UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

Willow Grove Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  ý                                                        NO  o

 

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

 

YES  ý                                                        NO  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

 

The Registrant had 10,179,359 shares of common stock issued and outstanding as of May 14, 2004.

 

 

WILLOW GROVE BANCORP, INC.

 

INDEX

 

PART I			FINANCIAL INFORMATION
	Item 1.			Financial Statements (unaudited)
				Consolidated Statements of Financial Condition at March 31, 2004 and June 30, 2003
				Consolidated Statements of Operations – For the Three and Nine Months ended March 31, 2004 and 2003
				Consolidated Statements of Cash Flows – For the Nine Months ended March 31, 2004 and 2003
				Notes to the unaduited Consolidated Financial Statements
	Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.			Quantitative and Qualitative Disclosures about Market Risk
	Item 4.			Controls and Procedures
PART II		OTHER INFORMATION
	Item 1.			Legal Proceedings
	Item 2.			Changes in Securities,Use of Proceeds and Issuer Purchases of Equity Securities
	Item 3.			Defaults upon Senior Securities
	Item 4.			Submission of Matters to a Vote of Security Holders
	Item 5.			Other Information
	Item 6.			Exhibits and Reports on Form 8-K

 

2

 

Willow Grove Bancorp, Inc.

Consolidated Statements of Financial Condition

 

(Dollars in thousands, except share data)		At March 31, 2004			At June 30, 2003
Assets
Cash and cash equivalents:
Cash on hand and non-interest-earning deposits		$	10,055		$	11,084
Interest-earning deposits		65,710			86,956
Total cash and cash equivalents		75,765			98,040
Securities:
Available for sale (amortized cost of $237,610 and $288,893, respectively)		239,397			291,885
Held to maturity (fair value of $26,358 and $17,995, respectively)		25,930			17,320
Loans (net of allowance for loan losses of $5,058 and $5,312, respectively)		468,644			413,799
Loans held for sale		17,155			5,293
Accrued income receivable		3,421			3,520
Property and equipment, net		6,124			6,364
Intangible assets		958			1,021
Other assets		10,143			7,882
Total assets		$	847,537		$	845,124
Liabilities and Stockholders’ Equity
Deposits		$	570,740		$	586,643
Federal Home Loan Bank advances		159,824			132,557
Advance payments from borrowers for taxes		2,165			2,904
Accrued interest payable		829			933
Other liabilities		3,979			4,957
Total liabilities		737,537			727,994
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; (40,000,000 authorized; 11,420,925 and 11,363,613 issued at March 31, 2004 and June 30, 2003, respectively)		114			114
Additional paid-in capital		84,321			83,542
Retained earnings-substantially restricted		52,925			51,049
Accumulated other comprehensive income		1,108			1,855
Obligation of deferred compensation plan		525			—
Treasury stock at cost, 1,272,962 and 656,700 at March 31, 2004 and June 30, 2003, respectively		(20,793		)	(10,356		)
Unallocated common stock held by
Employee Stock Ownership Plan (ESOP)		(5,612		)	(5,959		)
Recognition and Retention Plan Trust (RRP)		(2,588		)	(3,115		)
Total stockholders’ equity		110,000			117,130
Total liabilities and stockholders’ equity		$	847,537		$	845,124

 

See accompanying Notes to the Unaudited Consolidated Financial Statements

 

3

 

Willow Grove Bancorp, Inc.

Consolidated Statements of Operations

 

		For the Three Months Ended March 31,						For the Nine Months Ended March 31,
(Dollars in thousands, except per share data)		2004			2003			2004			2003
Interest and dividend income:
Loans		$	7,283		$	8,351		$	21,687		$	25,409
Securities, primarily taxable		2,872			3,133			8,761			10,363
Total interest income		10,155			11,484			30,448			35,772
Interest expense:
Deposits		2,099			3,027			7,165			9,853
Borrowings		1,487			1,494			4,134			4,521
Advance payments from borrowers for taxes		1			3			4			7
Total interest expense		3,587			4,524			11,303			14,381
Net interest income		6,568			6,960			19,145			21,391
Provision for loan losses		170			110			330			862
Net interest income after provision for loan losses		6,398			6,850			18,815			20,529
Non-interest income:
Service charges and fees		525			435			1,712			1,352
Realized gain on sale of:
Loans held for sale		110			292			460			551
Securities available for sale		158			629			668			636
Increase in cash surrender value of life insurance		63			—			192			—
Loss on disposition of borrowings		—			(538		)	—			(538		)
Loan servicing (loss), net		(4		)	(1		)	(25		)	(40		)
Total non-interest income		852			817			3,007			1,961
Non-interest expense:
Compensation and employee benefits		3,180			2,975			9,522			8,674
Occupancy		405			380			1,135			1,070
Furniture and equipment		284			274			794			757
Federal insurance premium		22			22			66			66
Amortization of intangible assets		21			27			63			77
Data processing		199			181			582			518
Advertising		108			104			403			371
Community enrichment		31			42			92			115
Deposit account services		212			212			663			618
Professional fees		175			125			599			389
Other expense		528			445			1,370			1,355
Total non-interest expense		5,165			4,787			15,289			14,010
Income before income taxes		2,085			2,880			6,533			8,480
Income tax expense		604			943			1,957			2,804
Net Income		$	1,481		$	1,937		$	4,576		$	5,676
Earnings per share:
Basic		$	0.16		$	0.19		$	0.49		$	0.55
Diluted		$	0.15		$	0.18		$	0.46		$	0.52
Cash dividends declared per share		$	0.10		$	0.08		$	0.28		$	0.22
Weighted average basic shares outstanding		9,272,735			10,222,816			9,236,256			10,189,791
Weighted average diluted shares outstanding		9,803,112			10,798,153			9,773,574			10,732,569

 

See accompanying Notes to the Unaudited Consolidated Financial Statements

 

4

 

Willow Grove Bancorp, Inc.

Consolidated Statements of Cash Flows

 

		For the Nine Months Ended March 31,
(Dollars in thousands)		2004			2003
Net cash flows from operating activities:
Net income		$	4,576		$	5,676
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		742			708
Amortization of premium and accretion of discount, net		1,022			810
Amortization of intangible assets		63			77
Provision for loan losses		330			862
Gain on sale of loans available for sale		(460		)	(551		)
Gain on sale of securities available for sale		(668		)	(636		)
(Increase) decrease in deferred loan fees		(377		)	234
Decrease in accrued income receivable		99			167
Increase in other assets		(1,813		)	(5,462		)
(Decrease) increase in accrued interest payable		(104		)	116
(Decrease) increase in other liabilities		(978		)	112
Expense of ESOP and RRP		1,333			1,016
Modification of debt expense		—			538
Originations and purchases of loans held for sale		(65,637		)	(53,565		)
Proceeds from sale of loans held for sale		54,235			52,580
Net cash (used in) provided by operating activities		$	(7,637	)	$	2,682
Cash flows from investing activities:
Net increase in loans		(54,468		)	(19,669		)
Purchase of securities available for sale		(128,600		)	(175,412		)
Purchase of securities held to maturity		(7,000		)	(3,961		)
Proceeds from sales, calls and maturities of securities available for sale		107,722			104,702
Proceeds from sales and calls of securities held to maturity		5,000			600
Principal repayments of securities available for sale		65,197			52,459
Proceeds from sale of other real estate owned		—			85
Purchase of property and equipment		(502		)	(769		)
Net cash used in investing activities		$	(12,651	)	$	(41,965	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(15,903		)	35,665
Net decrease in FHLB advances with original maturity less than 90 days		(5,000		)	—
Increase in FHLB advances with original maturity greater than 90 days		66,917			43,250
Repayment of FHLB advances with original maturity greater than 90 days		(34,650		)	(11,336		)
Net decrease in advance payments from borrowers for taxes		(739		)	(712		)
Dividends paid		(2,700		)	(2,306		)
Acquisition of stock for Recognition and Retention Plan		—			(3,194		)
Purchase of stock for treasury		(9,912		)	—
Net cash (used in) provided by financing activities		$	(1,987	)	$	61,367
Net (decrease) increase in cash and cash equivalents		$	(22,275	)	$	22,084
Cash and cash equivalents:
Beginning of period		98,040			31,986
End of period		$	75,765		$	54,070
Supplemental disclosures of cash and cash flow information:
Interest paid		11,407			14,265
Income taxes paid		3,196			1,849
Non-cash items:
Change in unrealized gain on securities available for sale (net of taxes of ($458) and ($423) in 2004 and 2003, respectively)		(747		)	674
Loans transferred to other real estate owned		64			391

 

See accompanying Notes to the Unaudited Consolidated Financial Statements

 

5

 

WILLOW GROVE BANCORP, INC.

 

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                      Summary of Significant Accounting Policies

 

Description of Business

 

Willow Grove Bancorp, Inc. (the “Company”) provides a full range of banking services through its wholly-owned subsidiary, Willow Grove Bank (the “Bank” or  “Willow Grove”) which has 14 branches in Dresher, Willow Grove, Maple Glen, Warminster (2), Hatboro, Huntington Valley, Roslyn, Philadelphia (3 – Somerton, Rhawnhurst and Bustleton), North Wales, Southampton and Holland, Pennsylvania.  All of the branches are full-service and offer commercial and retail banking products and services.  These products include checking accounts (interest and non-interest bearing), savings accounts, certificates of deposit, business loans, real estate loans, and home equity loans.  The Company is subject to competition from other financial institutions and other companies that provide financial services.  The Company is subject to the regulations of certain federal banking agencies and undergoes periodic examinations by those regulatory authorities.

 

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

 

In September 2000, Willow Grove Investment Corporation , a Delaware corporation was formed as a wholly owned subsidiary of the Bank to conduct the investment activities of the Bank. In May 2003, Willow Grove Insurance Agency, LLC , a Pennsylvania limited liability company was formed by the Bank to engage in sales of fixed-rate annuity products for the Bank.

 

2.                                      Basis of Financial Statement Presentation

 

The accompanying consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”).  However, all normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of these financial statements, have been included.  These financial statements should be read in conjunction with the audited financial statements and the notes thereto for the Company for the year ended June 30, 2003, which are included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003 (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, 2004.

 

The Company has prepared its accompanying consolidated financial statements in accordance with  GAAP as applicable to the banking industry.  Certain amounts in prior years are reclassified for comparability to current year’s presentation.  Such reclassifications, when applicable have no effect on net income.  The consolidated financial statements include the balances of the Company and its wholly owned subsidiary.  All material inter-company

 

6

 

balances and transactions have been eliminated in consolidation.  References to the Company include the Bank unless otherwise noted.

 

In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of financial condition and revenue and expense for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near-term include the determination of the allowance for loan losses.

 

3.                                      Earnings Per Share

 

Earnings per share, basic and diluted, were  $0.16 and $0.15, respectively, for the three months ended March 31, 2004, compared to $0.19 and $0.18 for the three months ended March 31, 2003, respectively.  Earnings per share, basic and diluted, were $0.49 and $0.46, for the nine months ended March 31, 2004, respectively, compared to  $0.55 and $0.52 for the nine months ended March 31, 2003, respectively.

 

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

 

7

 

		For the Three Months Ended March 31, 2004						For the Nine Months Ended March 31, 2004
(Dollars in thousands, except per share data)		Basic			Diluted			Basic			Diluted
Net income		$	1,481		1,481			$	4,576		4,576
Dividends on unvested common stock awards		(24		)	(24		)	(82		)	(82		)
Income available to common stockholders		$	1,457		$	1,457		$	4,494		$	4,494
Weighted average shares outstanding		9,272,735			9,272,735			9,236,256			9,236,256
Effect of dilutive securities:
Options		—			326,113			—			333,054
Unvested common stock awards		—			204,264			—			204,264
Adjusted weighted average shares used in earnings per share computation		9,272,735			9,803,112			9,236,256			9,773,574
Earnings per share		$	0.16		$	0.15		$	0.49		$	0.46

 

		For the Three Months Ended March 31, 2003						For the Nine Months Ended March 31, 2003
(Dollars in thousands, except per share data)		Basic			Diluted			Basic			Diluted
Net income		$	1,937		$	1,937		$	5,676		$	5,676
Dividends on unvested common stock awards		(27		)	(27		)	(45		)	(45		)
Income available to common stockholders		$	1,910		$	1,910		$	5,631		$	5,631
Weighted average shares outstanding		10,222,816			10,222,816			10,189,791			10,189,791
Effect of dilutive securities:
Options		—			252,227			—			219,668
Unvested common stock awards		—			323,110			—			323,110
Adjusted weighted average shares used in earnings per share computation		10,222,816			10,798,153			10,189,791			10,732,569
Earnings per share		$	0.19		$	0.18		$	0.55		$	0.52

 

The Company has two stock-based option plans described more fully in Note 9 of the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.  The Company accounts for both plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  As a result, stock based employee compensation cost is not reflected in net income, as all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of the grant.  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.

 

8

 

		For the Three Months Ended March 31,						For the Nine Months Ended March 31,
(Dollars in thousands), except per share data		2004			2003			2004			2003
Income available to common stockholders		$	1,457		$	1,910		$	4,494		$	5,631
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(76		)	(79		)	(229		)	(148		)
Pro forma net income		$	1,381		$	1,831		$	4,265		$	5,483
Earnings per share:
Basic-as reported		$	0.16		$	0.19		$	0.49		$	0.55
Basic-pro forma		$	0.15		$	0.18		$	0.46		$	0.54
Diluted-as reported		$	0.15		$	0.18		$	0.46		$	0.52
Diluted-pro forma		$	0.14		$	0.17		$	0.44		$	0.51

 

4.                                      Loan Portfolio

 

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

 

		At March 31, 2004					At June 30, 2003
(Dollars in thousands)		Amount			Percentage of Total		Amount			Percentage of Total
Mortgage loans:
Single-family residential		$	164,302		34.66	%	$	131,821		31.40	%
Commercial real estate and multi-family residential		160,470			33.86		155,892			37.14
Construction		45,908			9.69		36,191			8.62
Home equity		82,334			17.37		72,990			17.39
Total mortgage loans		453,014			95.58		396,894			94.55
Consumer loans		1,815			0.38		2,324			0.55
Commercial business loans		19,152			4.04		20,549			4.90
Total loans receivable		$	473,981		100.00	%	$	419,767		100.00	%
Allowance for loan losses		(5,058		)			(5,312		)
Deferred net loan origination fees		(279		)			(656		)
Loans receivable, net		$	468,644				$	413,799

 

The following is a summary of the activity in the allowance for loan losses for the nine months ended March 31, 2004 and 2003:

 

9

 

		For the Nine Months Ended March 31,
(Dollars in thousands)		2004			2003
Balance at the beginning of  period		$	5,312		$	4,626
Plus: Provisions for loan losses		330			862
Less charge-offs for:
Mortgage loans		58			284
Consumer loans		4			4
Commercial business loans		657			93
Total charge-offs		719			381
Plus: Recoveries		135			1
Balance at the end of the period		$	5,058		$	5,108

 

10

 

5.                                      Securities

 

The amortized cost and estimated fair value of held to maturity and available for sale securities at March 31, 2004 and June 30, 2003 are as follows:

 

		At March 31, 2004
(Dollars in thousands)		Amortized Cost			Unrealized Gains			Unrealized Losses			Estimated Fair Value
Held to Maturity:
Municipal securities		$	18,930		$	398		$	—		$	19,328
US government agency securities		7,000			30			—			7,030
Total securities held to maturity		$	25,930		$	428		$	—		$	26,358
Available for Sale:
US government agency securities		$	69,067		$	642		$	(133	)	$	69,576
Mortgage backed securities:
FNMA		84,677			1,158			(209		)	85,626
GNMA		2,687			31			—			2,718
FHLMC		64,493			622			(253		)	64,862
FHLB Stock		9,997			—			—			9,997
Equity securities		6,689			—			(71		)	6,618
Total securities available for sale		237,610			2,453			(666		)	239,397
Total securities		$	263,540		$	2,881		$	(666	)	$	265,755

 

		At June 30, 2003
(Dollars in thousands)		Amortized Cost			Unrealized Gains			Unrealized Losses			Estimated Fair Value
Held to Maturity:
Municipal securities		$	17,320		$	675		$	—		$	17,995
Total securities held to maturity		$	17,320		$	675		$	—		$	17,995
Available for Sale:
US government agency securities		$	76,980		$	1,225		$	—		$	78,205
Mortgage backed securities:
FNMA		128,303			2,456			(69		)	130,690
GNMA		52,912			365			(1,236		)	52,041
FHLMC		14,969			318			—			15,287
FHLB Stock		9,252			—			—			9,252
Equity securities		6,477			—			(67		)	6,410
Total securities available for sale		288,893			4,364			(1,372		)	291,885
Total securities		$	306,213		$	5,039		$	(1,372	)	$	309,880

 

11

 

6.                                      Recent Accounting Pronouncements

 

Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FASB Interpretation No. 45”)

 

Requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee.  Effective for financial statements ending March 31, 2003 and thereafter.  The provisions of this Statement had no impact on  the Company’s earnings, financial condition or stockholders’ equity.

 

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

 

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

 

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

 

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

 

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

 

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

 

12

 

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

 

In December 2003, the Emerging Issues Task Force issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”  The EITF addresses disclosure requirements regarding information about temporarily impaired investments.  The requirements are effective for fiscal years ending after December 15, 2003 for all entities that have debt or marketable equity securities with market values below carrying values.  The requirements apply to investments in debt and marketable equity securities that are accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”  The requirements apply only to annual financial statements.

 

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.

 

		For The Three Months Ended March 31,						Nine Months Ended March 31,
(Dollars in thousands)		2004			2003			2004			2003
Net income		$	1,481		$	1,937		$	4,576		$	5,676
Other comprehensive income, net of tax
Unrealized gains on securities available  for sale, net of tax
Unrealized holding gain during the period		635			(931		)	(1,415		)	280
Reclassification adjustment for gains (losses) included in net income		158			390			668			394
Total other comprehensive (loss) income		793			(541		)	(747		)	674
Comprehensive income		$	2,274		$	1,396		$	3,829		$	6,350

 

8.                                      Dividends

 

On July 29, 2003 and October 29, 2003, the Company declared a cash dividend on its common stock of $0.09 per share, payable on August 15, 2003 and November 7, 2003, respectively, to owners of record on August 7, 2003 and November 7, 2003, respectively.  On January 28, 2004, the Company declared a $0.10 per share cash dividend payable February 20, 2004 to shareholders of record on February 6, 2004.  Additionally, on April 27, 2004, the Company’s Board of Directors declared a $0.10 per share cash dividend payable May 21, 2004 to shareholders of record on May 7, 2004.

 

9.                                      Guarantees

 

In the normal course of business, the Company sells loans in the secondary market.  As is customary in such sales, the Company provides indemnification to the buyer under certain circumstances.  This indemnification may include the repurchase of loans by the Company.  In most cases repurchases and losses are rare, and no

 

13

 

provision is made for losses at the time of sale.  When repurchases and losses are probable and reasonably estimable, a provision is made in the financial statements for such estimated losses.

 

On May 12, 2003, the Company entered into a sales and servicing master agreement with the Federal Home Loan Bank of Pittsburgh (“FHLB”).  The agreement allows the Company to sell loans to the FHLB while retaining servicing and providing for a credit enhancement.  Under the terms of the agreement, the Company receives a ten basis point annual fee in exchange for assuming the credit risk on losses in excess of its contractual obligation up to a maximum of $303,000.   The Company has sold $8.7 million in loans under this agreement and has a maximum credit risk exposure of $165,000.

 

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

 

This Form 10-Q contains certain forward-looking statements and information based upon our beliefs as well as assumptions we have made.  In addition, to those and other portions of this document, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “should,” and similar expressions, or the negative thereof, as they relate to us are intended to identify forward-looking statements.  Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties, and assumptions.  Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.  Should one or more of these risks or uncertainties materialize, or 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 March 31, 2004 was $1.5 million.  This compares to net income of $1.9 million for the comparable quarter in the prior year.  Net income for the nine-month period ended March 31, 2004 was $4.6 million compared to net income of $5.7 million for the comparable nine-month period ended March 31, 2003.  The Company’s net interest margin on a tax-effected basis decreased 28 basis points to 3.31% for the three months ended March 31, 2004 from 3.59% for the three months ended March 31, 2003.  The net interest margin on a tax-effected basis decreased 47 basis points to 3.21% for the nine months ended March 31, 2004 from 3.68% for the nine months ended March 31, 2003.  The return on average assets for the three-month and nine-month periods ended March 31, 2004 and 2003 were 0.72% and 0.74%, respectively, and 0.97% and 0.95%, respectively.  The returns on average equity for the same periods were 5.42% and 5.51%, respectively, and 6.37% and 6.13%, 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 nine-month periods ended March 31, 2004 was $6.6 million and $19.1 million, respectively.  This compares to $7.0 million and $21.4 million for the respective prior comparable periods.  For the three-month and nine-month periods ended March 31, 2004, net interest income decreased $392,000 or 5.6% and $2.3 million or 10.5%, over the prior comparable three-month and nine-month periods. Net interest income declined primarily as a result of the reduction in interest income due primarily to the continuing low interest rate environment which reduced the Company’s interest earned on loans, securities and other interest-earning assets more than the interest it paid on deposits and borrowings.  For the three-month and nine-month periods ended March 31, 2004 the Company’s interest rate spread decreased six basis points to 2.87% and 26

 

14

 

basis points to 2.75%, respectively, compared to 2.93% and 3.01% for the respective three-month and nine-month periods ending March 31, 2003.

 

Average interest-earning assets increased $10.2 million and $20.6 million, or 1.3% and 2.6%, respectively, for the three-month and nine-month periods ended March 31, 2004 compared to the respective prior year periods.  Average interest-bearing liabilities for the three-month and nine-month periods ended March 31, 2004 increased  $24.1 million and $30.7 million or 3.8% and 5.0%, respectively, over the comparable prior year periods.  The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 124.10% and 124.66%, respectively, for the three-month and nine-month periods ended March 31, 2004 compared to an average 127.25% and 127.54%, respectively, for the three-month and nine-month periods ended March 31, 2003.  The Company took advantage of the low interest rate environment and increased both its deposits and borrowings in the three-month and nine-month periods ended March 31, 2004 over the prior comparable periods.  The Company aggressively marketed its core deposit products and also increased its utilization of FHLB advances.  The increase in the Company’s core deposit base also reflects the increase attributable to our fourteenth banking office which opened in January 2003.   The Company’s net interest margin decreased to 3.31% for three months ended March 31,2004, a decline of 28 basis points compared to 3.59% for the three months ended March 31, 2003.  The net interest margin for the nine months ended March 31, 2004 decreased to 3.21%, a decline of 47 basis points compared to 3.68% for the nine-month s ended March 31, 2003. The decrease in net interest margin for the three and nine month periods ended March 31, 2004 was primarily a result of the combination of a decline in net interest income and a decline in the ratio of average interest-earning assets to average interest-bearing liabilities.

 

The following table presents the average daily balances for various categories of assets and liabilities, and income and expense related to those assets and liabilities for the three-month and nine-month periods ended March 31, 2004 and 2003.  Loans receivable include non-accrual loans.  To adjust nontaxable securities to a taxable equivalent, a 29.0% effective rate has been used for both the three-month and nine-month periods ended March 31, 2004, respectively, compared to a taxable equivalent of 33.0% for both the comparable three-month and nine-month periods ended March 31, 2003.  The adjustment of tax exempt securities to a tax equivalent yield in the table below may be considered to include non-GAAP financial information.  Management believes that it is a standard practice in the banking industry to present net interest margin, net interest spread and net interest income on a fully tax equivalent basis.  Therefore, management believes, these measures provide useful information to investors by allowing them to make peer comparisons.  A GAAP reconciliation also is included below.

 

15

 

		For The Three Months Ended
		March 31, 2004								March 31, 2003
(Dollars in thousands)		Average Balance			Interest			Average Yield/Cost		Average Balance			Interest			Average Yield/Cost
Interest-earning assets:
Loans receivable:
Mortgage loans		$	450,062		$	7,003		6.25	%	$	442,003		$	7,881		7.19	%
Consumer loans		1,987			34			6.88		10,487			126			4.87
Commercial business loans		17,050			245			5.78		20,749			344			6.72
Total loans		469,099			7,282			6.23		473,239			8,351			7.12
Securities - taxable		280,354			2,593			3.72		258,356			2,817			4.42
Securities - nontaxable - adjusted to a taxable equivalent yield		18,520			287			6.23		17,829			302			6.87
Other interest-earning assets		40,055			70			0.70		48,398			107			0.90
Total interest-earning assets		808,028			10,232			5.09		797,822			11,577			5.86
Non-interest-earning assets		23,644								16,167
Total assets		$	831,672							$	813,989
Interest-bearing liabilities:
Deposits:
NOW and money market accounts		$	135,840		$	305		0.90	%	$	105,230		$	305		1.18	%
Savings accounts		91,461			133			0.58		79,452			207			1.06
Certificates of deposit		267,794			1,660			2.49		307,876			2,515			3.31
Total deposits		495,095			2,098			1.70		492,558			3,027			2.49
Total borrowings		153,622			1,487			3.89		131,383			1,494			4.61
Total escrows		2,386			2			0.34		3,050			3			0.40
Total interest-bearing liabilities		651,103			3,587			2.22		626,991			4,524			2.93
Non-interest-bearing liabilities		70,695								63,643
Total liabilities		721,798								690,634
Total stockholders’ equity		109,874								123,355
Total liabilities and stockholders’ equity		$	831,672							$	813,989
Net interest-earning assets		$	156,925							$	170,831
Net interest income					$	6,645							$	7,053
Net interest rate spread								2.87	%							2.93	%
Net interest margin								3.31	%							3.59	%
Ratio of average interest-earning assets to average interest-bearing liabilities								124.10	%							127.25	%

 

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		For The Nine Months Ended
		March 31, 2004								March 31, 2003
(Dollars in thousands)		Average Balance			Interest			Average Yield/Cost		Average Balance			Interest			Average Yield/Cost
Interest-earning assets:
Loans receivable:
Mortgage loans		$	425,426		$	20,767		6.50	%	$	436,954		$	23,995		7.32	%
Consumer loans		2,164			115			7.07		10,375			367			4.71
Commercial business loans		18,065			806			5.94		20,167			1,047			6.92
Total loans		445,655			21,688			6.48		467,496			25,409			7.24
Securities - taxable		295,561			7,897			3.56		270,072			9,560			4.72
Securities - nontaxable - adjusted to a  taxable equivalent yield		17,864			855			6.37		17,307			820			6.31
Other interest-earning assets		44,221			246			0.74		27,873			235			1.12
Total interest-earning assets		803,301			30,686			5.09		782,748			36,024			6.13
Non-interest-earning assets		23,648								16,644
Total assets		$	826,949							$	799,392
Interest-bearing liabilities:
Deposits:
NOW and money market accounts		$	135,426		$	931		0.91	%	$	99,511		$	999		1.34	%
Savings accounts		89,152			473			0.71		76,583			702			1.22
Certificates of deposit		277,973			5,761			2.76		306,558			8,152			3.54
Total deposits		502,551			7,165			1.90		482,652			9,853			2.72
Total borrowings		139,849			4,134			3.93		128,481			4,521			4.69
Total escrows		2,010			4			0.26		2,590			7			0.36
Total interest-bearing liabilities		644,410			11,303			2.33		613,723			14,381			3.12
Non-interest-bearing liabilities		72,013								62,279
Total liabilities		716,423								676,002
Total stockholders’ equity		110,526								123,390
Total liabilities and stockholders’ equity		$	826,949							$	799,392
Net interest-earning assets		$	158,891							$	169,025
Net interest income					$	19,383							$	21,643
Net interest rate spread								2.76	%							3.01	%
Net interest margin								3.21	%							3.68	%
Ratio of average interest-earning assets  to average interest-bearing liabilities								124.66	%							127.54	%

 

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Although management believes that the above mentioned non-GAAP financial measures enhance investors’ understanding of the Company’s business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.  The reconciliation of these non-GAAP financial measures from GAAP to non-GAAP is presented below.

 

		For the Three Months Ended March 31,
		2004					2003
(Dollars in thousands)		Interest			Average Yield/Cost		Interest			Average Yield/Cost
Securities - nontaxable		$	210		4.56	%	$	209		4.75	%
Tax equivalent adjustments		77					93
Securities - nontaxable to a taxable equivalent yield		$	287		6.23	%	$	302		6.87	%
Net interest income		$	6,568				$	6,960
Tax equivalent adjustment		77					93
Net interest income, tax equivalent		$	6,645				$	7,053
Net interest rate spread, no tax adjustment					2.83	%				2.89	%
Net interest margin, no tax adjustment					3.27	%				3.54	%

 

		For the Nine Months Ended March 31,
		2004					2003
(Dollars in thousands)		Interest			Average Yield/Cost		Interest			Average Yield/Cost
Securities - nontaxable		$	618		4.60	%	$	568		4.37	%
Tax equivalent adjustments		237					252
Securities - nontaxable to a taxable equivalent yield		$	855		6.37	%	$	820		6.31	%
Net interest income		$	19,146				$	21,391
Tax equivalent adjustment		237					252
Net interest income, tax equivalent		$	19,383				$	21,643
Net interest rate spread, no tax adjustment					2.72	%				2.97	%
Net interest margin, no tax adjustment					3.17	%				3.64	%

 

Interest Income.  Interest income on loans decreased $1.1 million and $3.7 million, or 12.8% and 14.6%, respectively, for the three-month and nine-month periods ended March 31, 2004 compared to the three-month and nine-month periods ended March 31, 2003. The overall decrease in the Company’s average yields earned on loans and taxable securities for the three-month and nine-month periods ended March 31, 2004 were the primary reasons for the decline in interest income compared to the similar prior year periods.  The Company’s average yield earned on loans declined by 89 basis points and 76 basis points in the three-month and nine-month periods ended March 31, 2004 compared to the respective three-months and nine-months ended March 31, 2003.  In addition the average balance of the company’s loans decreased $4.1 million and $21.8 million for the three-month and nine-month periods ended March 31, 2004 compared to the three and nine month periods ended March 31, 2003.  Interest income on securities decreased $261,000 and $1.6 million or 8.3% and 15.5%, respectively (adjusting our tax-exempt securities to 6.23% and 6.37%, respectively, on a tax equivalent basis) for the three-month and nine-month periods ended March 31, 2004 compared to the three-month and nine-month periods ended March 31, 2003.  Overall increases in the average balances of securities were offset by decreases in the average yields earned on taxable

 

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securities for the three-month and nine-month periods ended March 31, 2004 compared to the three-month and nine-month periods ended March 31, 2003.

 

Interest Expense.  Interest expense on deposit accounts decreased $928,000 and $2.7 million, or 30.7% and 27.3%, respectively, for the three-month and nine-month periods ended March 31, 2004 compared to the similar prior year periods.  Increases in the average balances of deposits of 0.5% and 4.1%, respectively, in the three-month and nine-month periods ended March 31, 2004 over the prior comparable periods were more than offset by the decreases in average rates paid on deposits.  The average rate paid on deposits fell to 1.70% and 1.90%, respectively, in the three-months and nine-months ended March 31, 2004 compared to 2.49% and 2.72%, respectively, for the three-months and nine-months ended March 31, 2003.  The decrease in average rates paid  on deposit accounts combined with a decrease in the average balance of higher cost certificates of deposit was primarily responsible for the overall decrease in interest expense.   Interest expense on borrowings decreased $7,000 and $387,000, respectively, or less than one percent and 8.6% for the three-month and nine-month periods ended March 31, 2004 compared to the similar prior year periods.  The decrease was primarily a result of the decrease in average borrowing rates offsetting the increase in the average balance of borrowings.

 

Provision for Loan Losses.  The Company’s provision for loan losses increased $60,000, or 54.5% to $170,000 for the three months ended March 31, 2004 compared to $110,000 for the corresponding prior fiscal period. The increase in the provision for loan losses in the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003 was primarily related to the risk components associated with a larger commercial portfolio, increasing to 47.6% of the total loan portfolio at March 31,2004 compared to 43.8% at March 31, 2003. For the nine months ended March 31, 2004 the provision for loan losses decreased $532,000, or 61.7% to $330,000 compared to $862,000 for the nine months ended March 31, 2003.  The decrease in provision for the nine-month period ended March 31, 2004 compared to the similar period ended March 31, 2003 was primarily related to decreases in classified loans and an overall improvement in asset quality.   The Company’s allowance for loan losses as a percentage of its loan portfolio decreased to 1.07% at March 31, 2004 compared to 1.09% at March 31, 2003.  At March 31, 2004 our ratio of non-performing loans to total loans was 0.60% compared to 0.78% at March 31, 2003.  The Company’s allowance for loan losses decreased to $5.1 million at March 31, 2004 compared to $5.3 million at June 30, 2003.  The decrease in the allowance for loan losses at March 31, 2004 compared to June 30, 2003 primarily was the result of a write-down of $633,000 on a previously identified commercial business loan. The remaining value of the impaired commercial business loan was $475,000 at March 31, 2004. Provisions for loan losses are based primarily upon the Company’s regular review of the credit quality of its loan portfolio, the net charge-offs during the period and other factors.  We believe, to the best of our knowledge, that the allowance for loan loss was adequate at March 31, 2004 and represents at such date all known and inherent losses in the portfolio that are both probable and reasonably estimable, 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 increased $35,000, or 4.3% to $852,000 for the three-month period ended March 31, 2004 compared to $817,000 for the similar prior year period.  Non-interest income increased $1.0 million, or 53.3% to $3.0 million for the nine-month period ended March 31, 2004 compared to $2.0 million in the prior year period.  For the three months ended March 31, 2004 the increase was primarily a result of increases in service charges, fees, and the cash surrender value of bank owned life insurance. During the three months ended March 31, 2004, service charges and fees increased $90,000, or 20.7% to $525,000.  During the nine months ended March 31, 2004, service charges and fees increased $360,000, or 26.6% to $1.7 million.  The increases in service charges for the three and nine-month periods were primarily the result of increased retail sales of annuities and securities and  prepayment penalties on loans.  Sales of annuities and securities increased $26,000 and $149,000 respectively, for the three-month and nine-month periods ended March 31, 2004 compared to the similar prior year periods.  For the nine months ended March 31, 2004, the Company realized gains of $668,000 and $460,000 on the sale of securities and loans, respectively, compared to gains of $636,000 and $551,000, respectively, during the corresponding comparable nine-month period. Gains on sales of securities were obtained by taking advantage of certain market opportunities and reflects our decision to sell some of our securities out of the available for sale portfolio in order to generate additional cash which is available for redeployment into new loan originations and/or securities purchased when interest rates increase from their current levels.

 

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Non-Interest Expense.  Non-interest expense increased $378,000, or 7.9% to $5.2 million for the three-month period ended March 31, 2004 compared to $4.8 million for the similar prior year period.  Non-interest expense increased $1.3 million, or 9.1% to $15.3 million for the nine-month period ended March 31, 2004 compared to $14.0 million for the similar year period.  Increases for the three and nine month periods ended March 31, 2004 were primarily a result of the Company’s increase in compensation and benefits expense, which include employee stock ownership plan (“ESOP”) and Recognition and Retention Plan (“RRP”) expenses, and professional fees.  The Company’s ESOP expense increased $61,000 and $222,000, or 28.1% and 39.0%, to $278,000 and $793,000, respectively, for the three-month and nine-month periods ended March 31, 2004 compared to ESOP expense of $217,000 and $571,000, respectively, for the similar prior year periods.  The increase in ESOP expense was primarily the result of market price appreciation of the Company’s common stock.  RRP expense increased $22,000 and $220,000, or 13.1% and 68.7% respectively, for the three and nine-month periods ended March 31, 2004 compared to RRP expense of $171,000 and $320,000 respectively, for the three and nine-month periods ended March 31, 2003 due to shares allocated from the 2002 RRP Trust.  Increases in expenses directly related to the operation of our 14^th  banking office for the nine-months ended March 31, 2004 include increased compensation costs of $122,000 and increased occupancy costs of $70,000 compared to the nine-months ended March 31, 2003. Professional fees increased $50,000 and $210,000, or 40.0% and 54.0%, respectively, during the three and nine-month periods ended March 31, 2004 compared to similar year periods.  Increases in professional fees were due primarily to costs related to the Company’s review of potential acquisition transactions and other general corporate matters.

 

Income Tax Expense.  The provision for income taxes for the three-month and nine-month periods ended March 31, 2004 was $604,000 and $2.0 million, respectively.  This compares to a provision of  $943,000 and $2.8 million for the similar prior year three-month and six-month periods.   The effective tax rate for the three-month and nine-month periods ended March 31, 2004 was 29.0% and 30.0%, respectively.  The decrease in provision for taxes for the three-month and nine-month periods ended March 31, 2004 is primarily related to a decrease in the pre-tax income, decreased tax liability associated with the purchase of certain investment securities and increased exercises of non-qualified stock options.

 

Changes in Financial Condition

 

General.  Total assets of the Company increased by $2.4 million, or less than one percent, to $847.5 million at March 31, 2004 compared to $845.1 million at June 30, 2003.  The increase in assets primarily resulted from an increase in loans held to maturity of $54.8 million, or 13.3%, and an increase of loans held for sale of $11.9 million, or 224.1%, which were partially offset by a decrease in securities of $43.9 million, or 14.2%, and a decline of $22.3 million, or 22.7% in cash.  Securities available for sale and held to maturity decreased a combined $43.9 million, or 14.2% at March 31, 2004 compared to June 30, 2003. Net loans increased $54.8 million, or 13.3% from $413.8 million at June 30, 2003 to $468.6 million at March 31, 2004. Total liabilities amounted to $737.5 million at March 31, 2004, an increase of $9.5 million, or 1.3% from June 30, 2003.  Deposits decreased $15.9 million, or 2.7% to $570.7 million, although core deposits increased $10.4 million, or 3.6%, to $297.3 million, while borrowings increased $27.3 million, or 20.6% from June 30, 2003.  Total stockholders’ equity decreased $7.1 million to $110.0 million at March 31, 2004.  The change in stockholders’ equity was primarily the result of the repurchase of 584,866 shares of Company common stock in the open market at an aggregate cost of $9.9 million, or an average of $16.95 per share.

 

Cash and Cash Equivalents.  Cash and cash equivalents amounted to $75.8 million and $98.0 million at March 31, 2004 and June 30, 2003, respectively.  Cash and cash equivalents decreased during the period as funds were utilized to purchase additional securities, fund loan originations and repurchase Company stock.

 

Assets Available or Held for Sale.  At March 31, 2004, securities classified as available for sale and loans classified as held for sale amounted to $239.4 million and $17.2 million, respectively.  This compares to $291.9 million in available for sale securities and $5.3 million in held for sale loans at June 30, 2003.  The decrease of $52.5 million, or 18.0%, in available for sale securities was primarily the result of the Company taking advantage of favorable market conditions and selling securities. At March 31, 2004, the Company had unrealized gains on

 

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available for sale securities of $1.1 million, net of unrealized losses, compared to unrealized gains on available for sale securities of $1.9 million at June 30, 2003.  The decrease in unrealized gains was primarily a result of a decrease in the available-for-sale portfolio and a general increase in overall market rates of interest.

 

Loans.  The net loan portfolio of the Company increased $54.8 million, or 13.3% from $413.8 million at June 30, 2003 to $468.6 million at March 31, 2004.  The increase in the Company’s net loan portfolio was primarily a result of the purchase from the Bank’s network of mortgage brokers and loan originators of a combined $37.6 million in newly originated single-family residential mortgage loans.

 

Single-family residential mortgage loans increased $32.5 million, or 24.6%, construction loans increased $9.7 million, or 26.9%, home equity loans increased $9.3 million, or 12.8%, and commercial real estate and multi-family residential loans increased $4.6 million, or 2.9% at March 31, 2004 compared to June 30, 2003.  Partially offsetting these increases were declines of $1.4 million, or 6.8% in commercial business loans, and $509,000, or 21.9% in consumer loans at March 31, 2004.

 

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 March 31, 2004			At June 30, 2003
Accruing loans past due 90 days or more:
Real estate		$	—		$	367
Commercial business loans		—			147
Total		—			514
Non-accrual loans:
Mortgage loans
Single-family residential		617			1,064
Commercial real estate and multi-family residential		—			48
Construction		—			—
Home Equity		98			236
Consumer loans		6			7
Commercial business loans		665			360
Total		1,386			1,715
Performing troubled debt restructurings		1,436			1,463
Total non-performing loans		2,822			3,692
Other real estate owned, net		441			391
Total non-performing assets		$	3,263		$	4,083
Non-performing loans to total loans, net of deferred fees		0.60		%	0.88		%
Non-performing assets to total assets		0.38		%	0.48		%

 

Total non-performing assets decreased $820,000, or 20.1%, to $3.3 million at March 31, 2004 compared to $4.1 million June 30, 2003.  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, non-performing construction loans and non-performing consumer loans, partially offset by an increase in non-performing commercial business loans.

 

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Intangible Assets. The amount of our intangible assets totaled $958,000 at March 31, 2004 compared to $1.0 million at June 30, 2003.  Our 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, which occurred in 1994.  The core deposit intangible is being amortized over a 12-year life.  At March 31, 2004 the Company had goodwill of $848,000, which is periodically measured for impairment.

 

Deposits.  The Company’s total deposits decreased by $15.9 million, or 2.7% to $570.7 million at March 31, 2004 compared to $586.6 million at June 30, 2003.  At March 31, 2004, checking and money market accounts increased $5.2 million, or 2.6% to $205.6 million compared to $200.4 million at June 30, 2003, and savings accounts increased $5.2 million, or 6.1% to $91.7 million compared to $86.4 million at June 30, 2003.  At March 31, 2004, certificates of deposits, which comprise the largest component of our deposit portfolio, amounted to $273.5 million or 47.9% of our deposit portfolio, a decrease of $26.3 million from $299.8 million or 51.1% of total deposits at June 30, 2003.  We believe the changes in our deposit portfolio are due to our efforts to increase core deposit accounts (which we define as checking, money market and savings accounts) and balances through targeting marketing of those products as well as many depositors’ unwillingness to invest in longer-term certificate of deposit accounts in the current low interest rate environment.

 

Federal Home Loan Bank Advances. We use advances from the FHLB of Pittsburgh as an additional source of funds to meet our loan demand, as leverage to fund certain revenue enhancing investment strategies and for other asset/liability management purposes.  At March 31, 2004, the total amount of these borrowings outstanding was $159.8 million, which is a $27.3 million or 20.6% increase from the $132.6 million outstanding at June 30, 2003.

 

Stockholders’ Equity.  Total stockholders’ equity of the Company amounted to $110.0 million, or 13.0% of assets at March 31, 2004 compared to $117.1 million or 13.9% of total assets at June 30, 2003, a decrease of $7.1 million, or 6.1%.  Changes in stockholders’ equity reflect year-to-date net income of $4.6 million, as well as a decrease of $747,000 in accumulated other comprehensive income, primarily as a result of the general increases in overall market rates, and the repurchase of 584,866 shares of Company stock at a cost of $9.9 million during the nine months ended March 31, 2004.  The average share price of the stock repurchased was $16.95.  The Company paid a cash dividend of $0.09, $0.09 and $0.10, respectively, per share for the quarters ended September 30, 2003, December 31, 2003 and March 31, 2004. These regular dividends totaled $2.7 million during the nine-months ended March 31, 2004.

 

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 March 31, 2004, the total approved investment and loan origination commitments outstanding amounted to $30.9 million.  Certificates of deposit scheduled to mature in one year or less at March 31, 2004 totaled $199.8 million.  Based on historical experience, management believes that a significant portion of maturing certificates of deposit will remain with the Company, although the trend during the quarter ended March 31, 2003, was toward checking and money market accounts.  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

 

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Company from the FHLB was $449.2 million as of March 31, 2004, 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.

 

Capital

 

At March 31, 2004, 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:

 

		Actual Capital					Required for Capital Adequacy Purposes					Required to Be Well Capitalized under Prompt Corrective Action Provision
(Dollars in thousands)		Amount			Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2004
Tangible capital		$	85,693		10.1	%	$	12,717		1.5	%	$	16,956		2.0	%
(to tangible assets)
Core capital		85,693			10.1	%	33,829			4.0	%	42,287			5.0	%
(to adjusted tangible assets)
Tier I capital		85,693			18.1	%	N/A			N/A		28,376			6.0	%
(to risk-weighted assets)
Risk-based capital		90,751			19.2	%	37,834			8.0	%	47,293			10.0	%
(to risk-weighted assets)
As of June 30, 2003
Tangible capital		$	85,732		10.2	%	$	12,685		1.5	%	$	16,914		2.0	%
(to tangible assets)
Core capital		85,732			10.2	%	33,712			4.0	%	42,284			5.0	%
(to adjusted tangible assets)
Tier I capital		85,732			19.6	%	N/A			N/A		26,234			6.0	%
(to risk-weighted assets)
Risk-based capital		91,044			20.8	%	34,978			8.0	%	43,723			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, 2003.  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 monitors interest rate risk and takes actions which it deems appropriate to maintain the short-term risk at levels considered acceptable 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 have been no material changes in the market risk of the Company’s asset and liability position since June 30, 2003.

 

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Item 4.  Controls and Procedures

 

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Part II.  OTHER INFORMATION

 

Item l.                                                              Legal Proceedings

 

Not applicable

 

Item 2.                                                           Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

The following table presents the repurchasing activity of the stock repurchase program during the third quarter of fiscal 2004:

 

Period		Total Number of shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs
Month #1 January 1, 2004- January 31,2004		—		—			—		511,565
Month #2 February 1, 2004- February 29,2004		27,000		$	18.07		27,000		484,565
Month #3 March 1, 2004- March 31,2004		81,000		$	18.10		81,000		403,565
Total		108,000		$	18.09		108,000		403,565

 

Notes to this table:

 

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(a)          On October 28, 2003 the Board of Directors of the Company authorized a new stock repurchase program (the “program”) effective immediately.  This program is the only program presently in effect.  This program was publicly announced in a press release issued October 29, 2003.

(b)         The Company was authorized to repurchase 5% or 511,565 of the outstanding shares.

(c)          The program has an expiration date of October 27, 2004.

(d)         No stock repurchase programs expired during the third quarter of fiscal 2004.

(e)          The Company presently has no plans for an early termination of the program.

(f)            A prior repurchase program announced March 25, 2003 for 10% or 1,133,566 shares of outstanding stock was completed on September 15, 2003 at an average share price of  $16.16.

(g)         All shares were purchased through the program and were accomplished in the open-market with-in the safe harbor rule, with the exception of 15,000 shares purchased February 20, 2004 at a price of $17.97 per share.

 

Item 3.                                                           Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.                                                           Submission of Matters to a Vote of Security Holders

 

Not applicable

 

Item 5.                                                           Other Information

 

a.               Not applicable.

 

b.              Not applicable.

 

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		Employment Agreement between Willow Grove Bancorp, Inc. and Frederick A. Marcell Jr.
10.2		Employment Agreement between Willow Grove Bank and Frederick A. Marcell Jr.
10.3		Form of Employment Agreement entered into between Willow Grove Bank and each of Joseph M. Matisoff, Christopher E. Bell, John T. Powers, Jerome P. Arrison and Ammon J. Baus
10.4		Supplemental Executive Retirement Agreement (2)
10.5		Non-Employee Director’s Retirement Plan (3)
10.6		1999 Stock Option Plan (4)
10.7		1999 Recognition and Retention Plan and Trust Agreement (4)
10.8		Amended Directors and Officers Incentive Compensation Plan (5)
10.9		2002 Stock Option Plan (6)
10.10		2002 Recognition and Retention Plan and Trust Agreement (6)
10.11		Deferred Compensation Plan (7)
31.1		Section 302 Certification of the Chief Executive Officer

 

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31.2		Section 302 Certification of the Chief Financial Officer
32.1		Section 906 Certification of the Chief Executive Officer
32.2		Section 906 Certification of the Chief Financial Officer

 

(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).

 

(7)                                                               Incorporated by reference from the Company’s Form 10-Q for the quarter ended December 31, 2003, filed with the SEC on February 12, 2004 (SEC File No. 000-49706).

 

(b)                                 Reports on Form 8-K:

 

A Current Report on Form 8-K, dated January 28, 2004, was filed by the Company on January 30, 2004 with respect to the Company’s press release announcing earnings results for the period ended December 31, 2003, and a declaration of a cash dividend, under Item 12.

 

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SIGNATURES

 

Pursuant to with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

WILLOW GROVE BANCORP, INC.
Date: May 14, 2004	By:	/s/ Frederick A. Marcell Jr.
		Frederick A. Marcell Jr. President and Chief Executive Officer
Date: May 14, 2004	By:	/s/ Christopher E. Bell
		Christopher E. Bell Chief Financial Officer

 

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