dollars in thousands) 1999: Federal $2,311 ($446) $1,865 State 179 -- 179 -------------------------------------------------------------------------- Total $2,490 ($446) $2,044 ========================================================================== 1998: Federal $1,873 ($738) $1,135 State 232 -- 232 -------------------------------------------------------------------------- Total $2,105 ($738) $1,367 ========================================================================== 1997: Federal $1,279 $30 $1,309 State 239 -- 239 -------------------------------------------------------------------------- Total $1,518 $30 $1,548 ========================================================================== The expense for income taxes differed from that computed at the statutory federal corporate rate for the years ended June 30, 1999, 1998 and 1997 as follows:
========================================================================================================== 1999 1998 1997 ------------------ ------------------ ------------------ Percentage Percentage Percentage of pretax of pretax of pretax Amount income Amount income Amount income - ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) At statutory rate $1,930 34% $1,296 34% $1,334 34% Adjustment resulting from: State tax, net of federal tax benefit 118 2 152 4 158 4 Low income housing tax credits (29) (1) (29) (1) (11) (0) Other 25 (0) (52) (2) 67 2 - ---------------------------------------------------------------------------------------------------------- Income tax expense per statements of operations $2,044 36% $1,367 36% $1,548 39% ==========================================================================================================
45 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (8) Continued Significant deferred tax assets and liabilities of the Company as of June 30, 1999 and 1998 are as follows: 1999 1998 -------------------------------------------------------------------------- (Dollars in thousands) Deferred loan fees $272 $371 Retirement plan reserves 300 271 Employee benefits 149 88 Other reserves 26 34 Intangible asset amortization 292 249 Capital loss carryover 85 85 Charitable contributions 216 107 Uncollected interest 50 45 Reserve for land held for investment 6 -- Book bad debt reserves 1,067 906 Unrealized loss on securities available for sale 861 -- -------------------------------------------------------------------------- Gross deferred tax assets $3,324 $2,156 -------------------------------------------------------------------------- Unrealized gain on securities available for sale -- ($51) Tax bad debt reserves in excess of base year (688) (826) Investment in Joint Venture 2 4 Prepaid expenses (37) (35) Originated mortgage servicing rights (80) (85) -------------------------------------------------------------------------- Gross deferred tax liabilities ($803) ($993) -------------------------------------------------------------------------- Net deferred tax asset $2,521 $1,163 ========================================================================== The realizability of deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets. (9) Benefit Plans The Company has a money purchase pension plan to which the Company contributes for all eligible employees, 7.5% of their base salary. Such contributions were $193,000 and $182,000 for the years ended June 30, 1999 and 1998, respectively. The Company also has a 401(k) plan which covers all eligible employees and permits them to make certain contributions to the plan on a pretax basis. Employees are permitted to contribute up to 10% of salary to this plan. The Company matches fifty cents for every dollar contributed. Such contributions were $89,000 and $79,000 for the years ended June 30, 1999 and 1998, respectively. 46 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (9) Continued Effective June 30, 1998, the Company adopted non-qualified supplemental retirement plans for the Company's Board of Directors (the "Directors' Plan") and for the Company's president (the "President's Plan"). The Directors' Plan provides for fixed annual payments to qualified directors for a period of ten years from retirement. Benefits to be paid accrue at the rate of 20% per year on completion of six full years of service, with full benefit accrual at ten years of service. Credit is given for past service. The President's Plan provides for payments for a period of ten years beginning at retirement based on a percentage of annual compensation not to exceed an established cap. Full benefits become accrued at age 68 with partial vesting prior thereto. Both plans provide for full payment in the event of a change in control of the Company. The costs of the Directors' Plan and President's Plan were $60,000 and $18,000, and $566,000 and $234,000, respectively, for the years ended June 30, 1999 and 1998. The expense of these plans incurred in 1998 included the cost for past service. The Directors' Plan and Presidents' Plan are intended to be and are unfunded. The ESOP Plan Concurrent with the Reorganization, the Company adopted an ESOP. The ESOP borrowed $1.8 million from the Company and used the funds to purchase 179,270 shares of the Company's stock issued in the Reorganization. The loan has an interest rate of 7.75% and has an amortization schedule of 15 years. Shares purchased are held in a suspense account for allocation among the participants as the loan is repaid. Contributions to the ESOP and shares released from the loan collateral will be in an amount proportional to repayment of the ESOP loan. Shares are allocated to participants based on compensation as described in the plan, in the year of allocation. At June 30, 1999, there were no ESOP shares allocated to participants in the year ended June 30, 1999, however, there were 8,964 shares committed to be released. The Company recorded compensation expense of $90,000 for the ESOP for the year ended June 30, 1999. (10) Federal Home Loan Bank Advances Under terms of its collateral agreement with the FHLB, the Company maintains otherwise unencumbered qualifying assets (principally qualifying 1-4 family residential mortgage loans and U.S. Government and Agency mortgage-backed securities, notes and bonds) in the amount of at least as much as its advances from the FHLB. The Company's FHLB stock is also pledged to secure these advances. 47 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (10) Continued At June 30, 1999 and 1998, such advances have contractual maturities as follows: ========================================================================== Weighted Average Due by June 30, Rate June 30, 1999 -------------------------------------------------------------------------- (Dollars in thousands) 2000 5.11% $4,000 2001 -- -- 2002 5.50% $6,000 2003 -- -- 2004 5.79% $986 Thereafter 5.21% $4,000 -------------------------------------------------------------------------- Total Federal Home Loan Bank advances 5.33% $14,986 ========================================================================== Weighted Average Due by June 30, Rate June 30, 1998 -------------------------------------------------------------------------- (Dollars in thousands) 1998 5.84% $11,000 1999 -- -- 2000 -- -- 2001 5.50% $6,000 2002 -- -- Thereafter 5.21% $4,000 -------------------------------------------------------------------------- Total Federal Home Loan Bank advances 5.62% $21,000 ========================================================================== Substantially all of the above advances with contractual maturities beyond one year are callable by the FHLB within one year of the respective balance sheet dates. (11) Commitments and Contingencies At June 30, 1999 and 1998, the Company was committed to fund loans as follows: ========================================================================== June 30, 1999 1998 -------------------------------------------------------------------------- (Dollars in thousands) Loans with fixed rates of interest $5,497 $6,563 Loans with variable rates of interest $8,469 $8,299 -------------------------------------------------------------------------- Total commitments to fund loans $13,966 $14,862 ========================================================================== 48 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (11) Continued Financial Instruments With Off-Balance Sheet Risk In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At June 30, 1999, the Company is committed to the funding of first mortgage loans of approximately $12.4 million, and construction loans of approximately $1.0 million, and committed to commercial business loans of approximately $422,000. The Company uses the same credit policies in extending commitments as it does for on-balance sheet instruments. The Company controls its exposure to loss from these agreements through credit approval processes and monitoring procedures. Commitments to extend credit are generally issued for one year or less and may require payment of a fee. The total commitment amounts do not necessarily represent future cash disbursements, as many of the commitments expire without being drawn upon. The Company may require collateral in extending commitments, which may include cash, accounts receivable, securities, real or personal property, or other assets. For those commitments which require collateral, the value of the collateral generally equals or exceeds the amount of the commitment. Concentration of Credit Risk The Company offers residential and construction real estate loans as well as commercial and consumer loans. The Company's lending activities are concentrated in Pennsylvania. The largest concentration of the Company's loan portfolio is located in Eastern Pennsylvania. The ability of the Company's borrowers to repay amounts owed is dependent on several factors, including the economic conditions in the borrower's geographic region and the borrower's financial condition. Legal Proceedings The Company is involved in routine legal proceedings in the normal course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of the Company. 49 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (11) Continued Other Commitments In connection with the operation of nine of its branches, the Company leases certain office space. The leases are classified as operating leases, with rent expense of $148,000, $205,000, and $124,000 for the years ended June 30, 1999, 1998 and 1997, respectively. Minimum payments over the remainder of the leases are summarized as follows: Minimum Lease Year ended June 30, Payments ------------------------------------------------ (Dollars in thousands) 2000 $255 2001 262 2002 249 2003 208 2004 and thereafter 86 ------------------------------------------------ $1,060 ================================================ (12) Regulatory Matters The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain certain minimum amounts and ratios (set forth in the table below). Management believes that the Bank meets, as of June 30, 1999, all capital adequacy requirements to which it is subject. As of June 30, 1999, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 50 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (12) Continued The Bank's actual capital amounts and ratios are presented in the following table.
To be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual capital Purposes Action Provisions -------------- -------- ----------------- Amount Ratio Amount Ratio Amount Ratio ========================================================================================== (Dollars in thousands) As of June 30, 1999: Tangible capital $46,180 9.8% $7,079 1.5% N/A N/A% (to tangible assets) Core capital 46,180 9.8 18,855 4.0 $23,568 5.0 (to adjusted tangible assets) Tier I Capital 46,180 16.9 10,901 4.0 16,352 6.0 (to risk- weighted assets) Risk-based capital 49,318 18.1 21,803 8.0 27,253 10.0 (to risk- weighted assets) As of June 30, 1998: Tangible capital $33,505 8.3% $6,038 1.5% N/A N/A% (to tangible assets) Core capital 33,505 8.3 12,075 3.0 $20,126 5.0 (to adjusted tangible assets) Tier I Capital 33,505 13.8 9,719 4.0 14,578 6.0 (to risk- weighted assets) Risk-based capital 36,170 14.9 19,438 8.0 24,297 10.0 (to risk- weighted assets) ==========================================================================================
51 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (12) Continued On September 30, 1996, federal legislation was enacted which included provisions for recapitalizing the Savings Association Insurance Fund ("SAIF") and the eventual merger of this fund with the Bank Insurance Fund. In accordance therewith, the FDIC billed the Bank, in fiscal 1997, for a special assessment of $1.5 million based on the amount of SAIF assessable deposits at an estimated assessment rate of 65.7 basis points per $100 of insured deposits. The Bank is not under any agreement with the regulatory authorities nor is it aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources, or operations of the Bank. (13) Fair Value of Financial Instruments The Company's methods for determining the fair value of its financial instruments as well as significant assumptions and limitations are set forth below. Limitations Estimates of fair value are made at a specific point in time, based upon, where available, relevant market prices and information about the financial instrument. Such estimates do not include any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. For a substantial portion of the Company's financial instruments, no quoted market exists. Therefore, estimates of fair value are necessarily based on a number of significant assumptions (many of which involve events outside the control of management). Such assumptions include assessments of current economic conditions, perceived risks associated with these financial instruments and their counterparties, future expected loss experience, and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only and, therefore, cannot be compared to the historical accounting model. Use of different assumptions or methodologies is likely to result in significantly different fair value estimates. The estimated fair values presented neither include nor give effect to the values associated with the Company's banking or other businesses, existing customer relationships, branch banking network, property, equipment, goodwill, or certain tax implications related to the realization of unrealized gains or losses. The fair value of noninterest-bearing demand deposits, savings and NOW accounts, and money market deposit accounts is equal to the carrying amount because these deposits have no stated maturity. This approach to estimating fair value excludes the significant benefit that results from the low-cost funding provided by such deposit liabilities, as compared to alternative sources of funding. As a consequence, this presentation may distort the actual fair value of a banking organization that is a going concern. 52 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (13) Continued The following methods and assumptions were used to estimate the fair value of each major classification of financial instruments at June 30, 1999 and 1998: Cash and Cash Equivalents Current carrying amounts approximate estimated fair value. Securities Available for Sale Current quoted market prices were used to determine fair value. Loans Fair values were estimated for portfolios of loans with similar financial characteristics. Loans were segregated by type and each loan category was further segmented by fixed and adjustable rate interest terms. The estimated fair value of the segregated portfolios was calculated by discounting cash flows based on estimated maturity and prepayment speeds using estimated market discount rates that reflected credit and interest risk inherent in the loans. The estimate of the maturities and prepayment speeds was based on the Company's historical experience. Cash flows were discounted using market rates adjusted for portfolio differences. Loans Available for Sale The fair value fo mortgage loans originated and intended for sale in the secondary market is based on contractual cash flows using current market rates, calculated on an aggregate basis. Accrued Income Receivable Current carrying amounts approximate estimated fair value. Deposits with No Stated Maturity (which consist of NOW, Money Market, and Passbook Accounts) Current carrying amounts approximate estimated fair value. Certificates of Deposit Fair value was estimated by discounting the contractual cash flows using current market rates offered in the Company's market area for deposits with comparable terms and maturities. Accrued Interest Payable Current carrying amounts approximate estimated fair value. 53 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (13) Continued FHLB Advances Fair value was estimated using discounted cash flow analysis based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. Commitments to Extend Credit The majority of the Company's commitments to extend credit carry current market interest rates if converted to loans. Because commitments to extend credit are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts. The carrying amounts and estimated fair values of the Company's financial instruments, including off-balance sheet financial instruments, were as follows at June 30, 1999 and 1998 (dollars in thousands): 1999 ------------------------ Carrying Estimated Assets Amount Fair Value ------------------------------------------------------------------------- Cash and cash equivalents $4,889 $4,889 Securities available for sale $80,055 $80,055 Loans, net $374,584 $380,266 Accrued income receivable $2,519 $2,519 ========================================================================= Liabilities ------------------------------------------------------------------------- Deposits with no stated maturity $139,524 $139,524 Certificates of Deposit $251,157 $254,000 FHLB advances $14,986 $14,435 Accrued interest payable $706 $706 ========================================================================= 54 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (13) Continued Off-Balance Sheet Financial Instruments: Contract Estimated Amount Fair Value -------------------------------------------------------------------------- Commitments to extend credit $13,966 $22 ========================================================================== 1998 ----------------------- Carrying Estimated Assets Amount Fair Value -------------------------------------------------------------------------- Cash and cash equivalents $18,291 $18,291 Securities available for sale $48,111 $48,111 Loans available for sale $12,152 $12,205 Loans, net $315,705 $320,168 Accrued income receivable $2,109 $2,109 ========================================================================== Liabilities -------------------------------------------------------------------------- Deposits with no stated maturity $108,791 $108,791 Certificates of Deposit $232,002 $233,677 FHLB advances $21,000 $21,119 Accrued interest payable $389 $389 ========================================================================== Off-Balance Sheet Financial Instruments: Contract Estimated Amount Fair Value -------------------------------------------------------------------------- Commitments to extend credit $14,862 $178 ========================================================================== 55 - -------------------------------------------------------------------------------- (14) Comprehensive Income The tax effects allocated to each component of "Other comprehensive income" are as follows:
1999 ----------------------------------------- Before-tax Tax Net of tax Amount Benefit Amount - ----------------------------------------------------------------------------------- (Dollars in thousands) Unrealized gains on securities available for sale Unrealized holding losses arising during the period ($2,404) $ 912 ($1,492) Other comprehensive income ($2,404) $ 912 ($1,492) ==================================================================================== 1998 ----------------------------------------- Before-tax Tax Net of tax Amount Expense Amount - ----------------------------------------------------------------------------------- (Dollars in thousands) Unrealized gains on securities available for sale Unrealized holding gains arising during the period $ 391 ($149) $ 242 Less: reclassification adjustment for losses included in net income $ 219 ($ 83) $ 136 Other comprehensive income $ 610 ($232) $ 378 ==================================================================================== 1997 ----------------------------------------- Before-tax Tax Net of tax Amount Expense Amount - ----------------------------------------------------------------------------------- (Dollars in thousands) Unrealized gains on securities available for sale Unrealized holding gains arising during period 531 202 329 Less: reclassification adjustment for losses included in net income 71 27 44 Other comprehensive income 602 229 373 ====================================================================================
(15) Reorganization Pursuant to the Plan, the Company offered and sold 2,240,878 shares of Company common stock in its initial public offering, issued 2,812,974 shares to the MHC and contributed 89,635 shares to the Foundation. The Company's initial public offering was completed on December 23, 1998 and resulted in net cash proceeds of $19.7 million. The Company loaned $1.8 million to the Bank to establish an ESOP which purchased 179,270 shares of the Company's stock in the initial public offering. The Company used $9.8 million, or 50% of the remaining net proceeds to purchase all of the outstanding stock of the Bank. 56 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (15) Continued As part of the Plan of Conversion, the Company formed the Willow Grove Foundation and donated 89,635 shares of the Company valued at approximately $896,000. The Company recorded a contribution expense charge and a corresponding deferred tax benefit of $305,000 for this donation. The formation of this private charitable foundation is to further the Bank's commitment to the communities that it serves. (16) Dividend Policy The Company's ability to pay dividends is dependent, in part, upon its ability to obtain dividends from the Bank. The future dividend policy of the Company is subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial conditions, cash needs, and general business conditions. Holders of common stock will be entitled to receive dividends as and when declared by the Board of Directors of the Company out of funds legally available for that purpose. Such payment, however, will be subject to the regulatory restrictions set forth by the OTS. In addition, FDICIA provides that, as a general rule, a financial institution may not make a capital distribution if it would be undercapitalized after making the capital distribution. To date, the MHC has waived its receipt of cash dividends from the Company. The dollar amount of dividends waived by MHC are considered as a restriction on the retained earnings of the Company. The amount of any dividend waived by MHC shall be available for declaration as a dividend solely to MHC. At June 30, 1999, the cumulative amount of such waived dividend was $225,000. 57 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (17) Parent Company Financial Information Condensed Statements of Financial Condition ================================================================================ June 30, 1999 - -------------------------------------------------------------------------------- (Dollars in thousands) Assets: Cash on deposit with subsidiary bank $ 142 Note receivable 11,293 Investment in subsidiary bank 48,421 Other assets 455 - -------------------------------------------------------------------------------- Total assets $ 60,311 ================================================================================ Liabilities and stockholders' equity: - -------------------------------------------------------------------------------- Other liabilities $ 166 Total liabilities $ 166 Stockholders' equity: Common stock $ 51 Additional paid-in capital 59,932 Retained earnings 1,573 Unrealized (losses) gains on securities available for sale ($ 1,411) - -------------------------------------------------------------------------------- Total stockholders' equity $ 60,145 Total liabilities and stockholders' equity $ 60,311 ================================================================================ Condensed Statement of Operations ================================================================================ 1999 - -------------------------------------------------------------------------------- (Dollars in thousands) Income: Interest income on note receivable $ 143 Equity in undistributed income of subsidiary 2,366 - -------------------------------------------------------------------------------- Total income $ 2,509 ================================================================================ Expense: Professional $ 125 Stationary and printing 31 Charitable foundation 896 Other 11 - -------------------------------------------------------------------------------- Total expense $ 1,063 ================================================================================ Income before taxes $ 1,446 Income tax expense (benefit) (313) - -------------------------------------------------------------------------------- Net income $ 1,759 ================================================================================ 58 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (17) Continued Condensed Statements of Cash Flows ================================================================================ 1999 - -------------------------------------------------------------------------------- (Dollars in thousands) Cash flows from operating activities: Net income $ 1,759 Less items not affecting cash flows: Equity in undistributed income of subsidiary (2,366) Increase in accrued interest receivable (142) Foundation contribution expense 896 Increase in other assets (313) Increase in other liabilities 166 - -------------------------------------------------------------------------------- Net cash used in operating activities $ O ================================================================================ Cash flows from investing activities: Capital investment in subsidiary bank ($ 9,828) Issuance of notes receivable from subsidiary (11,293) - -------------------------------------------------------------------------------- Net cash used in financing activities ($21,121) ================================================================================ Cash flows from financing activities: Proceeds from stock issuance $ 21,450 Dividends paid (187) - -------------------------------------------------------------------------------- Net cash provided by financing activities $ 21,263 ================================================================================ Net increase in cash and cash equivalents $ 142 Cash and cash equivalents at beginning of period -- Cash and cash equivalents at end of period $ 142 ================================================================================ (18) Subsequent Event The Company approved its 1999 Stock Option Plan (the "Option Plan") and the 1999 Recognition and Retention Plan ("RRP") on July 27, 1999 at a special shareholders meeting; and declared an $.08 per share dividend payable on September 1, 1999 to shareholders of record on August 13, 1999. Sock Option Plan The Company maintains the Option Plan and has reserved for future issuance pursuant to the Option Plan 224,087 shares of Common Stock, which is equal to 10% of the Common Stock sold in the Company's initial public offering. Under the Option Plan, stock options (which expire ten years from the date of grant) may be granted to the directors and officers of the Bank. Each option entitles the holder to purchase one 59 WILLOW GROVE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (18) Continued share of the Company's common stock at an exercise price equal to the fair market value of the stock at the date of the grant. Options will be exercisable in whole or in part over the vesting period. The options vest ratably over a 5-year period. All options become 100% exercisable in the event of death or disability. Recognition and Retention Plan (RRP) The Company maintains the RRP for the directors and officers of the Company which was approved by the Company's Board of Directors in June 1999. The objective of the RRP is to enable the Company to provide officers, key employees and directors of the Bank with a proprietary interest in the Company as an incentive to contribute to its success. The Plan is authorized to maintain up to 89,635 shares of the Company stock or 4% of the stock sold in the Company's initial public offering. Awards vest at a rate of 20% per year for directors and officers, commencing one year from the date of award. Awards become 100% vested in the event of death or disability. - -------------------------------------------------------------------------------- 60 (photo of William Langan and Fred Marcell sitting at table) (caption) William W. Langan, Chairman Frederick A. Marcell Jr., President (photo of 9 bank directors at conference table) (caption) Willow Grove Bank Directors: (standing left to right) William B. Weihenmayer, J. Ellwood Kirk, Frederick A. Marcell Jr., Betsy Gammill, Samuel H. Ramsey, III (Seated left to right) Lewis W. Hull, William W.Langan, Chairman, Charles F. Kremp, III, A. Brent O'Brien (photo of Senior Management Team in front of Willow Grove Bank sign) (caption) John T. Powers, Senior Vice President John J. Foff, Jr., Senior Vice President Thomas M. Fewer, Senior Vice President (listing of Executive Officers of Bank and Bancorp) Executive Officers of Willow Grove Bank and Willow Grove Bancorp, Inc. Frederick A. Marcell Jr., President and Chief Executive Officer Thomas M. Fewer, Senior Vice President John J. Foff, Jr., Senior Vice President, Chief Financial Officer and Treasurer John T. Powers, Senior Vice President and Corporate Secretary Directors of Willow Grove Bank and Willow Grove Bancorp, Inc. Elizabeth H. Gemmill*, Managing Trustee, Warwick Foundation, Philadelphia, PA Lewis W. Hull, Chairman of Hull Corporation and Hull Company (manufacturing companies) Hatboro, PA J. Ellwood Kirk, Retired President of Willow Grove Bank Charles F. Kremp, III, President and owner of Charles F. Kremp, III (florist), Willow Grove, PA William W. Langan, President and owner of Marmetal Industries, Inc., Horsham, PA Frederick A. Marcell, Jr., President and Chief Executive Officer of Willow Grove Bank since July 1992 A. Brent O'Brien, President and owner of Bean, Mason & Eyer (insurance broker), Doylestown, PA Samuel H. Ramsey, III, President and owner of Samuel H. Ramsey, III, Certified Public Accountants William B. Weihenmayer, Self-employed real estate investor, Huntingdon Valley, PA * Director since July 31, 1999. (Willow Grove Bancorp, Inc. logo) 61 (heading) CORPORATE INFORMATION Annual Meeting The annual meeting of the stockholders will be held on November 9, 1999 at 11:00 am: The Fairway Room North Hills Country Club 99 Station Avenue North Hills, Pennsylvania Independent Auditors KPMG LLP 1600 Market Street Philadelphia, Pennsylvania 19103 Shareholder Inquiries For information relating to the annual report on Form 10-K, press releases, reports filed with the SEC and the annual meeting of stockholders, call Frederick A. Marcell, Jr. or John J. Foff, Jr. at 215-646-5405. General Counsel Duffy, North, Wilson, Thomas & Nicholson 104 North York Road Hatboro, Pennsylvania 19040 Special Counsel Elias, Matz, Tiernan & Herrick LLP 734 15th Street, N.W., 12th Floor Washington, DC 20005 Transfer Agent and Registrar For information relating to your stock holdings, stock transfer requirements, lost certificates, dividends, tax forms, and related matters, contact: Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 800-368-5948 Corporate Headquarters Willow Grove Bancorp, Inc. Welsh and Norristown Roads Maple Glen, Pennsylvania 19002-8030 Common Stock Willow Grove Bancorp, Inc.'s common stock is traded on The Nasdaq Stock Market (NASDAQ) under the symbol WGBC. Newspaper stock listings: WillowG. or WillGrvBcp. The price range for the Company's common stock for each quarter for fiscal 1999: Quarter ended High Low Dec. 31, 1998 10 5/8 10 Mar. 31, 1999 10 1/2 9 5/8 June 30, 1999 10 9 1/8 Market Makers Boenning & Scattergood, Inc. F.J. Morrissey & Co., Inc. Freidman Billings Ramsey & Co., Inc. Keefe, Bruyette & Woods, Inc. Knight Securities LP Mayer & Schweitzer, Inc. Ryan, Beck & Co. Sandler O'Neill & Partners Spear Leeds & Kellogg Tucker Anthony, Inc. heading OFFICE LOCATIONS Maple Glen Welsh and Norristown Roads Maple Glen, PA 19002-8030 Warminster Warminster Square Shopping Center 1555 West Street Road Warminster, PA 18974 Warminster K-Mart Plaza 1141 Ivyland Road Warminster, PA 18974 Willow Grove 9 Easton Road Willow Grove, PA 19090 Dresher 701 Twining Road Dresher, PA 19025 Huntingdon Valley Huntingdon Valley Shopping Center 761 Huntingdon Pike Huntingdon Valley, PA 19006 Hatboro 2 North York Road Hatboro, PA 19040 Somerton Lumar Shopping Center 11730 Busleton Avenue Philadelphia, PA 19116 Roslyn Valley Roslyn Valley Shopping Center 1331 Easton Road Roslyn, PA 19001 (back cover) (Willow Grove Bank logo) (caption) Your Community Bank EX-23.0 3 CONSENT - INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.0 Consent of Independent Certified Public Accountants The Board of Directors Willow Grove Bancorp, Inc.: We consent to incorporation by reference in the registration statement (No. 333-70131) on Form S-8 of Willow Grove Bancorp, Inc. of our report dated July 23, 1999, except as to note 18, which is as of July 27, 1999, relating to the consolidated statements of financial condition of Willow Grove Bancorp, Inc. and subsidiary as of June 30, 1999 and 1998, and the related consolidated statements of operations, changes in equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 1999, which report appears in the June 30, 1999 annual report on Form 10-K of Willow Grove Bancorp, Inc. /s/ KPMG LLP Philadelphia, Pennsylvania September 24, 1999 EX-27 4 FDS
9 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 3,447 1,442 0 0 80,055 0 0 374,584 3,138 472,039 390,681 4,000 2,821 10,986 0 0 51 58,391 472,039 27,400 4,615 0 32,015 15,366 16,164 15,851 531 0 10,652 5,677 3,633 0 0 3,633 .46 .46 7.60 1,064 4 0 1,068 2,665 58 0 3,138 3,138 0 925
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