UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

                                                ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

                                                o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to _____________

 

Commission file number: 0-49706

 

Willow Grove Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002

(Address of principal executive offices)

 

(215) 646-5405

(Registrant’s telephone number, including area code)

 

 

                Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 ý    NO o

 

            Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

 

YES ý    NO o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

                Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

The Registrant had 9,782,103 shares of common stock issued and outstanding as of November 2, 2004.

 

WILLOW GROVE BANCORP, INC.

 

INDEX

 

				Page No.
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Consolidated Statements of Financial Condition at September 30, 2004 and June 30, 2004		3
		Consolidated Statements of Operations — For the Three Months ended September 30, 2004 and 2003		4
		Consolidated Statements of Cash Flows — For the Three Months ended September 30, 2004 and 2003		5
		Notes to the unaudited Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		22
	Item 4.	Controls and Procedures		23
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings		23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
	Item 3.	Defaults Upon Senior Securities		25
	Item 4.	Submission of Matters to a Vote of Security Holders		25
	Item 5.	Other Information		25
	Item 6.	Exhibits		25

 

 

 

2

 

Willow Grove Bancorp, Inc.

Consolidated Statements of Financial Condition

 

		At			At
(Dollars in thousands, except share data)		September 30, 2004			June 30, 2004
Assets
Cash and cash equivalents:
Cash on hand and non-interest-earning deposits		$	10,320		$	14,681
Interest-earning deposits		17,849			24,764
Total cash and cash equivalents		28,169			39,445
Securities:
Available for sale (amortized cost of $201,393 and $238,178, respectively)		200,128			234,207
Held to maturity (fair value of $188,103 and $98,401, respectively)		185,169			98,513
Loans (net of allowance for loan losses of $5,377 and $5,220, respectively)		537,675			524,189
Loans held for sale		1,646			1,136
Accrued income receivable		4,025			3,565
Property and equipment, net		5,968			5,975
Intangible assets		924			938
Other assets		11,881			13,624
Total assets		$	975,585		$	921,592
Liabilities and Stockholders’ Equity
Deposits		$	592,825		$	603,115
Federal Home Loan Bank advances		270,182			206,168
Advance payments from borrowers for taxes		1,203			2,863
Accrued interest payable		1,017			986
Other liabilities		5,924			4,684
Total liabilities		871,151			817,816
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; (40,000,000 authorized; 11,426,578 and 11,425,654 issued at September 30, 2004 and June 30, 2004, respectively)		114			114
Additional paid-in capital		85,051			84,915
Retained earnings-substantially restricted		54,309			53,516
Accumulated other comprehensive loss		(785		)	(2,463		)
Obligation of deferred compensation plan		525			525
Treasury stock at cost, 1,676,527 and 1,541,262 at September 30, 2004 and June 30, 2004, respectively		(27,170		)	(24,926		)
Unallocated common stock held by
Employee Stock Ownership Plan (ESOP)		(5,382		)	(5,497		)
Recognition and Retention Plan Trust (RRP)		(2,228		)	(2,408		)
Total stockholders’ equity		104,434			103,776
Total liabilities and stockholders’ equity		$	975,585		$	921,592

 

See accompanying Notes to the Unaudited Consolidated Financial Statements

 

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Willow Grove Bancorp, Inc.

Consolidated Statements of Operations

 

		For the Three Months Ended
		September 30,
(Dollars in thousands, except per share data)		2004			2003
Interest and dividend income:
Loans		$	8,139		$	7,153
Securities, primarily taxable		3,372			2,943
Total interest income		11,511			10,096
Interest expense:
Deposits		2,177			2,690
Borrowings		1,943			1,270
Total interest expense		4,120			3,960
Net interest income		7,391			6,136
Provision for loan losses		171			59
Net interest income after provision for loan losses		7,220			6,077
Non-interest income:
Service charges and fees		510			619
Realized gain on sale of:
Loans held for sale		46			239
Securities available for sale		12			415
Increase in cash surrender value of life insurance		49			64
Loan servicing income (loss), net		150			(10		)
Total non-interest income		767			1,327
Non-interest expense:
Compensation and employee benefits		3,143			3,226
Occupancy		390			368
Furniture and equipment		251			258
Federal insurance premium		21			22
Amortization of intangible assets		14			21
Data processing		221			192
Marketing		215			96
Deposit account services		239			223
Professional fees		181			238
Other expense		675			411
Total non-interest expense		5,350			5,055
Income before income taxes		2,637			2,349
Income tax expense		833			728
Net Income		$	1,804		$	1,621
Earnings per share:
Basic		$	0.20		$	0.17
Diluted		$	0.19		$	0.16
Cash dividends declared per share		$	0.11		$	0.09
Weighted average basic shares outstanding		8,992,143			9,456,088
Weighted average diluted shares outstanding		9,478,818			10,028,207

 

See accompanying Notes to the Unaudited Consolidated Financial Statements

 

 

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Willow Grove Bancorp, Inc.

Consolidated Statements of Cash Flows

 

		For the Three Months Ended
		September 30,
(Dollars in thousands)		2004			2003
Net cash flows from operating activities:
Net income		$	1,804		$	1,621
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		225			243
Amortization of premium and accretion of discount, net		191			536
Amortization of intangible assets		14			21
Provision for loan losses		171			59
Gain on sale of loans available for sale		(46		)	(239		)
Gain on sale of securities available for sale		(12		)	(415		)
Change in deferred loan fees		480			314
Change in accrued income receivable		(460		)	(106		)
Change in other assets		713			(2,224		)
Change in accrued interest payable		31			(37		)
Change in other liabilities		1,240			(382		)
Expense of ESOP and RRP		431			428
Originations and purchases of loans held for sale		(16,616		)	(19,132		)
Proceeds from sale of loans held for sale		16,152			19,488
Net cash provided by operating activities		$	4,318		$	175
Cash flows from investing activities:
Net increase in loans		(14,137		)	(4,968		)
Purchase of securities available for sale		(7,850		)	(91,960		)
Purchase of securities held to maturity		(90,305		)	—
Proceeds from sales, calls and maturities of securities available for sale		34,280			41,349
Proceeds from calls and maturities of securities held to maturity		200			—
Principal repayments of securities available for sale		10,182			34,421
Principal repayments of securities held to maturity		3,443			—
Proceeds from sale of other real estate owned		2			—
Purchase of property and equipment		(218		)	(72		)
Net cash used in investing activities		$	(64,403	)	$	(21,230	)
Cash flows from financing activities:
Net decrease in deposits		(10,290		)	(10,729		)
Borrowing of FHLB advances with original maturity less than 90 days		64,000			(5,000		)
Borrowing of FHLB advances with original maturity greater than 90 days		10,000			26,917
Repayment of FHLB advances with original maturity greater than 90 days		(9,986		)	(15,240		)
Net decrease in advance payments from borrowers for taxes		(1,660		)	(1,789		)
Dividends paid		(1,011		)	(893		)
Purchase of treasury stock		(2,244		)	(7,958		)
Net cash provided by (used in) financing activities		$	48,809		$	(14,692	)
Net decrease in cash and cash equivalents		$	(11,276	)	$	(35,747	)
Cash and cash equivalents:
Beginning of period		39,445			98,040
End of period		$	28,169		$	62,293
Supplemental disclosures of cash and cash flow information:
Interest paid		4,089			3,997
Income taxes paid		500			1,459
Non-cash items:
Change in unrealized gain (loss) on securities available for sale (net of taxes of ($1,029) and ($65) in 2004 and 2003, respectively)		1,678			(1,669		)

 

See accompanying Notes to the Unaudited Consolidated Financial Statements

 

 

5

 

WILLOW GROVE BANCORP, INC.

 

NOTES TO THE UNAUDITED 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 14 branches in Dresher, Willow Grove, Maple Glen, Warminster (2), Hatboro, Huntington Valley, Roslyn, Philadelphia (3 — Somerton, Rhawnhurst and Bustleton), North Wales, Southampton and Holland, Pennsylvania.  All of the branches are full-service and offer commercial and retail banking products and services.  These products include checking accounts (interest and non-interest bearing), savings accounts, certificates of deposit, business 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 banking agencies and undergoes periodic examinations by those regulatory authorities.

 

            On April 3, 2002 Willow Grove Bank completed its reorganization from the two-tier mutual holding company form of organization to the stock form of organization (the “April 2002 Reorganization”).  The former Willow Grove Bancorp, Inc. was a federally chartered mid-tier mutual holding company with approximately 56.9% of its stock being held by Willow Grove Mutual Holding Company and the remaining 43.1% being held by public shareholders.  As part of the April 2002 Reorganization, the former Willow Grove Bancorp, Inc., the federal corporation was merged into Willow Grove Bank and the current Willow Grove Bancorp Inc., a Pennsylvania corporation was incorporated by the Bank for the purpose of becoming the holding company for the Bank.  Willow Grove Bancorp, Inc., the new Pennsylvania corporation, through a public subscription offering sold 6,414,125 shares of stock at $10.00 per share and issued 4,869,375 shares to the stockholders of Willow Grove Bancorp, Inc., the former federal corporation, which represented an exchange of 2.28019 shares of common stock for each share of the former company.  Willow Grove Bank is now the wholly-owned subsidiary of Willow Grove Bancorp, Inc., the Pennsylvania corporation.   The stock has traded under the symbol “WGBC” for both the former federal corporation and the current Pennsylvania corporation.

 

            In September 2000, Willow Grove Investment Corporation (“WGIC”) , a Delaware corporation was formed as a wholly owned subsidiary of the Bank to conduct the investment activities of the Bank. In May 2003, Willow Grove Insurance Agency, LLC (the “Agency”) , a Pennsylvania limited liability company was formed by the Bank to sell fixed rate annuity products on a retail basis for the Bank.

 

 

2.             Basis of Financial Statement Presentation

 

The accompanying consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”).  However, all normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of these financial statements, have been included.  These financial statements should be read in conjunction with the audited financial statements and the notes thereto for the Company for the year ended June 30, 2004, which are included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004 (File No. 000-49706).  The results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending June 30, 2005.

 

             The Company has prepared its accompanying consolidated financial statements in accordance with U.S. generally accepted  accounting principles  (“GAAP”) as applicable to the banking industry.  Certain amounts in prior years are reclassified for comparability to the current year’s presentation.  Such reclassifications, when applicable, have no effect on net income.  The consolidated financial statements include the balances of the

 

 

6

 

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.  Material estimates that are particularly susceptible to significant change in the near-term include the determination of the allowance for loan losses and income taxes.

 

 

7

 

3.             Earnings Per Share

 

                Earnings per share, basic and diluted, were  $0.20 and $0.19, respectively, for the three months ended September 30, 2004, compared to $0.17 and $0.16 for the three months ended September 30, 2003, respectively.

 

                The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per

share calculations:

 

		For the
		Three Months Ended
		September 30, 2004
(Dollars in thousands, except per share data)		Basic				Diluted
Net income		$		1,804		1,804
Dividends on unvested common stock awards		(29			)	(29		)
Income available to common stockholders		$	1,775			$	1,775
Weighted average shares outstanding		8,992,143				8,992,143
Effect of dilutive securities:
Options		—				273,256
Unvested common stock awards		—				161,239
Adjusted weighted average shares used in earnings per share computation		8,992,143				9,426,638
Earnings per share		$	0.20			$	0.19
		For the
		Three Months Ended
		September 30, 2003
(Dollars in thousands, except per share data)		Basic				Diluted
Net income		$	1,621			$	1,621
Dividends on unvested common stock awards		(31			)	(31		)
Income available to common stockholders		$	1,590			$	1,590
Weighted average shares outstanding		9,456,088				9,456,088
Effect of dilutive securities:
Options		—				325,512
Unvested common stock awards		—				246,607
Adjusted weighted average shares used in earnings per share computation		9,456,088				10,028,207
Earnings per share		$	0.17			$	0.16

 

 

The Company has two stock-based option plans described more fully in Note 9 of the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.  The Company accounts for both plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  As a result, stock based employee compensation cost relating to the stock option plans is not reflected in net income, as all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of the grant.

 

 

8

 

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to the stock option plans.

 

		For the
		Three Months Ended
		September 30,
(Dollars in thousands, except per share data)		2004				2003
Income available to common stockholders		$	1,775			$		1,590
Deduct: Total stock-based compensation expense determined under fair value based method for stock options, net of related tax effects		(63			)	(54				)
Pro forma net income		$	1,712			$			1,536
Earnings per share:
Basic-as reported		$	0.20			$		0.17
Basic-pro forma		$	0.19			$		0.16
Diluted-as reported		$	0.19			$	0.16
Diluted-pro forma		$		0.18		$	0.15

 

4.                                      Loan Portfolio

 

Information about the Bank’s loans receivable portfolio is presented below as of and for the periods indicated:

 

		At						At
		September 30, 2004						June 30, 2004
						Percentage of						Percentage of
(Dollars in thousands)		Amount				Total		Amount				Total
Mortgage loans:
Single-family residential		$		176,113		32.36	%	$	181,049			34.15	%
Commercial real estate and multi-family residential		190,812				35.06		180,881				34.12
Construction		65,400				12.02		57,014				10.75
Home equity		94,834				17.42		91,848				17.32
Total mortgage loans		527,159				96.86		510,792				96.34
Consumer loans		1,644				0.30		1,678				0.32
Commercial business loans		15,476				2.84		17,686				3.34
Total loans receivable		$	544,279			100.00	%	$		530,156		100.00	%
Allowance for loan losses		(5,377			)			(5,220			)
Deferred net loan origination fees		(1,227			)			(747			)
Loans receivable, net		$	537,675					$		524,189

 

The following is a summary of the activity in the allowance for loan losses for the three months ended September 30, 2004 and 2003:

 

 

9

 

		For the Three Months Ended
		September 30,
(Dollars in thousands)		2004			2003
Balance at the beginning of period		$	5,220		$		5,312
Plus: Provisions for loan losses		171			59
Less charge-offs for:
Mortgage loans		(4		)	(57			)
Consumer loans		(8		)	—
Commercial business loans		(3		)	(24			)
Total charge-offs		(15		)	(81			)
Plus: Recoveries		1			15
Balance at the end of the period		$	5,377		$	5,305

 

5.                                      Securities

 

The amortized cost and estimated fair value of held to maturity and available for sale securities at September 30, 2004 and June 30, 2004 are as follows:

 

 

10

 

		September 30, 2004
		Amortized cost				Unrealized gains				Unrealized losses				Estimated fair value
		(Dollars in thousands)
Held to maturity:
Municipal bonds		$		19,660		$	339			$		(3	)	$	19,996
US government agency securities		17,000				11				(50			)	16,961
Mortgage-backed securities
FNMA		15,202				242				(13			)	15,431
FHLMC		19,401				5				—				19,406
CMOs		113,906				2,403				—				116,309
Total held to maturity		185,169				3,000				(66			)	188,103
Available for sale:
US government agency securities		51,054				22				(454			)	50,622
Mortgage-backed securities
FNMA		68,337				477				(440			)	68,374
FHLMC		58,046				128				(885			)	57,289
GNMA		—				—				—				—
FHLB stock		14,768				—				—				14,768
Equity securities		9,188				17				(130			)	9,075
Total available for sale		201,393				644				(1,909			)	200,128
Total securities		$	386,562			$		3,644		$	(1,975		)	$	388,231
		June 30, 2004
		Amortized cost				Unrealized gains				Unrealized losses				Estimated fair value
		(Dollars in thousands)
Held to maturity:
Municipal bonds		$	18,132			$		51		$	—			$	18,183
US government agency securities		16,000				—				(283			)	15,717
Mortgage-backed securities
FNMA		15,363				137				—				15,500
CMOs		49,018				—				(17			)	49,001
Total held to maturity		98,513				188				(300			)	98,401
Available for sale:
US government agency securities		75,031				—				(1,572			)	73,459
Mortgage-backed securities
FNMA		80,705				—				(1,043			)	79,662
FHLMC		58,565				—				(1,241			)	57,324
GNMA		2,486				—				(6			)	2,480
FHLB stock		12,203				—				—				12,203
Equity securities		9,188				16				(125			)	9,079
Total available for sale		238,178				16				(3,987			)	234,207
Total securities		$	336,691			$		204		$	(4,287		)	$	332,608

 

 

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6.                                      Recent Accounting Pronouncements

 

Consolidation of Variable Interest Entities- an interpretation of ARB No. 51 (“FASB Interpretation No. 46R”)

 

 In January 2003, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity.  FIN 46 Revised (“FIN 46R”), issued in December 2003, replaces FIN 46.  FIN 46R requires public entities to apply FIN 46 or FIN 46R to all entities that are considered special-purpose entities in practice and under the FASB literature that was applied before the issuance of FIN 46 by the end of the first reporting period that ended December 15, 2003.  For any variable interest entities that must be consolidated under FIN 46R, the assets, liabilities and noncontrolling interests of the variable interest entities initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of any accounting change.  If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the variable interest entities.  The provisions of the Statement had no impact on the Company’s earnings, financial condition, or stockholders’ equity.

 

 

Amendments of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”)

 

In April 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments, including derivatives embedded in other contracts and hedging activities.  This Statement amends Statement No. 133 for decisions made by the FASB as part of its Derivatives Implementation Group process.  This Statement also amends Statement No. 133 to incorporate clarifications of the definition of a derivative.  This Statement is effective for contracts entered into or modified and hedging relationships designated after June 30, 2003.  The provisions of this Statement had no impact on the Company’s earnings, financial condition or stockholders’ equity.

 

 

Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”)

 

In May 2003, the FASB issued SFAS No. 150,  “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining provisions of this Statement are consistent with the FASB’s proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. For nonpublic entities, mandatorily redeemable financial instruments are subject to the provisions of this Statement for the first fiscal period beginning after December 15, 2003.  The provisions of this Statement had no  impact on the Company’s earnings, financial condition or stockholders’ equity.

 

 

The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (“EITF 03-1”)

 

In December 2003, the Emerging Issues Task Force issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”  The EITF addresses disclosure requirements regarding information about temporarily impaired investments.  The requirements are effective for fiscal years ending after December 15, 2003 for all entities that have debt or marketable equity securities with market values below carrying

 

 

12

 

values.  The requirements apply to investments in debt and marketable equity securities that are accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”  The disclosure requirements apply only to annual financial statements and have been made in the Company’s annual financial statements.

 

On September 30, 2004, the FASB voted unanimously to delay the effective date of EITF 03-1.  The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads.  In addition, the provisions of EITF 03-1 that have been delayed relate to the requirements that a company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than—temporary impairment charge through earnings.  The financial statement disclosure provisions of EITF 03-1 were not affected by the September 30, 2004 delay.  The FASB will be issuing implementation guidance to this topic.  Once issued, the Company will evaluate the impact of adopting EITF 03-1.

 

 

Accounting for Certain Loans or Debt Securities Acquired in a Transfer(Statement of Position 03-3)

 

In December 2003, the AICPA’s Accounting Standards Executive Committee (AcSEC) issued SOP 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”.  SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged.  A certain transition provision applies for certain aspects of loans currently within the Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans.  SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.  It includes loans acquired in business combinations and applies to all nongovernmental entities, including not-for-profit organizations.  SOP 03-3 does not apply to loans originated by the entity.  Management is in the process of evaluating the potential impact of the proposed statement.

 

Share-Based Payment- An Amendment of Statements No. 123 and 95

 

In March 2004, the FASB issued an exposure draft, “Share Based Payment- An Amendment of Statements No. 123 and 95” that addresses the accounting for equity-based compensation arrangements, including employee stock options.  Upon implementation of the changes proposed in this statement, entities would no longer be able to account for equity-based compensation using intrinsic value method under Opinion No. 25.  Entities would be required to measure the cost of employee services received in exchange for awards of equity instruments at the grant date of the award using a fair value based method.  The comment period for this proposed statement ended on June 30, 2004.  In October 2004, FASB announced that for public entities, this proposed statement would apply prospectively for reporting periods beginning after June 15, 2005 as if all equity-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using fair value based method of accounting.  Management is in the process of evaluating the potential impact of the proposed statement.

 

 

7.                                      Comprehensive Income

 

The following table displays net income and the components of other comprehensive income to arrive at total comprehensive income.  For the Company, the only component of other comprehensive income is the change in the estimated fair value of investment securities available-for-sale.

 

 

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		Three Months Ended
		September 30,
(Dollars in thousands)		2004			2003
Net income		$	1,804		$	1,621
Unrealized gains (losses) on securities available for sale, net of tax:
Unrealized holding gain (loss) during the period		1,666			(2,084		)
Reclassification adjustment for gains included in net income		12			415
Total other comprehensive income (loss)		1,678			(1,669		)
Comprehensive income (loss)		$	3,482		$	(48	)

 

8.                                      Dividends

 

On July 28, 2004, the Company declared a cash dividend on its common stock of $0.11 per share, payable on August 20, 2004 to owners of record on August 6, 2004.  Additionally, on October 26, 2004, the Company’s Board of Directors declared an $0.11 per share cash dividend payable November 22, 2004 to shareholders of record on November 8, 2004.

 

 

9.          Guarantees

 

 

              In the normal course of business, the Company sells loans in the secondary market.  As is customary in such sales, the Company provides indemnification to the buyer under certain circumstances.  This indemnification may include the repurchase of loans by the Company.  In most cases repurchases and losses are rare, and no provision is made for losses at the time of sale.  When repurchases and losses are probable and reasonably estimable, a provision is made in the financial statements for such estimated losses.

 

              On May 12, 2003, the Company entered into a sales and servicing master agreement with the Federal Home Loan Bank of Pittsburgh (“FHLB”).  The agreement allows the Company to sell loans to the FHLB while retaining servicing and providing for a credit enhancement.  Under the terms of the agreement, the Company receives a ten basis point annual fee in exchange for assuming the credit risk on losses in excess of its contractual obligation up to a maximum of $480,000.   The Company has sold $12.2 million in loans under this agreement and has a maximum credit risk exposure of $296,000.

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

                This Form 10-Q 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 events and are subject to certain risks, uncertainties, and assumptions.  Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.  Should one or more of these risks or uncertainties materialize, or

 

 

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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.

 

 

                Results of Operations

 

                General.   Net income for the three-month period ended September 30, 2004 was $1.8 million.  This compares to net income of $1.6 million for the comparable quarter in the prior year.  The Company’s net interest margin on a tax-affected basis increased 21 basis points to 3.29% for the three months ended September 30, 2004 from 3.08% for the three months ended September 30, 2003.  The return on average assets for the three-month periods ended September 30, 2004 and 2003 were 0.77% and 0.78%, respectively.  The return on average equity for the same periods were 6.74% and 5.74%, respectively.

 

                Net Interest Income.  Net interest income is determined by our average interest rate spread (i.e. the difference between the average yields on interest-earning assets and the average rates paid on interest-bearing liabilities) and also the average amount of interest-earning assets relative to interest-bearing and non-interest-bearing deposit liabilities.

 

                Net interest income for the three-month period ended September 30, 2004 was $7.4 million.  This compares to $6.1 million for the respective prior year three-month period, an increase of  $1.3 million or 20.5%. Net interest income increased primarily as a result of increased average loan portfolio balances combined with an increase in net interest rate spread.  Net interest rate spread increased as a result of the combination of the average rate of interest-bearing liabilities decreasing 25 basis points and the average rate of interest-earning assets increasing six basis points.  For the three-month period ended September 30, 2004 the Company’s interest rate spread increased 31 basis points to 2.90% compared to 2.59% for the respective three-month period ending September 30, 2003.

 

                Average interest-earning assets increased $99.8 million, or 12.4%, for the three-month period ended September 30, 2004 compared to the respective prior year period.  Average interest-bearing liabilities for the three-month period ended September 30, 2004 increased $100.2 million, or 15.6%, over the comparable prior year periods.  The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 121.82% for the three-month period ended September 30, 2004 compared to an average 125.29% for the three-month period ended September 30, 2003.  The Company continues to aggressively market its core deposit products and also increased its utilization of FHLB advances.   The Company’s net interest margin increased to 3.29% for three months ended September 30, 2004, a increase of 21 basis points compared to 3.08% for the three months ended September 30, 2003.  The increase in net interest margin for the three month period ended September 30, 2004 was primarily a result of an increase in net interest income, which more than offset the decline in the ratio of average interest-earning assets to average interest-bearing liabilities.

 

                The following table presents the average daily balances for various categories of assets and liabilities, and income and expense related to those assets and liabilities for the three-month periods ended September 30, 2004 and 2003.  Loans receivable include non-accrual loans.  To adjust nontaxable securities to a taxable equivalent, a 31.0% effective rate has been used for both the three-month periods ended September 30, 2004 and 2003.  The adjustment of tax exempt securities to a tax equivalent yield in the table below may be considered to include non-GAAP financial information.  Management believes that it is a standard practice in the banking industry to present net interest margin, net interest spread and net interest income on a fully tax equivalent basis.  Therefore, management believes, these measures provide useful information to investors by allowing them to make peer comparisons.  A GAAP reconciliation also is included below. 

 

 

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		For the Three Months Ended
		September 30, 2004									September 30, 2003
(Dollars in thousands)		Average Balance			Interest				Average Yield/Cost		Average Balance					Interest				Average Yield/Cost
Interest-earning assets:
Loans receivable:
Mortgage loans		$	525,569		$	7,876			5.96	%	$		395,652			$	6,815			6.86	%
Consumer loans		1,876			31				6.56		2,403					43				7.12
Commercial business loans		16,295			232				5.65		20,053					295				5.85
Total loans		543,740			8,139				5.95		418,108					7,153				6.82
Securities - taxable		319,304			3,103				3.86		306,784					2,615				3.39
Securities - nontaxable - adjusted to a taxable equivalent yield		18,890			309				6.49		17,380					284				6.50
Other interest-earning assets		20,225			55				1.08		60,100					126				0.83
Total interest-earning assets		902,159			11,606				5.11		802,372					10,178				5.05
Non-interest-earning assets		24,168									23,125
Total assets		$	926,327								$			825,497
Interest-bearing liabilities:
Deposits:
NOW and money market accounts		$	156,869		$		485		1.23	%	$	132,201				$		303		0.91	%
Savings accounts		89,807			107				0.47		88,559					179				0.80
Certificates of deposit		270,656			1,585				2.32		293,397					2,208				2.99
Total deposits		517,332			2,177				1.67		514,157					2,690				2.08
Total borrowings		221,043			1,942				3.49		124,237					1,268				4.06
Total escrows		2,213			1				0.18		2,031					2				0.39
Total interest-bearing liabilities		740,588			4,120				2.21		640,425					3,960				2.46
Non-interest-bearing liabilities		79,515									72,653
Total liabilities		820,103									713,078
Total stockholders’ equity		106,224									112,419
Total liabilities and stockholders’ equity		$	926,327								$	825,497
Net interest-earning assets		$	161,571								$	161,947
Net interest income					$		7,486									$		6,218
Net interest rate spread									2.90	%										2.59	%
Net interest margin									3.29	%										3.08	%
Ratio of average interest-earning assets to average interest-bearing liabilities									121.82	%										125.29	%

 

 

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