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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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)

Registrant's telephone number: (including area code) (215) 646-5405

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
(Title of Class)

        Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ý    NO o

        The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price of $17.76 on December 31, 2003, the last business day of the Registrant's second quarter was $147,568,444 (9,754,138 shares outstanding less 1,445,104 shares held by affiliates at $17.76 per share). Although directors and executive officers of the Registrant and certain employee benefit plans were assumed to be "affiliates" of the Registrant for purposes of the calculation, the classification is not to be interpreted as an admission of such status.

        As of September 8, 2004 there were 9,799,898 shares of the Registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1.

Portions of the Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Part III.

Willow Grove Bancorp, Inc.

FORM 10-K

For the Fiscal Year Ended June 30, 2004

INDEX

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Forward Looking Statements

        This Form 10-K contains certain forward-looking statements and information based upon our beliefs as well as assumptions we have made. In addition, to those and other portions of this document, the words "anticipate," "believe,""estimate," "expect," "intend," "should," and similar expressions, or the negative thereof, as they relate to us are intended to identify forward-looking statements. Such statements reflect our current view with respect to future looking events and are subject to certain risks, uncertainties and assumptions. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, hostilities involving the United States, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting our 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.

PART I

Item 1. Business

        General.    Willow Grove Bancorp, Inc. (the "Company"), a Pennsylvania corporation, was formed to facilitate the reorganization of Willow Grove Bank (the "Bank") from the two-tier mutual holding company form to the stock holding company form of organization. The reorganization was completed on April 3, 2002. The Company issued 6,414,125 shares of common stock in a subscription offering and issued 4,869,375 shares of common stock in exchange for the stock held by the shareholders of the former Willow Grove Bancorp, Inc., the federally chartered stock-form mid-tier holding company. The Bank, which is now a wholly-owned subsidiary of the Company, was originally organized in 1909. In December 1998, the Bank was reorganized from a federally chartered mutual savings bank into a federally chartered stock savings bank in the mutual holding company form of ownership with a "mid-tier" holding company. The Bank is primarily engaged in attracting deposits from the general public and using those funds to invest in loans and security investments. At the present time, the business of the Company is primarily the business of the Bank. In September 2000, Willow Grove Investment Corporation ("WGIC"), a Delaware corporation was formed as a wholly owned subsidiary of the Bank to hold and manage certain securities investments of the Bank. In May 2003, Willow Grove Insurance Agency, LLC (the "Agency"), a Pennsylvania limited liability company was formed by the Bank to conduct permitted fixed rate annuity transactions for the Bank.

        References in this document to "we," "our" or "us" refer to Willow Grove Bancorp, Inc. together with its subsidiary, Willow Grove Bank, unless the context otherwise requires.

        In recent years, we have concentrated our business plan on the following primary goals—changing operations to a full-service community bank, continuing steady growth and maintaining a high level of asset quality. We intend to continue our growth through internal means. To the extent opportunities are available and deemed prudent by management,we also will consider growth through acquisitions of other institutions. We believe our business plan will continue to enhance shareholder value.

        Our principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, funds provided from operations and funds borrowed from outside sources such as the Federal Home Loan Bank ("FHLB") of Pittsburgh. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, commercial real estate and multi-family residential mortgage loans, construction real

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estate loans, home equity loans, consumer loans and commercial business loans. Our major source of income is the interest received on our loan and securities portfolios, while our major expense is interest paid on deposit accounts and borrowings.

        The Office of Thrift Supervision ("OTS") is the Bank's chartering authority and primary regulator. The Bank is also regulated by the Federal Deposit Insurance Corporation ("FDIC"), the administrator for the Savings Association Insurance Fund ("SAIF"). The Bank is also subject to reserve requirements established by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or "FRB"), and we are a member of the FHLB of Pittsburgh, one of the regional banks comprising the FHLB System.

        Our executive offices are located at Welsh and Norristown Roads, Maple Glen, Pennsylvania, and our telephone number is (215) 646-5405. The office for Willow Grove Investment Corporation is 1105 Market Street, Suite 1300, Wilmington, Delaware. The office for Willow Grove Insurance Agency, LLC is located at Welsh and Norristown Roads, Maple Glen, Pennsylvania.

Second Step Conversion

        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"). 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 to the stockholders of Willow Grove Bancorp, Inc., the former federal corporation, which represented an exchange of 2.28019 shares of its 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 resulting from the April 2002 Reorganization.

Available Information

        The Company files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Our SEC filings are available to the public at the SEC's web site at http://www.sec.gov. Members of the public may also read and copy any document we file at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room. In addition, our stock is listed for trading on the Nasdaq National Market and trades under the symbol "WGBC". You may find additional information regarding Willow Grove Bancorp, Inc. at www.nasdaq.com. In addition to the foregoing, we maintain a web site at www.willowgrovebank.com. We make available on our Internet web site copies of Willow Grove Bancorp's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such documents as soon as reasonably practicable after we file such material with, or furnish such documents to, the SEC.

Market Area and Competition

        Our main office is in Montgomery County, Pennsylvania, approximately 20 miles north of downtown Philadelphia. The primary market areas that we serve are: Montgomery County, Bucks County and the northeast section of Philadelphia that borders these counties. To a lesser extent, we provide services to areas of Chester and Delaware counties, the remainder of the City of Philadelphia, and central and southern New Jersey.

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        Most of our direct competition for attracting deposits and originating loans has historically come from savings associations, other savings banks, commercial banks and credit unions. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds, and other non-financial institutions such as securities brokerage firms and insurance companies. In our market area, we estimate that we compete with approximately 97 other financial institutions and numerous securities brokers.

Lending Activities

        General.    At June 30, 2004 our net loan portfolio totaled $524.2 million or 56.88% of our total assets. Historically, our primary emphasis has been the origination of loans secured by first liens on single-family (one-to four-units) residences. In recent years, we have changed the focus of our lending to place more emphasis on home equity loans, construction, commercial real estate and multi-family residential loans and commercial business loans. At June 30, 2004, commercial real estate and multi-family residential loans amounted to $180.9 million, or 34.12% of our total loan portfolio. As of that date, construction loans were $57.0 million or 10.75% of our loan portfolio; commercial business loans totaled $17.7 million or 3.34% of the total loan portfolio. Loans secured by liens on single-family residential properties include first mortgage loans totaling $181.0 million, or 34.15% of the loan portfolio, and $91.8 million of home equity loans and lines of credit, which accounted for 17.32% of the loan portfolio at June 30, 2004.

        The types of loans that we originate are subject to federal and state laws and regulations. Interest rates and fees charged on these loans are affected primarily by the demand for loans by borrowers and the supply of funds available for lending purposes and rates and fees charged by our competitors. Local, national and international economic conditions and their effect on the monetary policies of the Federal Reserve Board, legislative and tax policies and budgetary matters of local, state, and federal governmental bodies affect the supply of funds available and the demand for loans.

        Loan Portfolio Composition.    The following table sets forth the composition of the loan portfolio as of the dates indicated. This data does not include single family loans classified as held for sale which amounted to $1.1 million, $5.3 million, $1.6 million, $2.6 million, and $35.8 million at June 30, 2004, 2003, 2002, 2001 and 2000, respectively.

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        Contractual Principal Repayments and Interest Rates.    The following table sets forth scheduled contractual amortization of the loan portfolio at June 30, 2004. Demand loans, loans having no schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less.

        Of the $490.9 million of loan principal repayments due after June 30, 2005, $315.4 million have fixed rates of interest and $175.5 million have adjustable rates of interest.

        Lending Activity.    Our lending activities are subject to underwriting standards and origination procedures which have been approved by our Board of Directors. We process, underwrite and originate single-family residential mortgage loans on both a retail and wholesale basis. We have developed an extensive network of active residential mortgage brokers and mortgage bankers to support our wholesale production system. These correspondents identify, process and close loans on our behalf based upon rates and terms that we provide to them on a regular basis which correlate to our assessment of our demand for various types of loans. The correspondents forward completed loan applications for our review. Based upon this review, we will determine whether to reject the loan if it fails to meet our prescribed standards or acquire the loan for our portfolio or for sale into the secondary market. Depending upon the various programs we have with the correspondents, loans will be classified as either purchased or originated. When the correspondent advances funds for the closing of a loan we have committed to purchase, it is classified as "purchased". When we provide the funds for the closing of the loan, it is classified as "originated". In either case, we may retain the loan in our portfolio or sell it (on either a servicing released or retained basis) in the secondary market. Retail production is supported through our bank loan officer program whereby loan applications are obtained through our branch network and referrals from local builders, real estate brokers and financial consultants. Single-family residential mortgage loans generally are required to be underwritten in accordance with Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines (this facilitates resale into the secondary market). We also acquire loans that do not conform to FHLMC/FNMA guidelines ("non-conforming" loans) for the portfolio. Non-conforming loans that we place in the portfolio include, but are not limited to, sub-prime, investor loans and non-FNMA "A" paper. Non-conforming loans are underwritten according to our alternative underwriting guidelines. We believe that our underwriting guidelines are consistent with industry standards. These non-conforming loans accounted for approximately 15.85% of our single-family loan portfolio at June 30, 2004.

        In addition to originating loans, the Bank periodically purchases participation interests in larger balance loans, typically multi-family and commercial real estate mortgage loans and construction loans from other financial institutions in our market area. We may purchase these loans to supplement our

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own originations or to facilitate participation relationships to manage borrower concentration risks i.e. loans to one borrower issues. These participations are reviewed for compliance with our underwriting standards before they are purchased. During fiscal 2004 we purchased participation interests of $18.0 million in commercial real-estate loans and $12.8 million in construction loans. In addition, during fiscal 2004, the Bank purchased four pools consisting of an aggregate of 109 single-family residential fixed-rate "jumbo" mortgage loans in the aggregate amount of $45.9 million. Three of the pools were purchased at a modest discount, with the remaining pool purchased at a modest premium. The net aggregate discount on these loan pool purchase was $258,000, which is being accreted into income similar to originated loans. The average outstanding balance of the loans in these pools was $421,000 at the time of purchase. Other than the outstanding balances, which generally exceed secondary market standards, the loans in these pools generally conform to FNMA and FHLMC guidelines. These properties securing the loans in these pools were located across the eastern United States, primarily concentrated in Florida, Pennsylvania, Virginia and Georgia. The loan pools were subject to our due diligence review and conformed to our internal underwriting standards. At June 30, 2004, all the loans in these four loan pools were performing as agreed and have an average current loan to value ratio of 58.8%. The Company anticipates purchasing additional pools to supplement local production of non-conforming product which may encompass further geographic diversification.

        Our loan underwriting function is managed at our operations center located approximately three miles from our main office. The majority of our conforming loans are contractually underwritten by any one of several private mortgage insurance companies to ensure saleability in the secondary market. From time to time we also underwrite conforming loans based on our internal capacity and market conditions. We require a current appraisal prepared by an independent appraiser or an acceptable alternative property valuation on all new mortgage loans. We require title insurance on loans secured by real estate with the exception of certain single-family residential loans originated under $150,000 and most home equity loans originated under $100,000. Hazard insurance is required on all real estate loans. Flood insurance is also required for all loans secured by properties located in a designated flood area.

        Our loan policy authorizes certain officers to approve loans up to certain designated amounts, not exceeding $1.0 million, collectively, in the case of the President and Chief Operating Officer. Loans exceeding individual or collective limits must be approved by: the Management Loan Committee consisting of the President, Chief Operating Officer, other executive officers and other Bank lending vice-presidents; the Director's Loan Committee, consisting of three outside directors, the President, the Chief Operating Officer and Chief Lending Officer or the full Board of Directors. The Director's Loan Committee and the full Board of Directors are also provided with summaries of new loan activity on a routine basis.

        As a federal savings bank, we are limited in the amount of loans we make to any one borrower. This amount is equal to 15% of the Bank's unimpaired capital and surplus (in our case, this amount would be approximately $14.0 million at June 30, 2004), although there are provisions that would allow us to lend an additional 10% of unimpaired capital and surplus if the loans are secured by readily marketable securities. Our aggregate loans to any one borrower have been within these limits. At June 30, 2004, our three largest credit relationships with an individual borrower and related entities amounted to $9.1 million, $8.1 million and $5.9 million; all the loans included in these relationships were performing in accordance with their terms and conditions.

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        The following table shows the activity in our loan portfolio during the periods indicated.

(1)

Excludes loans classified as held for sale at the time of origination.

(2)

Includes $85.6 million in purchased loans for fiscal 2004

        Single-Family Residential Loans.    We utilize our bank loan officer's and a network of mortgage brokers and bankers to originate and purchase conventional single-family (one-to-four-units) mortgage loans. During the year ended June 30, 2004, single-family residential loans originated to be kept in our portfolio amounted to $110.7 million. In addition, we originated $85.5 million of single-family residential mortgage loans for resale in the secondary market. Our total single-family residential mortgage loans originated for portfolio or resale amounted to $196.2 million in the year ended June 30, 2004, of which $155.4 million were originated through our wholesale network and the remaining $42.2 million were originated through our retail sources. Conventional loans are loans that are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Department of Veterans Affairs ("VA"). The majority of our single-family residential mortgage loans are secured by properties located in our primary lending area which includes Montgomery, Bucks and Philadelphia Counties, Pennsylvania. Our residential lending areas have expanded to include northeastern Pennsylvania, central and southern New Jersey and Delaware. At June 30, 2004, single-family residential mortgage loans amounted to $181.0 million, or 34.15% of our total loan portfolio. Due to our strategic plan to diversify the loan portfolio, the single-family portion of our loan portfolio as a percent of the total loan portfolio has decreased during four of the past five years.

        Single-family residential mortgage loans which we purchase or originate for sale generally are underwritten with terms conforming to FHLMC/FNMA guidelines. Loans purchased or originated for our portfolio, may conform to these guidelines, may exceed the conforming loan amount for those agencies, or may otherwise not comply with the underwriting standards of the agencies for a variety of reasons, including credit risk. We remain active in selling conforming loans, typically 30 year fixed rate loans, in excess of our portfolio needs or as part of our interest rate risk management strategy, in the secondary market. We have generally sold loans to three national investors who purchase our loans primarily on a best efforts, servicing released basis. This arrangement, although not eliminating all risks associated with secondary market activity, can provide an additional source of non-interest income. As

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of June 30, 2004, $1.1 million of our single-family residential mortgage loans were classified as held-for-sale. During the year ended June 30, 2004, we sold an aggregate of $90.3 million of single-family residential mortgage loans at a gain of $627,000 while for the years ended June 30, 2003 and 2002, we had loan sales of $74.8 million and $77.8 million, respectively, at a gain of $1.2 million and $519,000, respectively. Although we anticipate continuing sales of loans in the secondary market, there can be no assurance that this activity will continue as currently structured or result in the realization of non-interest income. Low interest rates among other factors contributed to our increased sales activity over the past three years.

        Interest rates on our single-family residential mortgage loans either are fixed for the life of the loan ("fixed-rate") or are subject to adjustment at certain pre-determined dates throughout the life of the loan ("ARM"). Our fixed-rate loans generally mature in 10, 15, 20 or 30 years, and have equal monthly payments to repay the loan with interest by the end of the loan term. At June 30, 2004, the fixed-rate portion of our residential mortgage loan portfolio which includes single-family real estate loans and home equity loans, totaled $204.3 million which was 74.9% of the total single-family residential loans plus home equity loans outstanding at that date.

        We offer a variety of ARM loans. These loans have a pre-determined interest rate for a specified period of time ranging from one to ten years. After this initial period, the interest rate will adjust on a periodic basis in accordance with a designated index such as the one-year US Treasury yield adjusted to a constant maturity ("CMT") plus a stipulated margin. Also, ARM loans generally carry an annual limit for rate changes of 1% or 2%, and a maximum amount the rate can increase or decrease from the initial rate of 4% to 6% during the life of the loan. From time to time, we offer ARM loans with an initial rate less than the fully-indexed rate (the index at the time of origination plus the stipulated margin). These loans are underwritten based upon the borrower making payments calculated at the fully-indexed rate. Our ARM loans require that any payment adjustment caused by a change in the interest rate result in full amortization of the loan by the end of the original loan term, and no portion of the payment increase is permitted to be added to the principal balance of the loan, so-called negative amortization. At June 30, 2004, $68.5 million or 25.1% of our residential mortgage loan portfolio, which includes single-family real estate loans and home equity loans, were adjustable rate.

        ARM loans decrease some of the risks associated with changing interest rates. However, increases in the amount of a borrower's payment due to interest rate increases may affect the borrower's ability to repay the loan, thereby increasing the potential for default. To date, we have not experienced a material impact as a result of this additional credit risk associated with ARM loans, and believe that this risk is less than the interest rate risk of holding fixed-rate loans in a rising interest rate environment.

        Such factors as consumer preferences, the general level of interest rates, competition, and the availability of funds affect the amount of ARM loans we originate or purchase. Although we anticipate that we will continue to offer ARM loans, there can be no assurance that we can originate a sufficient amount of such loans to increase or maintain the percentage of such loans in our portfolio.

        Generally the largest single-family mortgage loan we originate or purchase does not exceed $500,000. In addition, our maximum loan-to-value ratio (the rate of the loan amount to the lesser of the appraised value or sales price—"LTV") is 95%. Some special first time homebuyer programs have loan to value ratios of 100%. In all cases when the loan to value ratio exceeds 80%, we require the borrower to maintain private mortgage insurance until the loan balance is reduced to 80% of the original fair market value.

        Home Equity Loans.    In recent years, we have increased our emphasis on the origination of home equity loans and lines of credit, due to their shorter maturities (the maximum term of our home equity loans is 20 years with the exception of purchase money second mortgage loans whose maximum term may be up to 30 years) and generally higher interest rates. A home equity loan is a fixed-rate loan

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where the borrower receives the total loan amount at a closing and makes monthly payments to repay the loan within a specific time period. Home equity lines of credit are a revolving line of credit with a variable rate and no stated maturity date. The borrower may draw on this account (up to the maximum credit amount) and repay this line at any time. At June 30, 2004 we had $91.8 million or 17.32% of the total loan portfolio in home equity loans and lines of credit outstanding. Of the $91.8 million outstanding at June 30, 2004, $16.8 million were in lines of credit. The unused portion of equity lines of credit was $19.7 million at that date. Despite increased amortization and prepayments on home equity loans due to the low level of interest rates in recent periods, the outstanding balance of home equity loans held at June 30, 2004 increased $18.9 million or 25.8% from June 30, 2003.

        Home equity loans and lines of credit are secured by the borrower's residence, and we generally obtain a second lien position on these loans. We offer home equity programs in amounts, when combined with the first mortgage, up to 100% of the value of the property securing the loan. In addition to originating home equity loans through our branch offices, we rely considerably on purchased loans from our network of correspondents.

        Commercial Real Estate and Multi-Family Residential Real Estate Loans.    At June 30, 2004 commercial real estate and multi-family residential loans amounted to $180.9 million or 34.12% of the total loan portfolio. This compares to $155.9 million or 37.14% at June 30, 2003.

        Our commercial real estate and multi-family residential loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, residential properties with five or more units, non-FNMA eligible single-family residential investment properties and other properties used for commercial and multi-family purposes located in our market area. Our commercial and multi-family real estate loans tend to be originated in an amount less than $3.0 million but will occasionally exceed that amount. At June 30, 2004, the average commercial and multi-family residential loan size was $392,000. The five largest commercial real estate and multi-family residential loans outstanding at June 30, 2004, were $5.5 million, $5.0 million, $4.4 million, $3.4 million and $3.4 million and all of such loans were performing in accordance with their terms at such date. During the year ended June 30, 2004, our commercial real estate and multi-family loan portfolio grew by $25.0 million, or 16.0% as the result of originations, participation purchases and the conversion of loans from construction to permanent status. The relatively low interest rate environment during the year ended June 30, 2004 stimulated increased amortization and prepayments which partially offset the total amount of multi-family and commercial real estate originations of $64.4 million during the year.

        Although terms for commercial real estate and multi-family loans vary, our underwriting standards generally allow for terms up to 20 years with monthly amortization over the life of the loan and LTV ratios of not more than 80%. Interest rates are either fixed or adjustable, based upon designated market indices such as the 5-year Treasury CMT or 5-year FHLB of Pittsburgh advance rate plus a margin, and fees ranging from 0.5% to 1.5% are generally charged to the borrower at the origination of the loan. Prepayment fees are generally charged on most commercial real estate and multi-family loans in the event of early repayment. Generally we obtain personal guarantees of the principals as additional security for commercial real estate and multi-family real estate loans.

        Commercial real estate and multi-family real estate lending involves different risks than single-family residential lending. These risks include, but are not limited to, larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower's business. These risks can be affected by supply and demand conditions in the project's market area of rental housing units, office and retail space, warehouses, and other commercial space. We attempt to minimize these risks by limiting our loans to proven businesses, only considering properties with existing operating performance which can be analyzed, using conservative debt coverage ratios in our underwriting, and periodically monitoring the operation of the business or project and the physical condition of the property. As of June 30, 2004, $48,000, or 0.03% of our commercial real estate and multi-family residential mortgage loans were on non-accrual status the same amount $48,000 or 0.03% as at June 30, 2003.

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        Various aspects of a commercial and multi-family loan transaction are evaluated in our effort to mitigate the additional risk in these types of loans. In our underwriting procedures, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally, we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 115%. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers are obtained on each loan to substantiate the property's market value, and are reviewed by us prior to the closing of the loan.

        Construction Loans.    We originate construction loans for residential and commercial uses within our market area. We generally limit originated construction loans to builders and developers with whom we have an established relationship, or who are otherwise known to officers of the Bank. Additionally we have been introduced to other borrowers through certain participation arrangements primarily from four other local financial institutions. These loans are underwritten with substantially similar guidelines to our own. Generally, we require the lead lender to maintain a minimal interest at least equal to our own interest. Construction loans outstanding at June 30, 2004 were $57.0 million, or 10.75% of total loans, compared to $36.2 million or 8.62% of total loans at June 30, 2003.

        Our construction loans generally have variable rates of interest, a maximum term to maturity of three years and LTV ratios less than 80%. Residential construction loans to developers are made on either a pre-sold or speculative (unsold) basis. Limits are placed on the number of units that can be built on a speculative basis based upon the reputation and financial position of the builder, his/her present obligations, the location of the property and prior sales in the development and the surrounding area. Generally a limit of two to six model homes is permitted per project.

        As a condition of any commitment on a construction loan, we require that an independent appraiser prepare an appraisal of the property which results are satisfactory to the Bank. We also review and inspect each project at its inception and prior to every disbursement of loan proceeds. Disbursements are made after inspections based upon a percentage of project completion. Monthly payment of interest is required on all construction loans.

        We also make construction loans for the acquisition and development of land for sale (i.e. roads, sewer and water lines). We make these loans only in conjunction with a commitment for a construction loan for the units to be built on the site. These loans are secured by a lien on the property and are generally limited to a LTV ratio of 75% of the appraised value. The loans have a variable rate of interest and require monthly payments of interest. The principal of the loan is repaid as units are sold and released. Generally, all of our loans of this type are in our market area and are to developers with whom we have established relationships. In most cases, we also obtain personal guarantees from the borrowers.

        Construction and land loans generally are considered to involve a higher level of risk than single-family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effect of economic conditions on developers, builders and projects. Additional risk is also associated with construction lending because of the inherent difficulty in estimating both a property's value at completion and the estimated cost (including interest) to complete a project. The nature of these loans is such that they are more difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not pre-sold and thus pose a greater potential risk than construction loans to individuals on their personal residences. At June 30, 2004, our four largest construction loans had outstanding balances of $4.9 million, $4.6 million, $4.3 million, and $3.8 million and all were performing in accordance with the terms of their agreements. At June 30, 2004, our fifth largest construction loan was a $3.6 million loan representing a 25.3% loan participation interest in the construction of a commercial real estate office building located in Montgomery County in the suburbs of Philadelphia. Although the loan was never delinquent, it fell behind in anticipated project occupancy projections and the lenders, including ourselves, agreed to modify the terms of the loan to, among

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other things, extend the loan term maturity. The borrower also was permitted to obtain additional subordinated financing from non-participant lenders. As a condition of the loan modification we received a loan principal payment of $800,000. Based on a recent increase in project occupancy, the loan has been upgraded to special mention from its previous classification as substandard as of June 30, 2003.

        In order to mitigate some of the risks inherent to construction lending, we inspect properties under construction, review construction progress prior to advancing funds, work with builders who have established relationships, and obtain personal guarantees from the principals.

        Commercial Business Loans.    At June 30, 2004, we had $17.7 million in commercial business loans, or 3.34% of total loans, compared to $20.5 million at June 30, 2003, a decrease of $2.9 million or 13.9%. At June 30, 2004 the average balance of the Bank's commercial business loans was $82,000. During the year ended June 30, 2004, we originated or advanced additional funds on business lines of credit in the amount of $12.4 million. These originations were offset by increased amortization and prepayments of loans primarily due to the continued low interest rate environment and as previously originated larger balance loans were repaid and replaced with smaller balance new originations. We began originating loans to small-to-mid-sized businesses in our market area in May 1997. Since that time, we have hired commercial lenders to actively solicit commercial business loans as well as commercial real estate and multi-family real estate loans. During fiscal 2002 and 2003, we generally did not originate new commercial business loans in amounts exceeding $250,000. Since that time, management undertook a process designed to enhance the Company's commercial business lending function. During fiscal 2003 we hired a Chief Lending Officer, experienced in business lending, and a Credit Risk Manager whose responsibilities include reviewing existing systems and policies, establishing or improving procedures, where necessary, and training new and existing personnel with respect to the origination and oversight of commercial business loans. During fiscal 2004, despite the Company's efforts to increase originations of commercial business loans, as a result of the full implementation of its enhanced policies and procedures with respect to such loans, the portfolio declined. However, it is anticipated that the recent portfolio decline will be reversed during fiscal 2005. We believe that these types of loans assist in our asset/liability management since they generally provide shorter maturities and/or adjustable rates of interest in addition to generally having higher rates of return which are designed to compensate for the additional credit risk associated with these loans.

        Generally, the Bank provides secured revolving lines of credit for short term working capital support of a business'accounts receivables and inventory. Typically the secured revolving line of credit is collateralized based upon an advance rate of up to 80% of eligible accounts receivable and up to 30% of finished goods inventory. Secured term loan financing is provided for the acquisition of fixed business assets, such as real property, vehicles, equipment and machinery. Generally, we provide financing up to 80% of the purchase price for the new fixed assets and up to 70% of book value for pre-owned fixed assets. In addition to business assets pledged as collateral, most commercial business loans are personally guaranteed by the principal owner(s) of the borrower. Interest rates are adjustable, indexed to a published prime rate of interest or fixed. At June 30, 2004, the Bank's five largest commercial business loans were $507,000, $380,000, $336,000, $320,000 and $311,000 and all such loans were performing in accordance with their terms with the exception of the $320,000 credit which, as of June 30, 2004, was deemed to be impaired and was on non-accrual status. The loan is secured by the borrower's principal residence and foreclosure proceedings have been initiated. The loan was written down $633,000, to its current value of $320,000, during the fiscal year.

        Generally, commercial business loans have been characterized as having higher risks associated with them than single-family mortgage loans. We have hired individuals, experienced in this type of lending, and have implemented policies and procedures which we deem to be prudent. As of June 30, 2004, the Bank had $698,000 of non-accrual commercial business loans compared to $360,000 at

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June 30, 2003. Charge-offs of commercial business loans amounted to $658,000 during the year ended June 30, 2004 compared to $103,000 in the year ended June 30, 2003.

        Other Consumer Lending Activities.    In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans primarily consisting of loans secured by automobiles and to a much lesser extent deposit account loans, and unsecured personal loans. In addition to originating consumer loans we facilitate the funding of student loans through our banking offices in conjunction with American Education Services ("AES/PHEAA"). Consumer loans are originated and facilitated primarily through existing and walk-in customers and direct advertising. At June 30, 2004, $1.7 million, or 0.32% of our total loan portfolio consisted of these types of loans. This compares to $2.3 million of consumer loans, or 0.55% of the total loan portfolio at June 30, 2003.

        Consumer loans, other than loans secured by deposit accounts, generally have higher interest rates and shorter terms than residential loans, however they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. In the fiscal year ended June 30, 2004, there were charge-offs, net of recoveries totaling $10,000 related to other consumer loans. This compares to $4,000 in net consumer loan charge-offs in the fiscal year ended June 30, 2003.

Asset Quality

        General.    As a part of our efforts to maintain asset quality, we have developed and implemented an asset classification system in conjunction with federal regulations. All of our assets are subject to this classification system. Loans are periodically reviewed and the classifications reviewed at least quarterly by the Asset Quality Committee of the Board of Directors.

        When a borrower fails to make a scheduled payment, we attempt to cure the delinquency by making personal contact with the borrower. Initial contacts are generally made 16 days after the date the payment is due. In most cases, delinquencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. We generally work with borrowers to resolve such problems, however, when the account becomes 90 days delinquent, we institute foreclosure or other proceedings, as necessary, to minimize any potential loss.

        On loans which we consider the collection of principal or interest payments doubtful, we cease the accrual of interest income ("non-accrual" loans). On loans more than 90 days past due, as to principal and interest payments, it is our policy to discontinue accruing additional interest and reverse any interest currently accrued (unless we determine that the loan principal and interest are fully secured and in the process of collection). On occasion, we may take this action earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan. Interest income is not accrued on these loans until the borrower's financial condition and payment record demonstrate an ability to service the debt.

        Real estate which we acquire as a result of foreclosure or deed-in-lieu of foreclosure is classified as real estate owned until sold. Real estate owned is recorded at the lower of cost or fair value less estimated selling cost. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of real estate owned are reflected in operations, as incurred.

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        Delinquent Loans.    The following table sets forth information concerning delinquent loans at the dates indicated. The amounts presented represent the total outstanding principal balances of the related loans rather than the actual payment amounts that are past due.

        Loans delinquent 30 to 89 days amounted to $1.5 million at June 30, 2004 compared to $4.5 million at June 30, 2003. Management continues to regularly monitor all delinquent loan activity. Management does not consider the current level of delinquencies to be of any significant concern as, based upon past experience, most loans, with the exception of commercial business loans, are expected to return to fully performing status without going to non-accrual status. In any event, management believes that these loans are adequately collateralized.

        Non-Performing Assets.    The following table sets forth information with respect to non-performing assets we have identified, including non-accrual loans and other real estate owned. The decrease in non-performing assets from $4.1 million at June 30, 2003 to $3.2 million at June 30, 2004 was the result of decrea