10-Q 1 g10q-26315.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- Commission file number: 0-25191 Willow Grove Bancorp, Inc. (Exact name of registrant as specified in its charter) United States 23-2986192 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Welsh and Norristown Roads, Maple Glen, Pennsylvania 19002 (Address of principal executive offices) (215) 646-5405 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] 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 4,940,987 shares of common stock issued and outstanding as of November 13, 2001. 1

2 WILLOW GROVE BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3

(1) See note 9 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4

SEE ACCOMPANYING NOTES TO THE 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 12 branches in Dresher, Willow Grove, Maple Glen, Warminster (2), Hatboro, Huntington Valley, Roslyn, Philadelphia (2 - Somerton and Rhawnhurst), North Wales and Southampton. All of the branches are full-service and offer commercial and retail banking products and services. These products include checking accounts (interest and non-interest bearing), savings accounts, certificates of deposit, business loans, real estate loans, and home equity loans. The Company is subject to competition from other financial institutions and other companies that provide financial services. The Company is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. On December 23, 1998 the Company completed the reorganization of the Bank into the federal mutual holding company form of ownership, whereby the Bank converted into a federally chartered stock savings bank as a wholly owned subsidiary of the Company, and the Company became a majority-owned subsidiary of Willow Grove Mutual Holding Company (the "MHC"), a federally chartered mutual holding company (collectively, the "Reorganization"). In connection with the Reorganization, the Company sold 2,240,878 shares of Company common stock, par value $0.01 per share at $10.00 per share which, net of issuance costs, generated proceeds of $21.4 million, including shares issued to the employee stock ownership plan ("ESOP"). The Company also issued 2,812,974 shares of Company common stock to the MHC. As an integral part of the Reorganization and in furtherance of Willow Grove's commitment to the communities it serves, Willow Grove and the Company established a charitable foundation known as the Willow Grove Foundation (the "Foundation") and contributed 89,635 shares to the Foundation. 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 investment securities. On September 7, 2001, the Board of Directors of the Company, the Bank and the MHC adopted a Plan of Conversion and Agreement and Plan of Reorganization which would reorganize the current corporate structure from a two-tier mutual holding company into a stock holding company. This proposed reorganization is subject to the approval of the Company's shareholders, the members of the Mutual Holding Company and OTS. 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. 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 year ended June 30, 2001. The results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending June 30, 2002. In preparing the financial statements, management is required to make certain estimates and assumptions that affect the carrying values of certain assets and liabilities, and revenues and expenses for the reporting periods contained herein, in particular the allowance for loan losses. Actual results could differ from such estimates. 6 3. EARNINGS PER SHARE Earnings per share, basic and diluted, were $0.26 and $0.25, respectively, for the three months ended September 30, 2001. This compares to basic and diluted earnings per share of $0.25 and $0.25, respectively, for the three months ended September 30, 2000. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations.

4. LOAN PORTFOLIO Information about the Bank's loan portfolio and allowance for loan losses is presented below as of and for the periods indicated: 7

8 5. SECURITIES The amortized cost of available-for-sale securities and their estimated fair values at September 30, 2001 and June 30, 2001 area as follows:

6. RECENT ACCOUNTING PRONOUNCEMENTS Business Combinations In June 2001, the FASB issued Statement No. 141, "Business Combinations." The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. There was no impact on earnings, financial condition, or equity upon adoption of Statement No. 141. Goodwill and Other Intangible Assets In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have 9 been initially recognized in the financial statements. The provisions of the SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of the SFAS No. 142. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. SFAS No. 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. The Company adopted SFAS No. 142 on July 1, 2001. With the adoption of SFAS 142, the Company reassessed the useful lives and residual values of all acquired intangible assets to make any necessary amortization period adjustments. Based on that assessment no adjustments were made to the amortization period or residual values of other intangible assets. SFAS 142 provides a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication that goodwill is impaired. To the extent that an indication of impairment exists, the Company must perform a second test to measure the amount of the impairment. The second test must be performed as soon as possible, but no later than the end of the fiscal year. Any impairment measured as of the date of adoption will be recognized as the cumulative effect of a change in accounting principle. Because of the extensive effort needed to complete this assessment, the Company has not determined whether there is any indication that goodwill is impaired or estimated the amount of any potential impairment. At September 30, 2001 the Company's had goodwill of $848,000, which is being assessed for impairment. The Company anticipates completing its initial assessment of impairment by December 31, 2001. Should an indication of impairment exist, the Company will perform the second test under SFAS 142 to measure and record the amount of impairment, if any. Asset Retirement Obligations - In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. The Bank does not expect the adoption of the Statement to have an impact on it's earnings, financial condition, or equity. Impairment or Disposal of Long-Lived Assets In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to 10 owners) or is classified as held for sale. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The provisions of this Statement generally are to be applied prospectively. The Bank does not expect the adoption of the Statement to have an impact on it's earnings, financial condition, or equity. 7. COMPREHENSIVE INCOME The following table displays net income and the components of other comprehensive income to arrive at total comprehensive income. For the Company, the only component of other comprehensive income is the change in the estimated fair value of investment securities available-for-sale. Three Months Ended (Dollars in thousands) September 30, -------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------- Comprehensive income: Net income $ 1,240 $ 1,241 Other comprehensive income net of tax Less: reclassification adjustments 72 - Net change in unrealized gain 1,671 660 -------------------------------------------------------------------------- Comprehensive income: $ 2,983 $ 1,901 -------------------------------------------------------------------------- 8. DIVIDENDS On July 24, 2001, the Company declared a dividend on its common stock of $0.12, payable on August 17, 2001, to owners of record on August 3, 2001. The MHC, which owns 2,812,974 shares of common stock, waived its portion of this dividend, reducing the actual dividend payout amount attributable to their dividends to $233,000. The dollar amount of dividends waived by the MHC is considered a restriction of retained earnings of the Company. The amount of any dividend waived by the MHC shall be available for declaration of a dividend solely to the MHC. At September 30, 2001, the cumulative amount of dividends waived by the MHC was $2.8 million. Additionally, on October 23, 2001, the Company's Board of Directors declared a $.13 cash dividend payable November 20, 2001 to shareholders of record on November 9, 2001. 9. GOODWILL AND OTHER INTANGIBLE ASSETS As described in Note 6, the Company adopted SFAS 142 on July 1, 2001. The following table reconciles the prior year's reported net income to their respective pro forma balances adjusted to exclude goodwill amortization expenses which is no longer recorded under the provision of SFAS 142. Current period net income and earnings per share are presented for comparative purposes. 11 Three Months Ended September 30, 2001 2000 -------------------------- (Dollars in thousands, except per share data) -- Net Income : Reported net income $ 1,240 $ 1,241 Add back: goodwill amortization after-tax - 42 ------------ ------------ Adjusted net income $ 1,240 $ 1,283 ============ ============ Basic earnings per share: Reported net income $0.26 $0.25 Goodwill amortization after-tax - 0.01 ------------ ------------ Adjusted net income $0.26 $0.26 ============ ============ Diluted earnings per share: Reported net income $0.25 $0.25 Goodwill amortization after-tax - 0.01 ------------ ------------ Adjusted net income $0.25 $0.26 ============ ============ Other intangible assets amounted to $380,000 at September 30, 2001. This intangible asset relates to a core deposit intangible resulting from a deposit acquisition and is currently being amortized over a 12-year life. There are no expected residual values related to this core deposit intangible. Estimated fiscal year amortization expense is as follows: 2002 - $138,000; 2003 - $111,000; 2004 - $83,000; 2005 - $57,000; and 2006 - $26,000. 12 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 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 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 September 30, 2001 was $1.2 million. This compares to similar net income of $1.2 million for the comparable quarter in the prior year. Net interest income increased primarily as a result of the combination of increased balances on average interest-earning assets and a reduction in interest rates paid on average interest-bearing liabilities. However, net interest margin declined as a result of a reduction in the ratio of average interest-earning assets to interest-bearing liabilities. The Company's net interest margin decreased nine basis points for the three-month period ended September 30, 2001 compared to the comparable prior year period. For the three months ended September 30, 2001, the provision for loan losses, non-interest income and non-interest expense increased compared to the similar three-month period ended September 30, 2000. NET INTEREST INCOME - Net interest income is determined by our interest rate spread (i.e., the difference between the yields on interest-earning assets and the rates paid on interest-bearing liabilities) and also the amount of interest-earning assets relative to interest-bearing and non-interest-bearing deposit liabilities. For the three-month period ended September 30, 2001, net interest income increased $411,000 or 8.1% compared to the three-month period ended September 30, 2000. During the three-month period ended September 30, 2001 the increase in net interest income was primarily the result of the combination of increased balances on average interest-earning assets and a reduction in interest rates paid on average interest-bearing liabilities. For the three-month period ended September 30, 2001 the Company's interest rate spread increased seven basis points to 2.79% compared to 2.72% at September 30, 2000. Average interest-earning assets increased $60.1 million or 10.8% for the three-month period ended September 30, 2001 compared to the respective prior year period. Average interest-bearing liabilities for the three-month period ended September 30, 2001 increased on average $60.0 million or 13.1% over the same period one year ago. The ratio of average interest-earning assets to average interest-bearing liabilities declined to 119.18% at September 30, 2001 compared to an average 121.67% for the three-month period ended September 30, 2000. For the three-month period ended September 30, 2001, the increase in interest rate spread was more than offset by the decrease in the ratio of interest-earning assets to interest-bearing liabilities reducing net interest margin nine basis points to 3.52% from 3.61% in the comparable prior year period. 13 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 period ended September 30, 2001 and 2000. The Company maintained average balances of tax-exempt securities of $3.6 million and $2.6 million for the month periods ending September 30, 2001 and 2000, respectively, for which the tax-exempt yield has not been adjusted to a taxable equivalent yield. Loans receivable include non-accrual loans.

INTEREST INCOME - Interest income on loans increased $210,000, or 2.3% for the three-month period ended September 30, 2001 compared to the comparable prior year period. Overall increases in average balances of interest-earning assets more than offset overall decreases in average rates earned during the quarter. The increases in average balances in the Company's mortgage loans were primarily responsible for the increase in interest income. Interest income on securities and other interest-earning assets increased $428,000 or 23.5% for the three-month period ended September 30, 2001 compared to the prior year period. Similar to the loans, an overall increase in average securities balances more than offset decreases in average rates and accounted for the increase during the three-month period ended September 30, 2001 compared to the three-month period ended September 30, 2000. INTEREST EXPENSE - Interest expense on deposit accounts increased $138,000, or 2.8% for the three-month period ended September 30, 2001 compared to the similar prior year period. The increase in average balances on deposits more than offset the decrease in average rates on deposits and were primarily responsible for the overall increase in interest expense. Interest expense on borrowings increased $90,000 or 10.5% for the three-month period ended September 30, 2001 compared to the three-month period ended September 30, 2000. The increase in average balances on borrowings more than offset the decrease in average borrowing rates and were primarily responsible for the overall increase expense. PROVISION FOR LOAN LOSSES - The Company's provision for loan losses was $374,000 for the three-month period ended September 30, 2001 compared to $110,000 for the three-month period ended September 30, 2000. The increase of $264,000 or 240% was a result of among other factors, the Company's regular review of the credit quality of its loan portfolio, consideration of the continuing diversification of the loan portfolio, as well as the impact of the current economic slowdown and resultant increases in national unemployment rates. Charge-offs for the three-month periods ended September 30, 2001 and 2000 were $148,000 and $39,000, respectively. The ratio of the allowance for loan losses to total loans was .99% at September 30, 2001 compared to .94% at June 30, 2001. The ratio of the allowance for loan losses to total non-performing loans was 95.8% at September 30, 2001 compared to 84.8% at June 30, 2001. Management believes that the Company's allowance for loan losses was adequate at September 30, 2001, 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. In recent periods the Company has significantly increased the amounts of its commercial real estate, construction, consumer and commercial business loans. Such loans generally are considered to involve a higher degree of risk than single-family residential mortgage loans. While the Company believes that its oversight of the risk elements in its loan portfolio is adequate, no assurance can be given that there may not be additional increases in the Company's non-performing loans and, as a result, its provisions for loan losses. NON-INTEREST INCOME - Non-interest income increased $192,000, or 55.8% for the three-month period ended September 30, 2001 compared to the similar prior year period. This increase was primarily a result of the Company taking advantage of market opportunities to realize gains upon the sale of loans and securities available-for-sale ("AFS") as well as increases in general service fees and charges. Gains on AFS loans were $114,000 for the three-month period ended September 30, 2001 compared to gains of $4,000 for the respective prior year period. Similarly, gains on AFS securities were $49,000 for the three-month period ended September 30, 2001 compared to gains of $19,000 for the comparable prior year period. NON-INTEREST EXPENSE - Non-interest expense increased $416,000 or 12.3% for the three-month period ended September 30, 2001 compared to the three-month period ended September 30, 2000. Compensation and employee benefits expense increased $141,000 or 7.1% for the three-month period ended September 30, 2001 compared to the similar period in the prior year. The increase which was primarily a result of general increases in salary levels as well as increased personnel costs related to the opening of our twelfth banking office in May 2001. Occupancy and furniture and fixture expense increased $90,000 or 21.0% for the three-month period ended September 30, 2001 compared to the similar prior year period. This increase was also partially a result of the opening of our twelfth banking office and costs associated with enhanced teller platform services and the introduction of our Online Banking product to better service our customers' needs. Amortization of intangible assets declined $78,000, or 75.7% for the three-month period ended September 30, 2001 compared to the similar period in the prior year. This decline was a result of the Company's adoption of SFAS #142 on July 1, 2001 requiring that goodwill no longer be amortized but instead be periodically measured for impairment. Advertising expense increased $75,000 or 87.2% primarily as a result of increased efforts to promote the Company's products and services including the implementation of our Online Banking product. Professional fees increased $97,000 or 164.4% partially related to legal costs associated with troubled loans and increased accounting costs associated with 15 additional reporting requirements. All other non-interest operating expenses, in the aggregate, increased $91,000 or 13.9% for the three-month period ended September 30, 2001. These increases were primarily the result of general expenses primarily associated with deposit and loan servicing. INCOME TAX EXPENSE - Provision for income taxes for the three-month period ended September 30, 2001 was $621,000 compared to $697,000 for the similar prior year three-month period. The reduction in the provision for income taxes in the three-month period ended September 30, 2001 primarily relates to a decrease in the Company's effective tax rate from 36.0% in the three-month period ended September 30, 2000 to 33.4% for the three-month period ended September 30, 2001. CHANGES IN FINANCIAL CONDITION GENERAL. Total assets of the Company increased by $12.3 million or 2.0% to $637.4 million at September 30, 2001 compared to $625.1 million at June 30, 2001. The increase in assets resulted primarily from net loans increasing $455,000, or 0.1% and AFS securities increasing $9.2 million, or 7.1%. Total liabilities amounted to $574.2 million, an increase of $9.5 million, or 1.7% from June 30, 2001. Deposits increased $6.1 million, or 1.2% to $503.1 million while borrowings increased $5.5 million, or 9.2% to $65.4 million at September 30, 2001. Total stockholders' equity increased $2.8 million to $63.2 million at September 30, 2001 compared to $60.4 million at June 30, 2001. Changes in stockholders' equity reflect net income for the quarter of $1.2 million, as well as an increase of $1.7 million in accumulated other comprehensive income, primarily as a result of the increase in the value of the AFS portfolio due to a decline in interest rates. CASH AND CASH EQUIVALENTS. Cash and cash equivalents amounted to $24.3 million and $22.2 million at September 30, 2001 and June 30, 2001, respectively. Cash and cash equivalents increased slightly during the period as a result of increased deposit balances and increases in cash flows from loans and investments. ASSETS AVAILABLE FOR SALE. At September 30, 2001, assets that were classified AFS consisted of securities totaling $139.6 million and loans totaling $4.5 million. This compares to $130.4 million in AFS securities and $2.6 million in AFS loans at June 30, 2001. The increase of $9.2 million, or 7.1%, in AFS securities was part of the Company's investment strategies to increase profitability. At September 30, 2001, the Company had unrealized gains on AFS securities of $2.7 million net of unrealized losses, compared to unrealized losses on AFS securities of $48,000 at June 30, 2001. The increase in unrealized gains is a result of decline in the general level of interest rates. The increase in AFS loans at September 30, 2001 of $1.9 million or 70.1% represents the Company's continued activity in the secondary market for residential mortgage loans in order to position the Company to realize gains upon the sale of loans. LOANS. The net loan portfolio of the Company increased by $455,000 from $454.2 million at June 30, 2001 to $454.7 million at September 30, 2001. The increase in the Company's net loan portfolio was due, in large part, to the Company's continuing efforts to expand its lending activities with a concentrated effort to expand multi-family, commercial real estate, consumer and business loans. During the three-months ended September 30, 2001, the Company's commercial real estate mortgage loans increased by $5.4 million or 5.1%, construction loans decreased $2.8 million or 10.1%, home equity loans increased $1.8 million or 2.4%, multi-family residential loans increased $94,000 or 0.4% and single-family residential mortgage loans decreased by $4.0 million or 2.0%. During the same period, the Company's other consumer loans increased $387,000 or 4.0% and commercial business loans decreased $209,000 or 1.0%. Generally, changes in the mix of the Bank's loan portfolio reflect the Company's continuing efforts to diversify its loan portfolio and increase its holdings in loans that generally have higher yields and shorter terms to maturity and/or repricing than single-family residential mortgage loans. However, commercial real estate loans, multi-family residential mortgage loans, construction loans, home equity loans and other consumer loans all generally are deemed to have increased credit risk characteristics in comparison to single-family residential mortgage loans. 16 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.

Total non-performing assets decreased $426,000 at September 30, 2001 compared to June 30, 2001. The decrease is primarily related to a reduction in non-performing single-family residential loans partially offset by the addition of a troubled debt restructuring. INTANGIBLE ASSETS. Intangible assets include a core deposit intangible and goodwill, which represent the excess cost over fair value of assets acquired over liabilities assumed. The core deposit intangible is being amortized to expense over a 12-year life. As of July 31, 2001, goodwill of $848,000 is no longer being amortized but is periodically measured for impairment. DEPOSITS. The Company's total deposits increased by $6.1 million, or 1.2% to $503.1 million at September 30, 2001 compared to $497.0 million at June 30, 2001. This increase occurred despite the Company being located in a highly competitive market for deposits. Savings accounts increased $2.5 million or 4.2%, checking and money market accounts increased $2.9 million or 2.4% and certificates of deposit increased $759,000 or 0.2%. The Company intends to continue its marketing efforts promoting core deposits to help fund asset growth. FEDERAL HOME LOAN BANK ADVANCES. The Company utilizes advances from the FHLB of Pittsburgh primarily as an additional source of funds to meet loan demand. FHLB advances increased $5.5 million or 9.2% to $65.4 million at September 30, 2001 compared to $59.9 million at June 30, 2001. The Company also uses FHLB advances to fund certain investment strategies approved by our Board of Directors. EQUITY. Total stockholders' equity of the Company amounted to $63.2 million, or 9.9%, of assets at September 30, 2001 compared to $60.4 million or 9.7% of total assets at June 30, 2001, an increase of $2.8 million, or 4.7%. Changes in stockholders' equity reflect net income for the quarter of $1.2 million, as well as an increase of $1.7 million in accumulated other comprehensive income, primarily as a result of the increase in the value of the AFS portfolio due to a decline in interest rates. Total stockholders' equity of the Company included net unrealized 17 gains (losses), net of taxes, of $1.7 million and ($29,000) on AFS securities at September 30, 2001 and June 30, 2001, respectively. The Company paid a cash dividend of $0.12 per share during the quarter ended September 30, 2001. This tenth regular dividend totaled $233,000. No treasury shares were repurchased during the quarter ended September 30, 2001. 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 September 30, 2001, the total approved investment and loan origination commitments outstanding amounted to $37.0 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2001 totaled $245.4 million. Based on historical experience, management believes that a significant portion of maturing deposits will remain with the Company. The Company has the ability to utilize borrowings, typically in the form of FHLB advances as an additional source of funds. The maximum borrowing capacity available to the Company from the Federal Home Loan Bank was $377.5 million, as of June 30, 2001, 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. 18 CAPITAL At September 30, 2001, 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:

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK For a 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, 2001. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company's portfolio equity. Management closely monitors interest rate risk and takes appropriate short-term actions to maintain this risk at acceptable levels while focusing on a longer-term loan diversification plan, which concentrates on the acquisition of shorter maturity or repricing assets. Based on, among other factors, such reviews, management believes that there are no material changes in the market risk of the Company's asset and liability position since June 30, 2001. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . Not applicable. ITEM 5. OTHER INFORMATION Not applicable.... ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (filed herewith unless otherwise noted) 2.1 Plan of Reorganization* 2.2 Plan of Stock Issuance* 3.1 Federal Stock Charter of Willow Grove Bancorp, Inc.* 3.2 Bylaws of Willow Grove Bancorp, Inc.* 4.0 Form of Stock Certificate of Willow Grove Bancorp, Inc.* 10.1 Form of Employment Agreement entered into between Willow Grove Bank and Frederick A. Marcell Jr.* 10.2 Form of Employment Agreement entered into between Willow Grove Bank and each of Christopher E. Bell, Thomas M. Fewer and John T. Powers* 10.3 Supplemental Executive Retirement Agreement* 10.4 Non-Employee Director's Retirement Plan* 10.5 1999 Stock Option Plan** 10.6 1999 Recognition and Retention Plan and Trust Agreement** 10.7 Incentive Compensation Plan*** ------------- * Incorporated by reference from the Company's Registration Statement on Form S-1, filed on September 18, 1999, as amended, and declared effective on November 12, 1999 (File No. 333-63737). ** Incorporated by reference from the Company's Proxy Statement on Schedule 14A as filed on June 23, 1999 (File No. 000-25191). *** Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended June 30, 2001. (b) A Current Report on Form 8-K was filed by the Company on September 10, 2001 with respect to the Company's press release announcing the Adoption of Plan of Conversion and Agreement and Plan of Reorganization. A Current Report on Form 8-K was filed by the Company on July 26, 2001 with respect to the Company's press release announcing earnings results for the period ended June 30, 2001. 20 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WILLOW GROVE BANCORP, INC. Date: November 14, 2001 By: /s/ Frederick A Marcell Jr. ------------------------------------- Frederick A. Marcell Jr. President and Chief Executive Officer Date: November 14, 2001 By: /s/ Christopher E. Bell ----------------------------------- Christopher E. Bell Senior Vice President and Chief Financial Officer 21

WILLOW GROVE BANCORP INC 10-Q