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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The transition period from ___________ to _____________
Commission file number: 0-49706
Willow Grove Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 80-0034942
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002
(Address of principal executive offices)
(215) 646-5405
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
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 [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The Registrant had 11,371,798 shares of common stock issued and outstanding as
of February 13, 2002.
WILLOW GROVE BANCORP, INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition at
December 31, 2002 and June 30, 2002 ........................................ 3
Consolidated Statements of Operations - For the Three and
Six months ended December 31, 2002 and 2001 ................................ 4
Consolidated Statements of Cash Flows - For the Six
Months ended December 31, 2002 and 2001 .................................... 5
Notes to the Unaudited Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................ 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 21
Item 4. Controls and Procedures..................................................... 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings .......................................................... 22
Item 2. Changes in Securities and Use of Proceeds................................... 22
Item 3. Defaults upon Senior Securities............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders......................... 22
Item 5. Other Information .......................................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................ 24
2
Willow Grove Bancorp, Inc.
Consolidated Statements of Financial Condition
At At
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) December 31, 2002 June 30, 2002
- ----------------------------------------------------------------------------- ----------------- ----------------
Assets
Cash and cash equivalents:
Cash on hand and non-interest-earning deposits $ 8,008 $ 5,710
Interest-earning deposits 25,486 26,276
----------------- ---------------
Total cash and cash equivalents 33,494 31,986
Securities
Available for sale (amortized cost of $265,580 and $251,651, respectively) 270,602 254,687
Held to maturity (fair value of $18,286 and $14,117, respectively) 17,923 13,973
Loans (net of allowance for loan losses of $5,283 and $4,626, respectively) 464,273 443,855
Loans held for sale 7,802 1,574
Accrued income receivable 4,084 4,138
Property and equipment, net 6,491 6,515
Intangible assets 1,075 1,126
Other assets 1,427 1,952
----------------- ---------------
Total assets $ 807,171 $ 759,806
================= ===============
Liabilities and Stockholders' Equity
Deposits $ 542,172 $ 529,752
Federal Home Loan Bank advances 131,227 97,824
Advance payments from borrowers for taxes 2,920 3,605
Accrued interest payable 1,045 868
Other liabilities 4,580 3,388
----------------- ---------------
Total liabilities 681,944 635,437
----------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; (40,000,000 authorized; 11,299,246 and 113 113
11,284,966 issued at December 31, 2002 and June 30, 2002, respectively)
Additional paid-in capital 82,704 82,521
Retained earnings-substantially restricted 48,984 46,708
Accumulated other comprehensive income 3,096 1,881
Unallocated common stock held by
Employee Stock Ownership Plan (ESOP) (6,189) (6,420)
Recognition and Retention Plan Trust (RRP) (3,481) (434)
----------------- ---------------
Total stockholders' equity 125,227 124,369
----------------- ---------------
Total liabilities and stockholders' equity $ 807,171 $ 759,806
================= ===============
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
Willow Grove Bancorp, Inc.
Consolidated Statements of Operations
For the Three Months Ended For the Six Months Ended
December 31, December 31,
-------------------------- ----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
- ------------------------------------------------------ ---- ---- ---- ----
Interest and dividend income:
Loans $ 8,587 $ 8,906 $ 17,058 $ 18,174
Securities, primarily taxable 3,447 2,108 7,229 4,358
----------- ----------- ----------- -----------
Total interest income 12,034 11,014 24,287 22,532
----------- ----------- ----------- -----------
Interest expense:
Deposits 3,253 4,578 6,825 9,661
Borrowings 1,528 955 3,026 1,903
Advance payments from borrowers for taxes 2 3 5 7
----------- ----------- ----------- -----------
Total interest expense 4,783 5,536 9,856 11,571
----------- ----------- ----------- -----------
Net interest income 7,251 5,478 14,431 10,961
Provision for loan losses 422 620 752 994
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,829 4,858 13,679 9,967
----------- ----------- ----------- -----------
Non-interest income:
Service charges and fees 445 398 916 752
Realized gain on sale of:
Loans held for sale 171 243 260 357
Securities available for sale 30 296 7 346
Loan servicing income (loss), net 4 21 (39) 39
----------- ----------- ----------- -----------
Total non-interest income 650 958 1,144 1,494
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 2,858 2,288 5,699 4,428
Occupancy 351 309 690 615
Furniture and equipment 250 226 483 438
Federal insurance premium 22 22 44 45
Amortization of intangible assets 26 12 51 37
Data processing 166 159 337 312
Advertising 107 124 268 285
Community enrichment 43 38 73 75
Deposit account services 203 210 406 404
Professional fees 134 111 262 268
Other expense 472 394 910 770
----------- ----------- ----------- -----------
Total non-interest expense 4,632 3,893 9,223 7,677
----------- ----------- ----------- -----------
Income before income taxes 2,847 1,923 5,600 3,784
Income tax expense 933 641 1,861 1,262
----------- ----------- ----------- -----------
Net Income $ 1,914 $ 1,282 $ 3,739 $ 2,522
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.19 $ 0.12 $ 0.36 $ 0.23
Diluted $ 0.18 $ 0.11 $ 0.34 $ 0.22
Cash dividends declared per share $ 0.07 $ 0.06 $ 0.14 $ 0.11
Weighted average basic shares outstanding 10,306,187 10,802,763 10,326,453 10,794,758
Weighted average diluted shares outstanding 10,789,005 11,050,455 10,868,703 11,033,367
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
Willow Grove Bancorp, Inc.
Consolidated Statements of Cash Flows
For the Six
Months Ended
December 31,
-------------------------
(DOLLARS IN THOUSANDS) 2002 2001
- ---------------------------------------------------------------------------------------- ---- ----
Net cash flows from operating activities:
Net income $ 3,739 $ 2,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 464 422
Amortization of premium and accretion of discount, net 455 90
Amortization of intangible assets 51 37
Provision for loan losses 752 994
Gain on sale of loans available for sale (260) (357)
Gain on sale of securities available for sale (7) (346)
Increase in deferred loan fees 350 60
Decrease in accrued income receivable 54 383
Decrease in other assets (220) (310)
Decrease in accrued interest payable 177 147
Increase in other liabilities 1,192 157
Expense of ESOP and RRP 503 181
Originations and purchases of loans held for sale (30,153) (36,861)
Proceeds from sale of loans held for sale 24,185 34,860
--------- ---------
Net cash provided by operating activities $ 1,282 $ 1,979
--------- ---------
Cash flows from investing activities:
Net (increase) decrease in loans (21,488) 13,983
Purchase of securities available for sale (110,146) (91,221)
Proceeds from sales and calls of securities available for sale 60,651 69,608
Principal repayments of securities available for sale 31,168 13,834
Purchase of property and equipment (440) (802)
--------- ---------
Net cash provided by investing activities $ (40,255) $ 5,402
--------- ---------
Cash flows from financing activities:
Net increase in deposits 12,420 12,118
Net increase in FHLB advances with original maturity less than 90 days 750 -
Increase in FHLB advances with original maturity greater than 90 days 35,750 9,000
Repayment of FHLB advances with original maturity greater than 90 days (3,097) (4,157)
Net decrease in advance payments from borrowers for taxes (685) (1,270)
Dividends paid (1,463) (493)
Acquisition of stock for Recognition and Retention Plan (3,194)
Issuance of treasury stock - 32
--------- ---------
Net cash provided by financing activities $ 40,481 $ 15,230
--------- ---------
Net increase in cash and cash equivalents $ 1,508 $ 22,611
Cash and cash equivalents:
Beginning of period 31,986 22,209
--------- ---------
End of period $ 33,494 $ 44,820
--------- ---------
Supplemental disclosures of cash and cash flow information:
Interest paid 9,679 11,424
Income taxes paid 1,248 1,230
Non-cash items:
Change in unrealized gain on securities available for sale 1,215 470
(net of taxes of ($745) and ($150) in 2002 and 2001, respectively)
Loans transferred to other real estate owned - -
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 13 branches in Dresher, Willow Grove, Maple Glen,
Warminster (2), Hatboro, Huntington Valley, Roslyn, Philadelphia (2 - Somerton
and Rhawnhurst), 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 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 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 to subscribers and issued 4,869,375 shares
to the stockholders of Willow Grove Bancorp, Inc., the former federal
corporation which represented an exchange ratio 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. All per share data and information prior to April 3, 2002 refers to
the former Willow Grove Bancorp, Inc., the federal corporation, and has been
restated to reflect the effect of the increased shares resulting from the share
issuance and exchange in the April 2002 Reorganization. For an interim period of
time after the completion of the April 2002 Reorganization, our stock traded
under the symbol "WGBCD", for all other periods the stock of both the former
federal corporation and the current Pennsylvania corporation traded under the
symbol "WGBC".
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.
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
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. However, all
normal, recurring adjustments which, in the opinion of management, are necessary
for a fasir 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, 2002, which are included in the Company's Annual Report on Form 10-K
for the year ended June 30, 2002 (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, 2003.
In preparing the financial statements, management is required to make
certain estimates and assumptions that affect the carrying values of certain
assets and liabilities, and revenues and expenses for the reporting periods
contained herein, in particular the allowance for loan losses. Actual results
could differ from such estimates.
6
3. EARNINGS PER SHARE
Earnings per share, basic and diluted, were $0.19 and $0.18 for the three
months ended December 31, 2002, respectively, compared to $0.12 and $0.11 for
the three months ended December 31, 2001, respectively. Earnings per share,
basic and diluted, were $0.36 and $0.34, for the six months ended December 31,
2002, respectively, compared to $0.23 and $0.22 for the six months ended
December 31, 2001, respectively.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations:
For the For the
Three Months Ended Six Months Ended
December 31, 2002 December 31, 2002
--------------------------- ---------------------------
(Dollars in thousands, except per share data) Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
Net income $ 1,914 1,914 $ 3,739 3,739
Dividends on unvested common stock awards (6) (6) (18) (18)
----------- ----------- ----------- -----------
Income available to common stockholders $ 1,908 $ 1,908 $ 3,721 $ 3,721
=========== =========== =========== ===========
Weighted average shares outstanding 10,306,187 10,306,187 10,326,453 10,326,453
Effect of dilutive securities:
Options - 139,147 - 198,579
Unvested common stock awards - 343,671 - 343,671
----------- ----------- ----------- -----------
Adjusted weighted average shares used in
earnings per share computation 10,306,187 10,789,005 10,326,453 10,868,703
=========== =========== =========== ===========
Earnings per share $ 0.19 $ 0.18 $ 0.36 $ 0.34
=========== =========== =========== ===========
For the For the
Three Months Ended Six Months Ended
December 31, 2001 December 31, 2001
--------------------------- ---------------------------
(Dollars in thousands, except per share data) Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
Net income $ 1,282 $ 1,282 $ 2,522 $ 2,522
Dividends on unvested common stock awards (7) (7) (16) (16)
----------- ----------- ----------- -----------
Income available to common stockholders $ 1,275 $ 1,275 $ 2,506 $ 2,506
=========== =========== =========== ===========
Weighted average shares outstanding 10,802,763 10,802,763 10,794,758 10,794,758
Effect of dilutive securities:
Options - 138,861 - 129,778
Unvested common stock awards - 108,831 - 108,831
----------- ----------- ----------- -----------
Adjusted weighted average shares used in
earnings per share computation 10,802,763 11,050,455 10,794,758 11,033,367
=========== =========== =========== ===========
Earnings per share $ 0.12 $ 0.11 $ 0.23 $ 0.22
=========== =========== =========== ===========
All options to acquire shares of common stock of the former Willow Grove
Bancorp, Inc. outstanding as of April 3, 2002 were exchanged, as adjusted for
the exchange ratio, for options to acquire common stock of the new company.
7
4. LOAN PORTFOLIO
Information about the Bank's loan portfolio is presented below as of and
for the periods indicated:
At At
December 31, 2002 June 30, 2002
--------------------------- ---------------------------
Percentage of Percentage of
(Dollars in thousands) Amount Total Amount Total
- ------------------------------------------------------ ----------- --------------- ------------ --------------
Mortgage loans:
Single-family residential $ 186,781 39.74 % $ 181,454 40.40 %
Commercial real estate and multi-family residential 148,265 30.66 134,294 29.90
Construction 30,786 7.44 29,306 6.52
Home Equity 73,106 15.56 75,016 16.70
--------- ------- --------- -------
Total mortgage loans 438,938 93.40 420,070 93.52
Consumer loans 9,877 2.15 10,081 2.24
Commercial business loans 21,128 4.45 19,067 4.24
--------- ------- --------- -------
Total loans receivable $ 469,943 100.00 % $ 449,218 100.00 %
========= ======= ========= =======
Allowance for loan losses (5,283) (4,626)
Deferred net loan origination fees (387) (737)
--------- ---------
Loans receivable, net $ 464,273 $ 443,855
========= =========
The following is a summary of the activity in the allowance for loan losses
for the six months ended December 31, 2002 and 2001:
For the Six Months Ended
December 31,
---------------------------
(DOLLARS IN THOUSANDS) 2002 2001
- -------------------------------------------------- ---- ----
Balance at the beginning of period $ 4,626 $ 4,313
Plus: Provisions for loan losses 752 994
Less Charge-offs for:
Mortgage loans - 11
Consumer loans 2 155
Commercial business loans 93 769
--------- ---------
Total charge-offs 95 935
Plus: Recoveries - 44
--------- ---------
Balance at the end of the period $ 5,283 $ 4,416
========= =========
8
5. SECURITIES
The amortized cost and estimated fair value of held to maturity and
available-for-sale securities at December 31, 2002 and June 30, 2002 are as
follows:
At December 31, 2002
---------------------------------------------------
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
- ------------------------------------------ ---------- ---------- ---------- ----------
HELD TO MATURITY:
Municipal securities $ 17,923 $ 363 $ - $ 18,286
--------- --------- --------- ---------
Total securities held to maturity $ 17,923 $ 363 $ - $ 18,286
========= ========= ========= =========
AVAILABLE FOR SALE:
US government agency securities $ 70,976 $ 1,349 $ - $ 72,325
Mortgage backed securities:
FNMA 108,408 3,293 (39) 111,662
GNMA 29,620 789 - 30,409
FHLMC 43,694 728 (1,029) 43,393
FHLB Stock 8,432 - - 8,432
Equity securities 4,450 - (69) 4,381
--------- --------- --------- ---------
Total securities available for sale 265,580 6,159 (1,137) 270,602
--------- --------- --------- ---------
Total securities $ 283,503 $ 6,522 $ (1,137) $ 288,888
========= ========= ========= =========
At June 30, 2002
---------------------------------------------------
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
- ------------------------------------------ ---------- ---------- ---------- ----------
Held to Maturity:
Municipal securities $ 13,973 $ 147 $ (3) $ 14,117
--------- --------- --------- ---------
Total securities held to maturity $ 13,973 $ 147 $ (3) $ 14,117
========= ========= ========= =========
Available for Sale:
US government agency securities $ 75,692 $ 1,013 $ (12) $ 76,693
Mortgage backed securities:
FNMA 87,778 1,649 - 89,427
GNMA 37,847 495 (1) 38,341
FHLMC 40,820 303 (360) 40,763
FHLB Stock 5,042 - - 5,042
Equity securities 4,472 - (51) 4,421
--------- --------- --------- ---------
Total securities available for sale 251,651 3,460 (424) 254,687
--------- --------- --------- ---------
Total securities $ 265,624 $ 3,607 $ (427) $ 268,804
========= ========= ========= =========
9
6. RECENT ACCOUNTING PRONOUNCEMENTS
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
This Statement amends FASB Statement No. 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies," and it applies to all entities.
It is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Earlier application is encouraged. There was no impact on
earnings, financial condition, or equity upon adoption of Statement No. 143.
RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, REPORTING GAINS AND
LOSSES FROM EXTINGUISHMENT OF DEBT, and an amendment of that Statement, FASB
Statement No. 64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND
REQUIREMENTS, along with rescinding FASB Statement No. 44, ACCOUNTING FOR
INTANGIBLE ASSETS OF MOTOR CARRIERS and amending FASB Statement No. 13,
Accounting for Leases. This Statement (1) eliminates an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions, (2) eliminates the extraordinary item
treatment of reporting gains and losses from extinguishment of debt, and (3)
makes certain other technical corrections.
The provisions of this Statement related to the rescission of Statement 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions of
this Statement related to Statement 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall be
effective for financial statements issued on or after May 15, 2002. There was no
impact on earnings, financial condition, or equity upon adoption of Statement
No. 145.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. There is no expected impact on earnings, financial condition, or
equity upon adoption of Statement No. 146.
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions
10
from the scope of both Statement No. 72 and Interpretation 9 and requires that
those transactions be accounted for in accordance with FASB Statements No. 141,
Business Combinations, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Thus,
the requirement in paragraph 5 of Statement No. 72 to recognize any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions within the scope of this Statement. In addition,
this Statement amends Statement No. 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement No. 144 requires for other long-lived
assets that are held and used.
Effective September 30, 2002 the Company adopted Statement No. 147 with
retroactive application effective June 30, 2001. With the adoption of Statement
No. 147 an adjustment to fiscal 2002 statements is included to eliminate the
accumulated amortization associated with the retroactive adjustment. The results
of this adjustment is an increase in income, for an average of $23,000, net of
taxes, for each quarter and $92,000, net of taxes, for fiscal year ended June
30, 2002. At December 31, 2002 the Company had goodwill of $848,000, which was
recently assessed for impairment. The Company determined there was no impairment
to goodwill at this time and correspondingly no impact on earnings was required.
Prospectively, should an indication of impairment exist, the Company will
perform a second test under Statement No. 142 to measure and record the amount
of impairment, if any.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FASB INTERPRETATION NO. 45)
o elaborates on the disclosures to be made by a guarantor in its
annual financial statements about its obligations under certain
guarantees that its issued.
o effective for financial statements ending December 31, 2002
CONSOLIDATION OF VARIABLE INTEREST ENTITIES- AN INTERPRETATION OF ARB NO. 51
(FASB INTERPRETATION NO. 46)
o requires that an enterprise review its degree of involvement in a
variable interest entity to determine of it is the primary
beneficiary of that entity.
o effective for fiscal years beginning after June 30, 2003 to
variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123." This statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for fiscal years ending after December 15, 2002, except
for financial reports containing condensed financial statements for interim
periods for which disclosure is effective for periods beginning after December
15, 2002. This Statement announces that "in the near future, the Board plans to
consider whether it should propose changes to the U.S. standards on accounting
for stock-based compensation."
11
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.
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
(DOLLARS IN THOUSANDS) 2002 2001 2002 2001
- ------------------------------------------------------ ---- ---- ---- ----
Net income $ 1,914 $ 1,282 $ 3,739 $ 2,522
Other comprehensive income, net of tax
Unrealized gains on securities available
for sale, net of tax
Unrealized holding gain(loss) during the period 35 (2,010) 1,210 (46)
Reclassification adjustment for gains
included in net income 20 296 5 346
--------- --------- --------- ---------
Total other comprehensive income (loss) 55 (1,714) 1,215 300
--------- --------- --------- ---------
Comprehensive income(loss) $ 1,969 $ (432) $ 4,954 $ 2,822
========= ========= ========= =========
8. STOCK-BASED COMPENSATION
At December 31, 2002, the Company has two stock-based option plans, the
first plan is described more fully in Note 9 of the Company's Annual Report on
Form 10-K for the year ended June 30, 2002. The 2002 Stock Option Plan was
recently adopted at the Annual Meeting of Stockholders held November 8, 2002.
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. No stock-based employee compensation cost is 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
grant. 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 stock-based
employee compensation.
For the For the
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
(DOLLARS IN THOUSANDS) 2002 2001 2002 2001
- ------------------------------------------------------ ---- ---- ---- ----
Income available to common stockholders $ 1,908 $ 1,275 $ 3,721 $ 2,506
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (44) (15) (70) (30)
--------- --------- --------- ---------
Pro forma net income $ 1,864 $ 1,260 $ 3,651 $ 2,476
========= ========= ========= =========
Earnings per share:
Basic-as reported $ 0.19 $ 0.12 $ 0.36 $ 0.23
========= ========= ========= =========
Basic- pro forma $ 0.17 $ 0.11 $ 0.35 $ 0.23
========= ========= ========= =========
Diluted-as reported $ 0.18 $ 0.11 $ 0.34 $ 0.22
========= ========= ========= =========
Diluted-pro forma $ 0.17 $ 0.11 $ 0.34 $ 0.22
========= ========= ========= =========
12
9. DIVIDENDS
On July 22, 2002 and October 22, 2002, the Company declared a cash
dividend on its common stock of $0.07 per share, payable on August 16, 2002 and
November 20, 2002, respectively, to owners of record on August 2, 2002 and
November 8, 2002, respectively. Additionally, on January 29, 2003, the Company's
Board of Directors declared a $0.08 per share cash dividend payable on February
17, 2003 to shareholders of record on February 3, 2003.
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 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 December 31, 2002
was $1.9 million. This compares to net income of $1.3 million for the comparable
quarter in the prior year. Net income for the six-month period ended December
31, 2002 was $3.7 million compared to net income of $2.5 million for the
comparable six-month period ended December 31, 2001. The Company's net interest
margin increased 22 basis points to 3.73% for the three months ended December
31, 2002 from 3.51% for the three months ended December 31, 2001. The net
interest margin increased 21 basis points to 3.73% for the six months ended
December 31, 2002 from 3.52% for the six months ended December 31, 2001. The
return on average assets for the three-month and six-month periods ended
December 31, 2002 and 2001 were 0.94% and 0.93%, respectively, and 0.78% and
0.78%, respectively. The return on average equity for the same periods was 6.08%
and 5.98%, respectively, and 7.95% and 7.96%, 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 and six-month periods ended
December 31, 2002 was $7.3 million, and $14.4 million, respectively. This
compares favorably to $5.5 million and $11.0 million in net interest income for
the respective prior comparable periods. For the three-month and six-month
periods ended December 31, 2002, net interest income increased $1.8 million or
32.4% and $3.5 million or 31.7%, over the prior comparable three-month and
six-month periods. The increases were primarily a result of the combination of
increased balances in average interest-earning assets and a reduction in average
interest rates paid on interest-bearing liabilities which more than offset a
reduction in average yield on interest-earning assets. For the three-month and
six-month periods ended December 31, 2002 the Company's interest rate spread
increased 23 basis points for both periods to 3.06% and 3.05%, respectively,
compared to 2.83% and 2.82% for the respective three-month and six-month periods
ending December 31, 2001.
Average interest-earning assets increased $157.6 million and $154.6
million, or 25.3% and 24.9%, respectively, for the three-month and six-month
periods ended December 31, 2002 compared to the respective prior
13
year periods. Average interest-bearing liabilities for the three-month and
six-month periods ended December 31, 2002 increased $89.8 million and $87.4
million or 17.2% and 16.8%, respectively, over the comparable prior periods. The
primary reason for the increases in interest-earning assets during the 2002
periods was the deployment of net proceeds from the April 2002 Reorganization.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased to 127.85% and 127.69%, respectively, for the three-month
and six-month periods ended December 31, 2002 compared to an average 119.65% and
119.42%, respectively, for the corresponding three-month and six-month periods
ended December 31, 2001. The Company's net interest margin increased 22 basis
points for the three-month period and 21 basis points for the six-month period
ended December 31, 2002 to 3.73% for both periods, compared to 3.51% and 3.52%,
respectively, for the respective prior year periods. The increase in net
interest margin was primarily a result of the increase in the ratio of average
interest-earning assets to average interest-bearing liabilities as a result of
the April 2002 Reorganization.
The following tables present 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 and six-month periods ended December
31, 2002 and 2001. The Company maintained tax-exempt securities for which the
yield has been adjusted to a taxable equivalent yield. Loans receivable include
non-accrual loans.
14
For the Three Months Ended
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) December 31, 2002 December 31, 2001
- --------------------------------------- ----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- ----------
Interest-earning assets:
Loans receivable:
Mortgage loans $ 442,798 $ 8,112 7.29 % $ 430,828 $ 8,395 7.76 %
Consumer loans 10,417 120 4.57 9,990 136 5.40
Commercial business loans 20,242 355 6.96 20,770 375 7.16
--------- ------- --------- --------
Total loans 473,457 8,587 7.22 461,588 8,906 7.68
Securities - taxable 276,743 3,222 4.62 134,070 1,937 5.73
Securities - nontaxable - adjusted to a 17,980 271 5.98 6,110 103 6.69
taxable equivalent yield
Other interest-earning assets 12,861 37 1.14 21,689 100 1.83
--------- ------- --------- --------
Total interest-earning assets 781,041 12,117 6.17 623,457 11,046 7.05
Non-interest-earning assets 16,665 15,590
--------- ---------
Total assets $ 797,706 $ 639,047
========= =========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 97,615 $ 329 1.34 % $ 73,413 $ 302 1.63 %
Savings accounts 75,644 228 1.20 62,398 324 2.06
Certificates of deposit 303,946 2,696 3.52 318,181 3,952 4.93
--------- ------- --------- --------
Total deposits 477,205 3,253 2.70 453,992 4,578 4.00
Total borrowings 131,504 1,528 4.61 65,044 955 5.83
Total escrows 2,173 2 0.37 2,024 3 0.59
--------- ------- --------- --------
Total interest-bearing liabilities 610,882 4,783 3.11 521,060 5,536 4.22
Non-interest-bearing liabilities 63,397 55,274
--------- ---------
Total liabilities 674,279 576,334
Total stockholders' equity 123,427 62,713
--------- ---------
Total liabilities and stockholders' equity $ 797,706 $ 639,047
========= =========
Net interest-earning assets $ 170,159 $ 102,397
========= =========
Net interest income $ 7,334 $ 5,510
======= =======
Net interest rate spread 3.06% 2.83%
==== ====
Net interest margin 3.73% 3.51%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 127.85% 119.65%
====== ======
15
For the Six Months Ended
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) December 31, 2002 December 31, 2001
- --------------------------------------- ----------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ---------- --------- -------- ----------
Interest-earning assets:
Loans receivable:
Mortgage loans $ 434,485 $ 16,113 7.38 % $ 433,274 $ 17,082 7.85 %
Consumer loans 10,320 242 4.65 9,978 272 5.41
Commercial business loans 19,883 703 7.01 20,337 820 8.00
--------- ------- --------- --------
Total loans 464,688 17,058 7.31 463,589 18,174 7.80
Securities - taxable 275,807 6,742 4.85 132,919 4,037 6.02
Securities - nontaxable - adjusted to a 17,051 518 6.03 4,842 164 6.72
taxable equivalent yield
Other interest-earning assets 17,834 128 1.42 19,387 208 2.13
--------- ------- --------- --------
Total interest-earning assets 775,380 24,446 6.27 620,737 22,583 7.24
Non-interest-earning assets 16,872 15,526
--------- ---------
Total assets $ 792,252 $ 636,263
========= =========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 96,714 $ 694 1.42 % $ 71,828 $ 662 1.83 %
Savings accounts 75,180 496 1.31 61,034 634 2.06
Certificates of deposit 305,912 5,635 3.65 319,635 8,365 5.19
--------- ------- --------- --------
Total deposits 477,806 6,825 2.83 452,497 9,661 4.24
Total borrowings 127,061 3,026 4.72 64,850 1,903 5.82
Total escrows 2,365 5 0.42 2,456 7 0.57
--------- ------- --------- --------
Total interest-bearing liabilities 607,232 9,856 3.22 519,803 11,571 4.42
Non-interest-bearing liabilities 61,612 54,266
--------- ---------
Total liabilities 668,844 574,069
Total stockholders' equity 123,408 62,194
--------- ---------
Total liabilities and stockholders' equity $ 792,252 $ 636,263
========= =========
Net interest-earning assets $ 168,148 $ 100,934
========= =========
Net interest income $14,590 $ 11,012
======= ========
Net interest rate spread 3.05% 2.82%
==== ====
Net interest margin 3.73% 3.52%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 127.69% 119.42%
====== ======
INTEREST INCOME. Interest income on loans decreased $319,000 and $1.1
million or 3.6% and 6.1%, respectively, for the three-month and six-month
periods ended December 31, 2002 compared to the three-month and six-month
periods ended December 31, 2001. The overall increase in the average balance of
loans was more than offset by an overall decrease in the average yields earned
for the three-month and six-month periods ended December 31, 2002 which
accounted for the decline in interest income compared to the similar prior year
periods. Interest income on securities increased $1.3 million and $2.9 million
or 63.5% and 65.9%, respectively (adjusting our tax-exempt securities to 5.98%
and 6.03%, respectively, on a tax equivalent basis) for the three-month and
six-month periods ended December 31, 2002 compared to the three-month and
six-month periods ended December 31, 2001. Overall increases in the average
balance of securities more than offset the overall decrease in average yields
earned for the
16
three-month and six-month periods ended December 31, 2002 compared to the
three-month and six-month periods ended December 30, 2001.
INTEREST EXPENSE. Interest expense on deposit accounts decreased $1.3
million and $2.8 million, or 28.9% and 29.4%, respectively, for the three-month
and six-month periods ended December 31, 2002 compared to the similar prior year
periods. The increase in the average balances of deposits was more than offset
by the decrease in average rates paid on deposits. The decrease in average rates
paid was primarily responsible for the overall decrease in interest expense.
Interest expense on borrowings increased $573,000 and $1.1 million, or 60.0% and
59.0% for the three-month and six-month periods ended December 31, 2002 compared
to the similar prior year period. The increase in average balances on
borrowings, primarily related to revenue enhancement strategies, more than
offset the decrease in average borrowing rates.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses for the
three months and six months ended December 31, 2002 was $422,000 and $752,000,
respectively. This compares to $620,000 and $994,000, respectively, for the
corresponding prior fiscal year periods. The Company's allowance for loan losses
as a percentage of its loan portfolio increased to 1.12% at December 31, 2002
compared to 1.03% at June 30, 2002. During the three months ended December 31,
2002 the Company made specific provisions of $338,000 related to a previously
reported non-performing commercial real estate loan with an original balance of
$675,000. Excluding the specific loan provision of $338,000 the Company's
allowance for loan losses as a percentage of its loan portfolio would have been
1.05%. The Company is in the process of foreclosure of the property securing
this loan and anticipates taking possession within the next few months. The
provisions for loan losses are based primarily upon the Company's regular review
of credit quality and is based upon, but not limited to, the following factors:
an evaluation of the portfolio, loss experience, current economic conditions,
volume, growth and composition of the portfolio. Management believes, to the
best of its knowledge, that the Company's allowance represents all known and
inherent losses in the portfolio that are both probable and reasonably estimable
at December 31, 2002, however, no assurance can be given as to the amount or
timing of additional provisions for loan losses in the future as a result of
potential increases in the amount of the Company's non-performing loans in the
remainder of the Company's loan portfolio.
NON-INTEREST INCOME. Non-interest income decreased $308,000, or 32.2% to
$650,000 for the three-month period ended December 31, 2002 compared to $958,000
for the similar prior year period. Non-interest income decreased $350,000, or
23.4% to $1.1 million for the six-month period ended December 31, 2002 compared
to $1.5 million for the similar prior fiscal year period. The decreases were
primarily a result of the Company's reduction in gains on sale of loans and
investments during the second quarter of fiscal 2003. The decrease related to
the gain on sales of loans was $72,000 and $97,000, respectively and the
decrease in gain on sale of securities was $266,000 and $339,000, respectively,
for the three-month and six-month periods ended December 31, 2002 compared to
the similar prior year period. Additionally, loan servicing income decreased
$17,000 and $78,000, respectively for the three-month and six-month periods
ended December 31, 2002 compared to the similar period in 2001. The decrease was
primarily related to a $49,000 increase in the amortization of capitalized loan
servicing rights which reflect accelerated mortgage loan prepayments as a result
of record single-family residential loan re-financings. These decreases were
partially offset by an increase of $47,000 and $164,000, respectively, for the
three-month and six-month periods ended December 31, 2002 in general service
charges and fees.
NON-INTEREST EXPENSE. Non-interest expense increased $739,000, or 19.0% to
$4.6 million for the three-month period ended December 31, 2002 compared to $3.9
million for the similar prior year period. Non-interest expense increased $1.5
million, or 10.0% to $9.2 million for the six-month period ended December 31,
2002 compared to $7.7 million for the similar prior year period. The increases
were primarily a result of general increases in compensation and benefits,
increased Employee Stock Ownership Plan ("ESOP") and increased Recognition and
Retention Plan ("RRP") expense, increased personnel costs due to the opening of
our thirteenth banking office in April 2002 and an increase in staffing
primarily in our lending area. ESOP expense increased $175,000 and $306,000, or
331.4% and 309.1%, respectively, to $228,000 and $405,000 for the three-month
and six-month periods ended December 31, 2002. This compares to $53,000 and
$99,000, respectively for the three-month and six-month periods ended December
31, 2001. The increase in ESOP expense was primarily the result of stock price
appreciation and the expense associated with the additional 513,130 shares
acquired by the ESOP in the April 2002 Reorganization. The RRP expense increased
$55,000 and $55,000, or 134.1% or 67.3%, to $96,000 and $136,000, respectively
for the three-month and six- month periods ended December 31, 2002. This
compares to $41,000 and $81,000, respectively, for the three-month and six-month
periods ended December 31, 2001. The increase was exclusively related to shares
allocated from the 2002 RRP Trust. Increases in compensation expense related to
the operation of our thirteenth office were $42,000 and $89,000, respectively
for the three months and six months ended December 31, 2002. Increases in
occupancy expense related to the operation of our thirteenth banking office were
17
$30,000 to $58,000, respectively for the three months and six months ended
December 31, 2002. Additionally, other expenses increased due to general
increases in back office operations.
INCOME TAX EXPENSE. The provision for income taxes for the three-month and
six-month periods ended December 31, 2002 was $933,000 and $1.9 million,
respectively. This compares to a provision of $641,000 and $1.3 million for the
similar prior year three-month and six-month periods. The increase in provision
for taxes for the three-month and six-month periods ended December 31, 2002
primarily relates to an increase in pre-tax income. The effective tax rate for
the three-month and six-month periods ended December 31, 2002 was 32.7% and
33.2%, respectively.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets of the Company increased by $47.4 million, or 6.2% to
$807.2 million at December 31, 2002 compared to $759.8 million at June 30, 2002.
The increase in assets resulted from securities available for sale and held to
maturity increasing a combined $19.9 million, or 7.4% primarily as a result of
the investment of the net proceeds received in the Company's April 2002
Reorganization and certain leverage strategies funded by Federal Home Loan Bank
advances. Net loans increased $20.4 million, or 4.6% from $443.9 million at June
30, 2002 to $464.3 million at December 31, 2002 due primarily to an increase in
the commercial real estate, single-family residential mortgage, commercial
business and construction loan portfolios. Total liabilities amounted to $681.9
million at December 31, 2002, an increase of $46.5 million, or 7.3% from June
30, 2002. Deposits increased $12.4 million, or 2.3% to $542.2 million, with core
deposits increasing $12.7 million, or 5.7%, to $236.6 million, while borrowings
increased $33.4 million, or 34.1% from June 30, 2002 to December 31, 2002. Total
stockholders' equity increased $858,000 to $125.2 million at December 31, 2002.
The change in stockholders' equity was primarily the result of the combination
of $1.9 million in net income and accumulated other comprehensive income of $3.1
million, which was partially offset by the purchase of shares in the open market
for the Company's 2002 RRP Plan totaling $3.2 million, which are recorded as a
contra-equity account, and dividend payments of $1.6 million during the six
months ended December 31, 2002.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents amounted to $33.5
million and $32.0 million at December 31, 2002 and June 30, 2002, respectively.
Cash and cash equivalents increased during the period as a result of increased
cash flows from loans and mortgage-backed securities and increased deposit
balances.
ASSETS AVAILABLE OR HELD-FOR-SALE. At December 31, 2002, securities
classified available-for-sale and loans classified held-for-sale amounted to
$270.6 million and $7.8 million, respectively. This compares to $254.7 million
in available-for-sale securities and $1.6 million in held-for-sale loans at June
30, 2002. The increase of $15.9 million, or 6.2%, in available-for-sale
securities was part of the Company's investment strategy to increase its
securities portfolio in its continuing efforts to increase net profits without
exposing the Company to unnecessary risk. At December 31, 2002, the Company had
unrealized gains on available- for- sale securities of $3.1 million, net of
unrealized losses, compared to unrealized gains on available- for -sale
securities of $1.9 million at June 30, 2002. The increase in unrealized gains
was a result of a decrease in the general level of interest rates. The increase
of $6.2 million or 395.7% in held for sale loans was part of the Company's
strategy to sell single-family residential mortgage loans to generate
non-interest income and to reduce potential interest rate risk in the future.
LOANS. The net loan portfolio of the Company increased $20.4 million, or
4.6% from $443.9 million at June 30, 2002 to $464.3 million at December 31,
2002. The increase in the Company's net loan portfolio was due to an increase in
the commercial real estate, single-family residential mortgage, commercial
business and construction loan portfolios.
During the second quarter of fiscal 2003, the Company's single-family
residential mortgage loans increased $5.3 million, or 2.9%, construction loans
increased $1.5 million, or 5.1%, commercial real estate and multi-family real
estate loans increased $14.0 million, or 10.4%, and commercial business loans
increased $2.1 million, or 9.8%. Partially offsetting these increases were
declines of $204,000, or 2.1% in consumer loans and $1.9 million, or 2.6% in
home equity loans. Recent changes in the mix of the Company's loan portfolio
reflect the Company's continuing efforts to diversify its loan portfolio and
increase its holdings in loans that generally have higher yields and shorter
terms to maturity and/or repricing than single-family residential mortgage
loans. However, commercial real estate loans, multi-family residential mortgage
loans, construction loans, home equity loans and other consumer loans all
18
generally are deemed to have increased credit risk characteristics in comparison
to single-family residential mortgage loans.
The following table sets forth information with respect to
non-performing assets identified by the Company, including non-accrual loans and
other real estate owned.
(DOLLARS IN THOUSANDS) At December 31, 2002 At June 30, 2002
- --------------------------------------------------------- --------------------- ----------------
Accruing loans past due 90 days or more:
Real estate $ 344 $ -
Commercial business loans 478 200
------------ ------------
Total 822 200
------------ ------------
Non-accrual loans:
Mortgage loans
Single-family residential 1,246 1,897
Commercial real estate and multi-family residential 723 1,179
Construction - -
Home Equity 215 55
Consumer loans 6 104
Commercial business loans 605 724
------------ ------------
Total 2,795 3,959
------------ ------------
Performing troubled debt restructurings 1,503 1,512
Total non-performing loans 5,120 5,671
Other real estate owned, net 85 85
------------ ------------
Total non-performing assets $ 5,205 $ 5,756
============ ============
Non-performing loans to total loans, net of deferred fees 1.09% 1.28%
Non-performing assets to total assets 0.64% 0.76%
Total non-performing assets decreased $551,000, or 9.6%, to $5.2 million at
December 31, 2002 compared to $5.8 million June 30, 2002. The decrease was
primarily related to a decrease in non-performing single family residential
mortgage loans, non-performing commercial and multi-family real estate loans and
non-performing consumer loans.
INTANGIBLE ASSETS. Intangible assets include a core deposit intangible and
an unidentified intangible asset, which represents the excess cost over fair
value of assets acquired over liabilities assumed in a branch acquisition. The
core deposit intangible is being amortized over a 12-year life. At December 31,
2002 the Company had goodwill of $848,000 which is periodically measured for
impairment.
DEPOSITS. The Company's total deposits increased by $12.4 million to $542.2
million at December 31, 2002 compared to $529.8 million at June 30, 2002. This
increase occurred despite the Company being located in a highly competitive
market for deposits. Savings accounts increased $4.2 million or 5.7%, checking
and money market accounts increased $8.5 million or 5.7% and certificates of
deposit decreased $280,000, less than 1.0%. The Company intends to continue its
marketing efforts promoting core deposits in its effort to help fund asset
growth.
19
FEDERAL HOME LOAN BANK ADVANCES. The Company utilizes advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB") primarily as an additional source
of funds to meet loan demand. FHLB advances increased $33.4 million, or 34.1% to
$131.2 million at December 31, 2002 compared to $97.8 million at June 30, 2002.
The Company also uses FHLB advances to fund certain investment strategies
approved by our Board of Directors.
STOCKHOLDERS' EQUITY. Total stockholders' equity of the Company amounted to
$125.2 million, or 15.5% of assets at December 31, 2002 compared to $124.4
million or 16.4% of total assets at June 30, 2002, an increase of $858,000 or
less than 1.0%. Changes in stockholders' equity reflect year-to-date net income
of $3.7 million, as well as an increase of $1.2 million in accumulated other
comprehensive income, primarily as a result of the increase in the value of the
available-for-sale investment securities portfolio. This was partially offset by
the purchase of shares in the open market for the Company's 2002 RRP Plan
totaling $3.2 million, which are recorded as a contra-equity account. Total
stockholders' equity of the Company included unrealized gains, net of taxes, of
$3.1 million and $1.9 million on available-for-sale securities at December 31,
2002 and June 30, 2002, respectively. The Company paid a cash dividend of $0.07
per share for both the quarter ended September 30, 2002 and December 31, 2002.
These regular dividends totaled $1.6 million during the six-months ended
December 31, 2002.
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing, and financing activities. The Company's
primary sources of funds are deposits, amortizations, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
The Company also utilizes borrowings, generally in the form of FHLB advances, as
a source of funds. While scheduled payments from the amortization of loans and
mortgage related securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Company invests excess funds in
short-term interest-earning assets which provide liquidity to meet lending
requirements.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as U.S. Treasury securities. The Company uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a portfolio
of mortgage backed and mortgage related securities and investment securities. At
December 31, 2002, the total approved investment and loan origination
commitments outstanding amounted to $23.8 million. Certificates of deposit
scheduled to mature in one year or less at December 31, 2002 totaled $217.6
million. Based on historical experience, management believes that a significant
portion of maturing certificates of deposit will remain with the Company. The
Company has the ability to utilize borrowings, typically in the form of FHLB
advances as an additional source of funds. The maximum borrowing capacity
available to the Company from the FHLB was $425.8 million as of September 30,
2002, the most recent date for which information is available, based on
qualifying collateral. The Company is required to maintain sufficient liquidity
to ensure its safe and sound operation. The Company anticipates that it will
continue to have sufficient funds, together with borrowings, to meet its current
commitments.
20
CAPITAL
At December 31, 2002, the Bank had regulatory capital which was well in
excess of regulatory limits set by the Office of Thrift Supervision. The current
requirements and the Bank's actual capital levels are detailed below:
Required to Be Well
Capitalized under
Required for Capital Prompt Corrective
Actual Capital Adequacy Purposes Action Provision
--------------------- ---------------------- -----------------------
(DOLLARS IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------- --------- ------- --------- ------- -------- -------
AS OF DECEMBER 31, 2002
- --------------------------------
Tangible capital $ 81,428 10.1% $ 12,105 1.5% $ 16,140 2.0%
(to tangible assets)
Core capital 81,428 10.1% 32,112 4.0% 40,140 5.0%
(to adjusted tangible assets)
Tier I capital 81,428 19.3% N/A N/A 25,321 6.0%
(to risk-weighted assets)
Risk-based capital 86,703 20.6% 33,761 8.0% 42,201 10.0%
(to risk-weighted assets)
AS OF JUNE 30, 2002
- --------------------------------
Tangible capital $ 82,668 10.9% $ 11,393 1.5% $ 15,191 2.0%
(to tangible assets)
Core capital 82,668 10.9% 30,267 4.0% 37,834 5.0%
(to adjusted tangible assets)
Tier I capital 82,668 20.4% N/A N/A 24,311 6.0%
(to risk-weighted assets)
Risk-based capital 87,293 21.5% 32,414 8.0% 40,518 10.0%
(to risk-weighted assets)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the discussion of the Company's asset and liability management
policies as well as the potential impact of interest rate changes upon the
market value of the Company's portfolio equity, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report to stockholders for the year ended June 30, 2002. Management, as
part of its regular practices, performs periodic reviews of the impact of
interest rate changes upon net interest income and the market value of the
Company's portfolio equity. Management closely monitors interest rate risk and
takes appropriate short-term actions to maintain this risk at acceptable levels
while focusing on a longer-term loan diversification plan, which concentrates on
the acquisition of shorter maturity or repricing assets. Based on, among other
factors, such reviews, management believes that there are no material changes in
the market risk of the Company's asset and liability position since June 30,
2002.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that these controls and procedures are
effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
21
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Brenda DiCicco v. Willow Grove Bank, (United States District
Court, Eastern District of Pennsylvania). On October 11, 2002, a lawsuit was
filed against Willow Grove Bank by Ms. DiCicco in her individual capacity as
president and sole shareholder of ATS Products Corp. ("ATS") alleging eight
causes of action related to a line of credit between the Bank and ATS. The
complaint has since been amended to add Mr. Marcell and one present and one
former employee of the Bank as defendants.Thecauses of action are: breach of
contract, breach of oral contract, fraud, negligent misrepresentation, breach of
fiduciary duty, unjust enrichment,conversion and negligence. The plaintiff seeks
compensatory damages in an amount in excess of $75,000, punitive damages,
attorney fees and costs. ATS previously filed suit against Willow Grove Bank in
the U.S. Bankruptcy Court averring similar causes of action. Willow Grove Bank
is vigorously defending the claims made by the plaintiff in both suits and
believes that those claims are without merit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. An annual meeting of stockholders of the Company was held on
November 8, 2002 ("Annual Meeting").
b. Not applicable
c. There were 11,285,566 shares of common stock of the Company
eligible to be voted at the Annual Meeting and 10,411,442 shares
were represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual Meeting
and the vote for each proposal were as follows:
1. Election of directors for a three-year term.
FOR WITHHELD
--- --------
William W. Langan 10,073,804 337,638
A. Brent O'Brien 10,083,206 328,236
Samuel H. Ramsey, III 10,076,533 334,909
2. Proposal to adopt the 2002 Stock Option Plan.
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
6,917,987 792,036 87,525 2,613,894
22
3. Proposal to adopt the 2002 Recognition and Retention
Plan and Trust Agreement.
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
6,422,625 1,285,873 89,050 2,613,894
4. Proposal to ratify the appointment of KPMG LLP, as the
Company's independent auditors for the year ending June
30, 2003.
FOR AGAINST ABSTAIN
--- ------- -------
10,297,891 88,793 24,758
d. Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
Exhibit No. Description
----------- -----------
2.1 Plan of Conversion and Agreement and Plan of
Reorganization (1)
3.1 Articles of Incorporation of Willow Grove Bancorp,
Inc. (1)
3.2 Bylaws of Willow Grove Bancorp, Inc. (1)
4.0 Form of Stock Certificate of Willow Grove Bancorp,
Inc. (1)
10.1 Form of Employment Agreement entered into between Willow
Grove Bank and Frederick A. Marcell Jr. (2)
10.2 Form of Employment Agreement entered into between Willow
Grove Bank and each of Joseph M. Matisoff, Christopher E.
Bell,
Thomas M. Fewer and John T. Powers (2)
10.3 Supplemental Executive Retirement Agreement (2)
10.4 Non-Employee Director's Retirement Plan (as amended
2002) (3)
10.5 1999 Stock Option Plan (4)
10.6 1999 Recognition and Retention Plan and Trust
Agreement (4)
10.7 Amended Incentive Compensation Plan (5)
10.8 2002 Stock Option Plan (6)
10.9 2002 Recognition and Retention Plan and Trust Agreement
(6)
- ---------
(1) Incorporated by reference from the Company's Registration Statement
on Form S-1, filed on December 14, 2001, as amended, and declared
effective on February 11, 2002 (Registration No. 333-75106).
(2) Incorporated by reference from the registration statement on
Form S-1, filed by the Company's predecessor, a federal corporation
also known as Willow Grove Bancorp, Inc (the "Mid-Tier") on
September 18, 1999, as amended, and declared effective on November
12, 1998 (Registration No. 333-63737).
(3) Incorporated by reference from the Company's Form 10-Q for the
quarter ended September 30,2002, filed with the SEC on November
14, 2002 (SEC File No. 000-49706).
(4) Incorporated by reference from the Company's Definitive Proxy
Statement on Schedule 14A filed by the Mid-Tier on June 23, 1999
(SEC File No. 000-25191).
(5) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended June 30, 2002, filed with the SEC on September
30, 2002 (SEC File No. 000-49706).
(6) Incorporated by reference from the Company's Definitive Proxy
Statement on Schedule 14A filed on October 9, 2002 (SEC File
No. 000-49706).
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed by the Company on November 12,
2002 with respect to the Company's press release announcing the results
of the Annual Meeting.
A Current Report on Form 8-K was filed by the Company on October 23,
2002 with respect to the Company's press release announcing earnings
results for the period ended September 30, 2002 and a declaration of a
dividend.
24
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WILLOW GROVE BANCORP, INC.
Date: February 14, 2002 By: /s/ Frederick A. Marcell Jr.
---------------------------------
Frederick A. Marcell Jr.
President and Chief Executive Officer
Date: February 14, 2002 By: /s/ Christopher E. Bell
---------------------------------
Christopher E. Bell
Chief Financial Officer
25
CERTIFICATION
I, Frederick A. Marcell Jr., the President and Chief Executive Officer of Willow
Grove Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Willow Grove Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ Frederick A. Marcell Jr.
-------------------------------------
Frederick A. Marcell Jr.
President and Chief Executive Officer
26
CERTIFICATION
I, Christopher E. Bell, the Senior Vice President, Chief Financial Officer and
Corporate Secretary of Willow Grove Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Willow Grove Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 /s/ Christopher E. Bell
-------------------------------
Christopher E. Bell
Senior Vice President, Chief Financial
Officer and Corporate Secretary
27