April
16, 2008
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Harleysville National delivered a
first draft of the Agreement and Plan of Merger to representatives of
Willow Financial. Negotiations between the parties, their representatives,
and counsel continued from this date through May 20,
2008.
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April
17, 2008
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Harleysville National Board
Meeting Regular scheduled board meeting with general discussion on the
potential transaction.
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April
18, 2008
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Harleysville Nationals financial
advisor presented to Sandler ONeill via electronic mail some modest
modification proposals to Harleysville Nationals April 16
th
draft of the merger agreement.
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May 7,
2008
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Harleysville National conducted a
review of KPMGs workpapers relating to the restatement.
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May 8,
2008
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Harleysville National Board
Meeting Regular scheduled board meeting with general discussion on the
potential transaction.
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May 8,
2008
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Harleysville National submitted
the final Non-Binding Indication of Interest Letter to Willow
Financial.
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May 9,
2008
May 20, 2008
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Senior officials of Harleysville
National and Willow Financial, and their respective counsel held numerous
meetings and telephone conferences to discuss and negotiate terms of a
merger agreement.
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May
13, 2008
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Mr. Geraghty and Mr. Ross Myers
(Harleysville National board member) met with Mr. James McErlane, a
director of Willow Financial, to discuss the benefits of a merger between
the two companies.
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May
20, 2008
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Harleysville Nationals board of
directors met to consider the Agreement and Plan of Merger, and the
schedules, exhibits and annexes thereto. After presentations by
management, special counsel Bybel Rutledge LLP, and Janney Montgomery
Scott LLC, and receipt of a written fairness opinion from Janney
Montgomery Scott LLC, the board of directors discussed, considered, and
approved the terms of the transaction and the Agreement and Plan of Merger
and ancillary documents and exhibits.
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May
20, 2008
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Harleysville National and Willow
Financial executed the Agreement and Plan of Merger with the schedules,
exhibits and annexes thereto.
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May
21, 2008
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Harleysville National and Willow
Financial publicly announced the transaction before the markets opened.
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During the months of October, November
and December 2007, Donna M. Coughey, President and CEO of Willow Financial, met
separately with various prospective strategic partners, including Harleysville
National, regarding the regional banking environment and possible strategic
transactions.
On November 14, 2007, Willow Financial
announced that it had delayed filing its Quarterly Report on Form 10-Q for the
period ending September 30, 2007 due to certain account reconcilements that
indicated an out-of-balance condition in its balance sheet totaling
approximately $6 million. Despite its efforts between November 2007 and April
2008, Willow Financial was unable to completely reconcile the out-of-balance
condition and ultimately recorded the un-reconciled differences as a charge to
prior-period earnings as described on page 87 of this joint proxy
statement/prospectus.
On November 27, 2007, the Willow
Financial Board held a special meeting at which Sandler ONeill provided an
update on the status of its search for strategic partners. Following discussion,
the Willow Financial Board decided to continue to consider the merits of various
strategic alternatives, including a possible merger transaction.
At a special meeting of the Willow
Financial Board on January 7, 2008, Sandler ONeill again reviewed strategic
options with the Willow Financial Board, including continued operation as an
independent company and a possible sale. Following discussion, the Willow
Financial Board authorized the retention of Sandler ONeill to explore strategic
alternatives, including a sale of Willow Financial. On January 9, 2008, Willow
Financial executed an engagement letter with Sandler ONeill for that
purpose.
On January 22, 2008, the Willow Financial
Board held a special meeting during which Sandler ONeill reviewed strategic
alternatives available to Willow Financial. Following deliberation, the Willow
Financial Board determined that a merger transaction represented a favorable
opportunity to enhance shareholder value relative to the other available
options. The Willow Financial Board subsequently authorized Sandler ONeill to
contact 8 financial institutions, including Harleysville National, regarding a
merger with Willow Financial. Of those institutions contacted, 6 financial
institutions executed confidentiality agreements and, during the months of
February and March 2008, were sent a copy of the confidential information
memorandum by Sandler ONeill.
In February 2008, representatives of
Willow Financial and Harleysville National met on three separate occasions to
discuss each of their respective companys strategic goals, how the companies
would assist each other in meeting those goals and the possible merits of a
business combination.
Between February 22, 2008 and February
26, 2008, Willow Financial received written non-binding indications of interest
from Harleysville National and a second prospective buyer (Company B). On
February 26, 2008, the Willow Financial Board held a special meeting at which
Sandler ONeill presented the Willow Financial Board with the two written
indications of interest. Harleysville National submitted its initial non-binding
indication of interest offering an all stock offer with a price ranging between
$11-$12 for each share of Willow Financial common stock, subject to customary
conditions, including completion of due diligence. Company B made an all stock
offer with a price ranging between $10-$12 per share. Sandler ONeill reviewed
the terms of each of the two indications of interest and the financial
background and strategic fit of the two bidders. After discussion, the Willow
Financial Board instructed Sandler ONeill to continue discussions and commence
due diligence work with Harleysville National and Company B.
On February 29, 2008, a third prospective
buyer (Company C) submitted an all cash offer with a price range of $14 to $15
per share.
On or about March 1, 2008, Willow
Financial engaged the law firm of Dechert LLP (Dechert) to provide legal
advice regarding the sale process and to assist with the negotiation of a
definitive merger agreement.
On March 3, 2008, at a special meeting,
Sandler ONeill reviewed the terms of Company Cs proposal with the Willow
Financial Board. Following deliberation, the Willow Financial Board instructed
Sandler ONeill to move forward with due diligence and merger discussions with
Company C.
On March 3, 2008, Mr. Geraghty met with
Ms. Coughey to further discuss the possibility of a business combination
involving Harleysville National.
33
Over the next several weeks, Harleysville
National, Company B and Company C conducted due diligence on Willow Financial.
Company B conducted one day of due diligence off-site on March 10, 2008. Shortly
thereafter, Company B notified Sandler ONeill that it declined to continue
discussions regarding a potential merger.
On March 13, 2008, Company C withdrew its
offer. On March 13 and 14, 2008, Harleysville National conducted off-site due
diligence (other than a credit review) with respect to Willow
Financial.
On March 15, 2008, a fourth party
(Company D) notified Sandler ONeill that it sought to be included in the
sales process. Following a discussion between Sandler ONeill, Rosemary Loring,
Chairman of the Board of Willow Financial and Ms. Coughey, Company D was invited
to perform due diligence over the weekend of March 22 and 23, 2008 and to submit
a proposal by March 26, 2008.
On March 24, 2008, Harleysville National
submitted a revised non-binding indication of interest for an all stock purchase
at a fixed exchange ratio of 0.80 shares of Harleysville National common stock
for each share of Willow Financial common stock, which amounted to a price of
$11.82 per share based on the closing price of Harleysville Nationals common
stock on March 21, 2008. The proposal also indicated that the proposed exchange
ratio would be subject to an adjustment for certain reductions of Willow
Financials tangible net worth prior to the merger closing.
The next day, the Willow Financial Board
invited representatives from Sandler ONeill and Dechert to its regularly
scheduled meeting to provide an update on the discussions with prospective
partners and to review the specifics of Harleysville Nationals proposal. After
discussing the terms of Harleysville Nationals latest proposal, the Willow
Financial Board directed Sandler ONeill and Dechert to negotiate with
Harleysville National regarding their proposed tangible net worth price
adjustment, which the Willow Financial Board viewed as unacceptable. Sandler
ONeill then advised the Willow Financial Board about the emergence of Company D
as a potential buyer. The Willow Financial Board determined that it should wait
to receive Company Ds indication of interest before making any further
decisions concerning a transaction with Harleysville National.
On March 26 and 28, 2008, the Willow
Financial Board held two special meetings where Sandler ONeill provided an
update on the negotiations with Harleysville National and Company D. After
discussion, the Willow Financial Board instructed Sandler ONeill to continue
discussions with both bidders and to seek improvements to the terms proposed by
Harleysville National, including in relation to price and the proposed tangible
net worth price adjustment.
On March 29, 2008, Company D submitted a
proposal for an all stock purchase price at a fixed exchange ratio of 0.7046
shares of common stock of Company D for each share of Willow Financial common
stock, which represented a price of approximately $11.00 per share based on the
recent trading price of Company Ds common stock. Company Ds proposal also
indicated that a downward adjustment to its proposed price would occur if Willow
Financials out-of-balance condition resulted in an adjustment of more than $6
million to its stated financial condition.
On March 31, 2008, Harleysville National
submitted a revised non-binding indication of interest for an all stock purchase
at a fixed exchange ratio of 0.74 shares of Harleysville National common stock
for each share of Willow Financial common stock, which lowered the fixed
exchange ratio in its prior proposal in exchange for a more favorable net worth
price adjustment.
On March 31, 2008, the Willow Financial
Board held a special meeting by telephone to review the status of the proposals
from Harleysville National and Company D. Sandler ONeill reviewed the revised
proposal from Harleysville National and the new proposal from Company D.
Following discussion, the Willow Financial Board decided that the proposal from
Company D was a more attractive proposal and directed Sandler ONeill and
Dechert to move forward with negotiation of a definitive merger agreement with
Company D.
On April 2, 2008, Harleysville National
submitted a revised proposal with an increased fixed exchange ratio of 0.78
shares of Harleysville National common stock for each share of Willow Financial
common stock. This proposal also removed the tangible net worth price
adjustment. On the same day, Willow Financial received a proposed form of merger
agreement from Company Ds legal counsel.
The next day, the Willow Financial Board
held a special meeting by telephone. Sandler ONeill reviewed the terms of the
latest proposal from Harleysville National in comparison to Company Ds bid.
Dechert then discussed the principal legal issues relating to the definitive
agreement submitted by Company D. After discussion, the
34
Willow Financial Board considered the
proposals of the two bidders to be comparable on an overall basis but viewed
Company D to be further progressed with its diligence and merger agreement
negotiations. The Willow Financial Board therefore instructed its advisors to
finalize a merger agreement with Company D.
Over the next several days, Dechert
negotiated the merger agreement terms with counsel to Company D. On April 7,
2008, Willow Financial announced that it expected it would restate its financial
statements for certain prior periods in connection with the out-of-balance
condition. On April 8, 2008, NASDAQ granted Willow Financials request for an
extension to file its Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007 by May 14, 2008 and its Quarterly Report on Form 10-Q for the
quarter ended December 31, 2007 by May 22, 2008.
On April 10, Company D informed Willow
Financial that it required a one week delay on merger negotiations to attend to
internal matters unrelated to the merger. Due to this delay, after consultation
with Chair Loring, Ms. Coughey inquired with Harleysville National as to whether
it was still interested in pursuing a merger with Willow Financial. Harleysville
National confirmed its interest and on April 12 and 13, 2008 continued its due
diligence review. On April 16, 2008, Harleysville National delivered a proposed
merger agreement, which included a price adjustment mechanism similar to its
previously proposed net worth adjustment.
Over the next week, Willow Financial
continued to work on the out-of-balance condition and the restatement of its
financial statements. Ms. Coughey instructed Harleysville National and Company D
that Willow Financial needed to focus on the finalization of this accounting
work, and as a result, decided to suspend any further merger discussions until
its restated financial statements could be filed.
On May 5, 2008, Willow Financial
completed the restatement by filing its Form 10-K/A for the fiscal years ended
June 30, 2007 and 2006, which resulted in an aggregate reduction to pre-tax
income of $8.3 million ($5.5 million after tax) and a charge to fiscal 2004
retained earnings of approximately $365,000. On May 6, 2008, Sandler ONeill
sent Harleysville National and Company D a letter directing each of them to
submit a revised proposal, including confirmation of price.
Harleysville National and Company D
submitted their updated proposals on May 8, 2008. Harleysville Nationals
proposal offered an all stock purchase price at an exchange ratio of 0.7275
shares of Harleysville National common stock for each share of Willow Financial
common stock, which was lower than its prior proposed exchange ratio. The
proposal did not contain a tangible net worth price adjustment. Company Ds
proposal offered an all stock purchase price at an exchange ratio of 0.6725
shares of Companys D common stock for each share of Willow Financial common
stock, which was lower than its prior proposed exchange ratio. Company Ds
proposal was subject to a downward price adjustment for certain reductions of
Willow Financials tangible net worth.
On May 9, 2008, the Willow Financial
Board held two special meetings by telephone to consider the updated proposals
from Harleysville National and Company D. In the first meeting, Sandler ONeill
compared the key business terms contained in the two proposals. Following the
discussion, the Willow Financial Board viewed the Harleysville National proposal
as a better overall proposal than Company Ds bid and authorized Ms. Coughey and
its advisors to seek improvements to the proposal from Harleysville National in
both price and certain terms. At the second meeting on May 9
th
, Ms. Coughey
and Dechert updated the Willow Financial Board on the discussions, which
occurred with Harleysville National and Bybel Rutledge after the first meeting.
Harleysville National agreed to increase the
fixed exchange ratio to 0.73 and agreed to improvements to certain other
principal terms. After discussing these developments, the Willow Financial Board
authorized Ms. Coughey and its advisors to negotiate a proposed definitive
merger agreement with Harleysville National for presentation to the Willow
Financial Board for approval. On May 10, 2008, Sandler ONeill and Ms. Coughey
notified Company D that the Willow Financial Board had determined that its
proposal was not selected and that Willow Financial was moving forward with
another prospective partner.
On May 13, 2008, Mr. Geraghty and Mr.
Ross Myers (Harleysville National board member) met with Mr. James E. McErlane,
a director of Willow Financial, to discuss the benefits of a merger between the
two companies. On May 15, 2008, Company D submitted a revised proposal, offering
an all stock purchase price at an increased fixed exchange ratio of 0.7046
shares of Company D common stock for each share of Willow Financial common
stock, which removed the tangible net worth price adjustment.
On May 16, 2008, the Willow Financial
Board held a special meeting to determine whether to proceed towards a final
definitive merger agreement with Harleysville National or Company D, based on
Company Ds revised proposal. Sandler ONeill reviewed each of the proposals.
Based upon Sandler ONeills report, the Willow Financial Board concluded that,
over the longer term and after excluding the short term volatility of the two
bidders share prices, the bids from Harleysville National and Company D were
comparable financially. Dechert then reported on the fiduciary duties of the
Willow Financial Board under Pennsylvania law. Thereafter, the Willow Financial
Board
35
considered each proposal. After
thorough discussion, the Willow Financial Board decided that a merger
transaction with Harleysville National was preferable to a transaction with
Company D given the financially comparable bids, the superb growth prospects of
Harleysville Nationals stock, and the strategic fit with Harleysville National.
Thereafter, the Willow Financial Board directed its advisors to finalize a
transaction with Harleysville National.
Between May 16 and 20, 2008,
representatives of Willow Financial and Dechert and Harleysville National and
Bybel Rutledge negotiated the terms of the merger agreement.
On May 20, 2008, the Willow Financial
Board met to review the merger proposal as set forth in the definitive merger
agreement and related documents negotiated by Harleysville Nationals and Willow
Financials management and their respective counsel. At the Willow Financial
Board meeting, Sandler ONeill delivered its oral and written opinion that the
merger consideration to be paid by Harleysville National was fair to the
shareholders of Willow Financial from a financial point of view. Dechert once
again reviewed the fiduciary duties of the Willow Financial Board under
Pennsylvania law and summarized the terms of the merger agreement and the voting
agreement. Ms. Coughey summarized the terms of her employment arrangements with
Harleysville National which would be effective upon the closing of the proposed
merger. After receiving the various presentations, the Willow Financial Board
instructed Dechert and Ms. Coughey to seek improvements to certain termination
fee sections in the merger agreement. Harleysville Nationals and Willow
Financials management and their respective counsel then participated in a
telephone call in which compromises on these points were reached to the
satisfaction of the Willow Financial Board. After extensive discussion and
deliberation, the Willow Financial Board unanimously approved the merger
proposal at this meeting (with the exception of Madeline Wing Adler who was not
able to be present at the vote but who is recommending the approval of the
merger by Willow Financials shareholders).
After the close of business on May 20,
2008, following the approvals of the merger by the Willow Financial Board and
the Harleysville National Board at their May 20, 2008 meetings, Willow Financial
and Harleysville National signed the merger agreement. In
addition, Harleysville National entered into voting agreements
and non-competition and non-solicitation agreements with Willow Financials
directors and executive officers and an employment agreement with Ms. Coughey.
HARLEYSVILLE NATIONALS REASONS FOR
THE MERGER
Harleysville Nationals objective is to grow both organically and
inorganically through a disciplined strategy. Its acquisition philosophy is
comprised of both strategic and financial elements consisting of identifying
financial institutions (1) with business philosophies and cultures that are
similar to those of Harleysville National, (2) which operate in strong markets
that are geographically complementary to Harleysville Nationals operation, (3)
which can be acquired at an acceptable cost, and (4) which will be accretive to
earnings in an appropriate time frame. In evaluating acquisition opportunities,
Harleysville National generally considers potential revenue enhancements and
expense synergies, operating efficiencies, credit and asset qualities, interest
rate risk, and management and sales capabilities of the potential target.
In
determining the terms of its proposal for Willow Financial and whether to enter
into the merger agreement with Willow Financial, Harleysville Nationals board
of directors considered a number of factors including the following:
-
A thorough analysis of Harleysville Nationals and
Willow Financials business, operations, financial
condition, and earnings and future operating forecasts, including the
geographic position of each in
Pennsylvania.
-
The conditions of the current and prospective
environment in which Harleysville National and Willow
Financial operate, including regional and local economic conditions,
the competitive environment for
financial
institutions generally as well as the trend towards industry consolidation in
particular, and the
likely effect of these
factors on Harleysville National in light of, and in absence of, the proposed
merger.
-
The merger of Harleysville National and Willow
Financial would result in a combined company with
over $5.5 billion in assets and would deliver a significant market
share in Chester County, one of the
fastest-growing counties in Pennsylvania, increase Harleysville
Nationals market presence in Bucks and
Montgomery counties, and establish a new market presence in
Philadelphia county.
36
-
The combined company would establish a stronger
presence in eastern Pennsylvania, including becoming
the third largest financial institution headquartered in suburban
Philadelphia.
-
Willow Financial has complementary lines of
business, a solid reputation with customers in growing
markets, and a network of 29 branches that would augment the
traditional Harleysville National Bank
footprint.
-
The similar operating models, low business
complexity, similar approaches to the market, and compatible
credit cultures of Harleysville National and Willow
Financial should result in less execution risk in the
integration of Harleysville Nationals and Willow Financials
businesses.
-
The combination would result in good credit
quality given Harleysville National and Willow Financials
similar credit cultures.
-
The anticipated accretion to earnings per share
and minor tangible book value dilution for Harleysville
National as a result of the Willow Financial
acquisition.
-
Harleysville Nationals managements view that the
consideration to be paid to Willow Financial
shareholders is fair to Harleysville National and its shareholders from
a financial perspective based on,
among other
things, a comparable transaction review.
-
The expectation of Harleysville National, due to
advice from its legal advisors, that the merger would
qualify as a transaction of the type that is generally tax-free to
shareholders for United States federal
income
tax purposes.
-
The merger of Harleysville National and Willow
Financial would create a larger product base, including
fee-generating businesses such as an employee benefits
service provider, a mortgage origination business,
and wealth management services, which would enhance the overall
customer experience.
-
Willow Financials commitment to serving its
community is consistent with Harleysville Nationals
general business philosophy.
-
The merger of Harleysville National and Willow
Financial would result in a company better able to leverage
its customer base through a larger branch network and better
able to cross-sell the entire franchise.
-
The historical and current market prices of
Harleysville National and Willow Financial common stock.
-
The likelihood that the regulatory approval needed
to complete the transaction would be obtained.
The
foregoing discussion of the factors considered by the Harleysville National
board of directors in evaluating the merger agreement and merger is not
exhaustive but rather includes a number of material factors considered by the
board of directors. In approving the transaction, Harleysville Nationals board
of directors did not specifically identify any one factor or group of factors as
being more significant than any other factor in the decision-making process, and
each director may have viewed the significance of the individual factors
differently. The Harleysville National board of directors considered all of the
above factors collectively and concluded that the factors supported the decision
to enter into the merger agreement.
There can
be no certainty that the above benefits of the merger anticipated by
Harleysville National board of directors will occur. Actual results may vary
materially from those anticipated (see A Warning About Forward-Looking
Information and Risk Factors beginning on page 23 and page 17
respectively).
RECOMMENDATION OF THE HARLEYSVILLE
NATIONAL BOARD OF DIRECTORS
The
Harleysville National board of directors has unanimously approved the merger and
the merger agreement, and unanimously recommends that Harleysville National
shareholders vote FOR approval and adoption of the merger
agreement.
37
OPINION OF HARLEYSVILLE NATIONALS
FINANCIAL ADVISOR
Pursuant
to the terms of its agreement, Janney Montgomery Scott LLC was retained by
Harleysville National to act as its financial advisor in connection with a
possible business combination with Willow Financial. Harleysville National
selected Janney because of Janneys knowledge of, experience with, and
reputation in the financial services industry. Janney agreed to assist
Harleysville National in analyzing, structuring, negotiating and effecting a
possible merger. Janney, as part of its investment banking business, continually
engages in the valuation of financial institutions and their securities in
connection with mergers and acquisitions and other corporate transactions.
Janney
acted as financial advisor to Harleysville National in connection with the
proposed merger and participated in certain of the negotiations leading to the
merger agreement. Harleysville Nationals board of directors considered and
approved the merger agreement at the May 20, 2008 board of directors meeting.
Janney delivered its written opinion, that as of May 20, 2008, the merger
consideration was fair to Harleysville Nationals shareholders from a financial
point of view.
The
full text of Janneys opinion is attached as Annex B to this joint proxy
statement/prospectus. Harleysville Nationals shareholders are urged to read the
opinion in its entirety for a description of the procedures followed,
assumptions made, matters considered, and qualifications and limitations on the
review undertaken by Janney in rendering its opinion. The description of the
opinion set forth below is qualified in its entirety by reference to the
opinion.
Janneys opinion speaks only as of the date of the opinion. The opinion
was directed to the Harleysville National board of directors and addresses only
the fairness, from a financial point of view, of the consideration offered in
the merger. It does not address the underlying business decision of Harleysville
National to proceed with the merger or any other aspect of the merger.
In rendering its opinion, Janney
reviewed and considered, among other things:
|
1.
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The historical financial
performances, current financial positions and general prospects of
Harleysville National and Willow Financial.
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|
2.
|
|
The proposed financial terms of
the merger and have examined the projected consequences of the merger with
respect to, among other things, market value, earnings per share and
tangible book value per share of Harleysville National common
stock.
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|
3.
|
|
To the extent deemed relevant, an
analysis of selected public information of certain other bank and thrift
holding companies and compared Harleysville National and Willow Financial
from a financial point of view to these other bank and thrift holding
companies.
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4.
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|
The historical market price
ranges and trading activity performance of the common stock of
Harleysville National and Willow Financial.
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5.
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Publicly - available information
such as annual reports, quarterly reports and SEC filings. Janney notes in
this regard that Willow Financial is not current in its periodic filings
required to be filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, to which it is subject.
Accordingly, for Willow Financials two most recent quarterly periods
ending December 31, 2007 and March 31, 2008, there did not exist publicly
available financial statements and other information regarding Willow
Financial that was prepared in accordance with generally accepted
accounting principles (GAAP) and reviewed by independent certified
public accountants and available for Janneys review.
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6.
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|
A comparison of the terms of the
merger with the terms of certain other comparable merger and acquisition
transactions to the extent information concerning such acquisitions was
publicly available.
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7.
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|
Discussions with certain members
of senior management of Harleysville National the strategic aspects of the
merger, including, but not limited to, estimated cost savings from the
merger.
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8.
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The merger agreement;
and
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9.
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Such other analyses and
examinations as Janney deemed necessary.
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38
Janney
also discussed with certain members of senior management of Harleysville
National the business, financial condition, results of operations and prospects
of Harleysville National and held similar discussions with certain members of
senior management of Willow Financial regarding the business, financial
condition, results of operations and prospects of Willow Financial.
In
performing its review, Janney relied upon the accuracy and completeness of all
of the financial and other information that was available to it from public
sources, that was provided to it by Harleysville National or Willow Financial or
their respective representatives or that was otherwise reviewed by Janney, and
assumed such accuracy and completeness for purposes of rendering its opinion.
Janney further relied on the assurances of management of Harleysville National
and Willow Financial that they were not aware of any facts or circumstances that
would make any of such information inaccurate or misleading. Janney was not
asked to and did not undertake any independent verification of any such
information and did not assume any responsibility or liability for the accuracy
or completeness thereof. Janney did not make an independent evaluation or
appraisal of the specific assets, the collateral securing assets or the
liabilities (contingent or otherwise) of Harleysville National or Willow
Financial or any of their subsidiaries, or the ability to collect any such
assets, nor was Janney furnished with any such evaluations or appraisals. Janney
did not make any independent evaluation of the adequacy of the allowance for
loan losses of Harleysville National or Willow Financial or any of their
subsidiaries nor did Janney review any individual credit files and assumed that
their respective allowance for loan losses was adequate to cover such losses. In
addition, Janney did not make any independent evaluation of the adequacy or
accuracy of the preliminary indications that Willow Financial will record an
impairment charge for the quarter ended December 31, 2007 in the range of $25.0
million to $40.0 million and Janney expressed no opinion regarding the adequacy
or accuracy of such estimate. With respect to the financial projections,
Harleysville Nationals and Willow Financials management confirmed that they
reflected the best currently available estimates and judgments of such
management of the future financial performance of Harleysville National and
Willow Financial respectively, and Janney assumed that such performance will be
achieved. Janney expressed no opinion as to such financial projections or the
assumptions on which they were based. Janney also assumed that there has been no
change in Harleysville Nationals or Willow Financials assets, financial
condition, results of operations, business or prospects since the date of the
most recent financial statements made available to it. Janney assumed in all
respects material to its analysis that Harleysville National and Willow
Financial will remain as going concerns for all periods relevant to its
analysis, that all of the representations and warranties contained in the merger
agreement and all related agreements were true and correct, that each party to
such agreements will perform all of the covenants required to be performed by
such party under such agreements and that the conditions precedent to the merger
agreement was not waived.
The
earnings projections for Harleysville National and Willow Financial used and
relied upon by Janney in certain of its analyses were based upon discussions
with both Harleysville National and Willow Financial management teams and
Harleysville National management has confirmed that that they reflect the best
currently available estimates and judgments of such management of the future
financial performance of Harleysville National and Willow Financial
respectively, and Janney has assumed that such performance will be achieved.
These projections, as well as other estimates used by Janney in its analyses,
were based on numerous variables and assumptions that are inherently uncertain,
and accordingly, actual results could vary materially from those set forth in
such projections.
In
performing its analyses, Janney also made numerous assumptions with respect to
industry performance, business, economic and market conditions and various other
matters, many of which cannot be predicted and are beyond the control of
Harleysville National and Willow Financial and Janney. The analyses performed by
Janney are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Estimates of the values of companies do not purport to be appraisals or
necessarily reflect the prices at which companies or their securities may
actually be sold. Accordingly, these analyses and estimates are inherently
subject to substantial uncertainty. Janney prepared its analyses solely for
purposes of rendering its opinion and provided such analyses to the Harleysville
National board of directors on May 20, 2008. In addition, Janneys opinion was
among several factors taken into consideration by the Harleysville National
board of directors in making its decision to approve the merger agreement and
the merger.
Janneys
opinion was necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to it as of, the
date of its opinion. Events occurring after the date of the opinion could
materially affect the opinion. Janney has not undertaken to update, revise,
reaffirm or withdraw its opinion or otherwise comment upon events occurring
after the date thereof.
39
In
rendering its opinion, Janney performed a variety of financial analyses. The
following is a summary of the material analyses prepared by Janney for its
meeting with the Harleysville National board of directors on May 20, 2008. The
summary is not a complete description of all the analyses underlying Janneys
opinion. The preparation of a fairness opinion is a complex process involving
subjective judgments as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances. Therefore, a fairness opinion is not readily susceptible to
partial analysis or summary description. Janney believes that its analyses must
be considered as a whole and that selecting portions of the factors and analyses
used without considering all factors and analyses, or attempting to ascribe
relative weights to some or all such factors and analyses, could create an
incomplete view of the evaluation process underlying its opinion. The financial
analyses summarized below include information presented in a tabular format. In
order to fully understand the financial analyses, these tables must be read
together with the accompanying text. The tables alone do not constitute a
complete description of the financial analyses. Also, no company or transaction
used in the comparable analyses listed below is identical to Harleysville
National or Willow Financial and no transaction is identical to the merger.
Accordingly, an analysis of comparable companies or transactions involves
complex considerations and judgments concerning the differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values or merger transaction values, as the case may be, of
Harleysville National or Willow Financial and the companies to which they are
being compared.
Summary of Proposal
Janney
reviewed the financial terms of the proposed transaction. Based on a fixed
exchange ratio of 0.73 shares of Harleysville National common stock for each
share owned of Willow Financial common stock and Harleysville Nationals ten day
average stock price of $14.40, Janney calculated the offer price to be $10.51
per share for an aggregate merger consideration of $165.9 million.
Based
upon Willow Financials financial information as of and for the twelve months
ended September 30, 2007, Janney calculated the following ratios:
Transaction
Ratios
|
Transaction Price / Last Twelve Months Earnings
|
28.5
|
x
|
Transaction Price /
Book Value
|
103.8
|
%
(1)
|
Transaction Price / Tangible Book Value
|
183.6
|
%
(1)
|
Tangible Book Premium /
Core Deposits
|
7.4
|
%
(2)
|
____________________
(1)
|
|
Willow Financials book and tangible book values are stated book
and tangible book values at 9/30/07 less the announced goodwill impairment
charge of $40 million (greater of the announced $25 million to $40 million
per 8-K dated 4/14/08).
|
|
(2)
|
|
Tangible Book Premium / Core Deposits is equal to (Total Deal
Consideration Tangible Book Value) / Core Deposits. Core Deposits
exclude all time deposits greater than $100,000.
|
|
|
|
For purposes of Janneys analyses, earnings per share were based on
fully diluted earnings per share.
|
Stock Trading History
Janney
reviewed the reported closing per share market prices of the common stock of
Harleysville National and Willow Financial and the relationship between the
movements in the prices of Harleysville Nationals common stock and Willow
Financials common stock, respectively, to movements in certain stock indices.
Harleysville Nationals stock trading history was compared to various
indices, including the SNL Bank Index, ABA NASDAQ Community Bank Index, S&P
500 Index and to the weighted average (by market capitalization) performance of
a peer group of publicly-traded banks headquartered in Pennsylvania, New Jersey
and Maryland with assets between $2.0 billion and $10.0 billion. The
institutions included in these peer groups are identified in the section
Comparable Company Analysis below.
40
Willow
Financials stock trading history was compared to various indices, including the
SNL Thrift Index, ABA NASDAQ Community Bank Index, S&P 500 Index and to the
weighted average (by market capitalization) performance of a peer group of
publicly-traded thrifts headquartered in Pennsylvania, New Jersey and New York
with assets between $750.0 million and $2.0 billion. The institutions included
in these peer groups are identified in the section Comparable Company Analysis
below.
During
the one-year period ended May 19, 2008, Harleysville Nationals common stock
outperformed the index as compared to the SNL Bank Index and the ABA NASDAQ
Community Bank Index. However, they underperformed the index as compared to its
relative peer group index and the S&P 500 Index for the one-year period
ending May 19, 2008.
One-Year Stock Performance of
Harleysville National
|
|
Beginning
Index
|
|
Ending
Index
|
|
|
Value
|
|
Value
|
|
|
May 18, 2007
|
|
May 19, 2008
|
Harleysville National
|
|
100.0%
|
|
87.8%
|
Harleysville National
Peer Group Index
|
|
100.0%
|
|
96.8%
|
SNL
Bank Index
|
|
100.0%
|
|
68.5%
|
ABA NASDAQ Community
Bank Index
|
|
100.0%
|
|
77.5%
|
S&P
500 Index
|
|
100.0%
|
|
93.7%
|
During
the three-year period ended May 19, 2008, Harleysville Nationals common stock
underperformed the index as compared to its relative peer group index, the SNL
Bank Index, the ABA NASDAQ Community Bank Index and the S&P 500 Index.
Three-Year Stock Performance of
Harleysville National
|
|
Beginning
Index
|
|
Ending Index
|
|
|
Value
|
|
Value
|
|
|
May 19, 2005
|
|
May 19, 2008
|
Harleysville National
|
|
100.0%
|
|
68.5%
|
|
Harleysville National
Peer Group Index
|
|
100.0%
|
|
86.6%
|
|
SNL
Bank Index
|
|
100.0%
|
|
78.4%
|
|
ABA NASDAQ Community
Bank Index
|
|
100.0%
|
|
82.6%
|
|
S&P
500 Index
|
|
100.0%
|
|
119.8%
|
|
During
the one-year period ended May 19, 2008, Willow Financials common stock
underperformed the index as compared to its relative peer group index, the ABA
NASDAQ Community Bank Index and the S&P 500 Index. Willow Financial,
however, outperformed the SNL Thrift Index over the one-year period ending May
19, 2008.
41
One-Year Stock Performance of Willow
Financial
|
|
Beginning
Index
|
|
Ending
Index
|
|
|
Value
|
|
Value
|
|
|
May 18, 2007
|
|
May 19, 2008
|
Willow
Financial
|
|
100.0%
|
|
66.7%
|
Willow Financial Peer
Group Index
|
|
100.0%
|
|
96.9%
|
SNL
Thrift Index
|
|
100.0%
|
|
56.6%
|
ABA NASDAQ Community
Bank Index
|
|
100.0%
|
|
77.5%
|
S&P
500 Index
|
|
100.0%
|
|
93.7%
|
During
the three-year period ended May 19, 2008, Willow Financials common stock
underperformed the index as compared to its relative peer group index, the SNL
Thrift Index, the ABA NASDAQ Community Bank Index and the S&P 500 Index.
Three-Year Stock Performance of
Willow Financial
|
|
Beginning
Index
|
|
Ending Index
|
|
|
Value
|
|
Value
|
|
|
May 19, 2005
|
|
May 19, 2008
|
Willow
Financial
|
|
100.0%
|
|
47.9
|
%
|
|
Willow Financial Peer
Group Index
|
|
100.0%
|
|
102.0
|
%
|
|
SNL
Thrift Index
|
|
100.0%
|
|
62.3
|
%
|
|
ABA NASDAQ Community
Bank Index
|
|
100.0%
|
|
82.6
|
%
|
|
S&P
500 Index
|
|
100.0%
|
|
119.8
|
%
|
|
Comparable Company
Analysis
Janney
used publicly available information to compare selected financial and market
trading information for Harleysville National and a group of bank holding
companies headquartered in Pennsylvania, New Jersey and Maryland. This peer
group consisted of the following publicly traded bank institutions with total
assets between $2.0 billion and $10.0 billion:
-
First Commonwealth Financial
Corporation
-
Lakeland Bancorp, Inc.
-
National Penn Bancshares, Inc.
-
Pennsylvania Commerce Bancorp,
Inc.
-
S&T Bancorp, Inc.
-
Sandy Spring Bancorp, Inc.
-
Sun Bancorp, Inc.
-
Univest Corporation of Pennsylvania
Janney
used publicly available information to compare selected financial and market
trading information for Willow Financial and a group of thrift institutions
headquartered in Pennsylvania, New York and New Jersey. This peer group
consisted of the following publicly traded thrift institutions with total assets
between $750 million and $2.0 billion:
-
Abington Bancorp, Inc.
-
Beacon Federal Bancorp, Inc.
-
Carver Bancorp, Inc.
-
ESB Financial Corporation
-
ESSA Bancorp, Inc.
-
OceanFirst Financial Corp.
-
Parkvale Financial Corporation
42
For
purposes of such analysis, the financial information used by Janney was as of
and for the twelve months ended March 31, 2008, with the exception of Willow
Financial whose data was as of and for the twelve months ended September 30,
2007. Stock price information was as of May 19, 2008. Certain financial data
prepared by Janney, and as referenced in the tables presented below, may not
correspond to the data presented in Harleysville Nationals and Willow
Financials historical financial statements, as a result of the different
periods, assumptions and methods used by Janney to compute the financial data
presented. The results of this analysis are summarized in the following
table:
|
|
|
|
|
Peer
|
|
|
|
|
Peer
|
|
|
Harleysville
|
|
Group
|
|
Willow
|
|
Group
|
|
|
National
|
|
Media
n
|
|
Financial
|
|
Media
n
|
Loans /
deposits
|
|
83.0%
|
|
|
93.8%
|
|
|
103.8%
|
|
|
106.7%
|
|
Tangible equity /
tangible assets
|
|
5.88%
|
|
|
6.66%
|
|
|
6.19%
|
|
|
6.33%
|
|
Non-performing assets for more than 90 days / assets
|
|
0.69%
|
|
|
0.69%
|
|
|
0.30%
|
|
|
0.30%
|
|
Net Charge Offs /
Average Loans
|
|
0.13%
|
|
|
0.13%
|
|
|
0.04%
|
|
|
0.05%
|
|
Last
twelve months ROAA
|
|
0.79%
|
|
|
0.80%
|
|
|
0.38%
|
|
|
0.47%
|
|
Last twelve months
ROAE
|
|
8.93%
|
|
|
9.23%
|
|
|
2.89%
|
|
|
5.05%
|
|
Net
interest margin
|
|
2.85%
|
|
|
3.46%
|
|
|
3.10%
|
|
|
2.80%
|
|
Last twelve months
efficiency ratio
|
|
61.7%
|
|
|
61.7%
|
|
|
82.2%
|
|
|
70.6%
|
|
Price /
last twelve months EPS
|
|
15.2x
|
|
|
13.7x
|
|
|
19.5x
|
|
|
18.2x
|
|
Price / 2008 est.
EPS
|
|
NM
|
|
|
13.6x
|
|
|
16.5x
|
|
|
16.5x
|
|
Price /
tangible book value per share
|
|
198.3%
|
|
|
198.3%
|
|
|
130.4%
|
|
|
116.5%
|
|
Comparable Transactions
Analysis
Janney
reviewed publicly available information related to certain bank and thrift
merger and acquisition transactions. The first group of comparable transactions
included 39 nationwide bank and thrift transactions announced since January 1,
2007 with announced transaction values between $100.0 million and $500.0
million, Janney refers to this as the nationwide transactions. The second group
of comparable transactions included 25 regional bank and thrift transactions
announced since January 1, 2007, Janney refers to this as the regional
transactions. The third group of comparable transactions included 29 nationwide
bank and thrift transactions announced since January 1, 2007 where the targets
trailing twelve month ROAE was less than 5.00% and trailing twelve month ROAA
was less than 0.50%, Janney refers to this as the performance based
transactions.
For each precedent transaction,
Janney derived and compared, among other things, the implied ratio of aggregate
price paid for the acquired company to:
-
Book value per share of the acquired company based
on the latest publicly available financial statements
of the company prior to the announcement of the
acquisition.
-
Tangible book value per share of the acquired
company based on the latest publicly available financial
statements of the company available prior to the
announcement of the acquisition.
-
The earnings of the acquired company for the
latest 12 months of results publicly available prior to the
time the transaction was announced.
-
The premium paid in excess of the most recent
trading days closing stock price for the target.
-
The premium paid in excess of the tangible book
value acquired company as a percentage of core
deposits based on the latest publicly available financial statements of
the company available prior to the
announcement
of the acquisition.
Transaction multiples for the merger were derived from the $10.51 per
share transaction value and financial data as of September 30, 2007 for Willow
Financial, book and tangible book values include the announced $40.0 million
goodwill impairment charge per 8-K dated 4/14/08. Janney compared these results
with announced transaction multiples. The results of the analysis are set forth
in the following table:
43
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
|
|
|
Price
/
|
|
Price
/
|
|
|
|
Premium /
|
|
|
Price
/
|
|
Tangible
|
|
LTM
|
|
Market
|
|
Core
|
|
|
Book
|
|
Book
|
|
Earnings
|
|
Premium
|
|
Deposits
|
|
|
(%)
|
|
(%)
|
|
(x)
|
|
(%)
|
|
(%)
|
Harleysville National / Willow Financial
|
|
103.8%
|
|
183.6%
|
|
28.5x
|
|
38.5%
|
|
7.4%
|
|
Nationwide
Transactions
|
|
258.0%
|
|
265.3%
|
|
22.1x
|
|
22.9%
|
|
23.6%
|
|
Regional Transactions
|
|
218.8%
|
|
228.3%
|
|
24.3x
|
|
26.0%
|
|
16.5%
|
|
Performance Based
Transactions
|
|
151.5%
|
|
160.9%
|
|
45.8x
|
|
32.1%
|
|
8.4%
|
|
Discounted Cash Flow and Terminal
Value Analysis
Janney
performed a discounted cash flow analysis on Willow Financial using financial
forecasts and estimates confirmed by Harleysville Nationals management for
Willow Financials calendar years 2008 through 2012, after taking into account
the potential cost savings anticipated by Harleysville Nationals management to
result from the proposed merger. Janney calculated a range of present values for
a share of Willow common stock by discounting the cash flows and the terminal
value at a discount rate ranging from 11% to 15%. The terminal values were
calculated using a range of terminal value multiples ranging from 12.0x to 16.0x
the trailing twelve month earnings at December 31, 2012. This analysis resulted
in ranges of implied present values of approximately $10.33 to $15.18 per share
of Willow Financial common stock as compared to the implied per share value of
the merger consideration of $10.51 utilizing the fixed exchange ratio of 0.73x
and the 10-day average trading price of Harleysville National common stock on
May 19, 2008 of $14.40.
Sensitivity Analysis
($ per share)
|
|
|
|
2012E
Net Income M
ultiple
|
|
|
|
|
12.0
x
|
|
13.0
x
|
|
14.0
x
|
|
15.0
x
|
|
16.0
x
|
|
|
11.0%
|
|
$
|
12.14
|
|
$
|
12.90
|
|
$
|
13.66
|
|
$
|
14.42
|
|
$
|
15.18
|
Discount
|
|
12.0%
|
|
|
11.65
|
|
|
12.38
|
|
|
13.10
|
|
|
13.83
|
|
|
14.56
|
Rate
|
|
13.0%
|
|
|
11.19
|
|
|
11.88
|
|
|
12.57
|
|
|
13.27
|
|
|
13.96
|
Range
|
|
14.0%
|
|
|
10.75
|
|
|
11.41
|
|
|
12.07
|
|
|
12.73
|
|
|
13.39
|
|
|
15.0%
|
|
|
10.33
|
|
|
10.96
|
|
|
11.59
|
|
|
12.23
|
|
|
12.86
|
In
connection with the discounted cash flow and terminal value analysis performed,
Janney considered and discussed with Harleysville Nationals board of directors
how the present value analysis would be affected by changes in the underlying
assumptions, including variations with respect to the growth rate of assets and
net income. Janney noted that the discounted cash flow and terminal value
analysis is a widely used valuation methodology, but the results are highly
dependent upon the numerous assumptions that must be made, and the results
thereof are not necessarily indicative of the actual values or expected values
of Willow Financial common stock.
Financial Impact
Analysis
Janney
performed a
pro forma
merger analysis that combined projected balance sheet and
income statement information of Harleysville National and Willow Financial. The
analysis assumed that 100% of Willow Financials shares were exchanged for
shares of Harleysville Nationals common stock at an exchange ratio of 0.73
shares. The analysis also contemplated certain purchase accounting adjustments,
charges and transaction costs associated with the merger, as well as certain
transaction synergies determined by the managements of Harleysville National and
Willow Financial. The analysis assumed earnings projections that were discussed
with management in the case of both Harleysville National and Willow Financial.
In addition, Janney assumed that the merger will result in cost savings equal to
managements estimates. Based on its analysis, Janney determined that the merger
would be accretive to Harleysville Nationals management estimates for earnings
per share and cash earnings per share in 2009. The analysis also indicated that
the proposed transaction would be dilutive to Harleysville Nationals tangible
book value per share.
Furthermore, the analysis indicated that Harleysville Nationals Leverage
Ratio, Tier 1 Risk-Based Capital Ratio and Total Risk Based Capital Ratio would
all remain above regulatory minimums for well capitalized institutions. This
analysis was based on internal projections provided by Harleysville Nationals
and Willow Financials management teams.
44
In
connection with its analyses, Janney considered and discussed with Harleysville
Nationals board of directors how the
pro
forma
analyses would be affected by various
changes in the underlying assumptions. Janney noted that the actual results
achieved by the combined company may vary from the projected results and the
variations may be material.
Under the
terms of Janneys engagement, Harleysville National has agreed to pay Janney an
aggregate fee of 0.40% of the aggregate consideration, a portion of which was
payable in connection with Janneys opinion and the remainder is contingent upon
the consummation of the merger. Aggregate consideration solely for the purposes
of determining the contingent transaction fee payable to Janney, shall be equal
to the offer per share, as set forth in the definitive merger agreement,
multiplied by the total number of shares outstanding including any Employee
Stock Option Plan and Management Recognition Plan shares, plus the in-the-money
value (based on the offer) of all stock options and warrants outstanding. Since
the transaction is a fixed exchange for common stock, Harleysville Nationals
average closing stock price for the ten business days prior to the day of
closing shall be used in the calculation of the aggregate consideration. In
addition, Harleysville National has agreed to reimburse Janney for expenses,
including fees and expenses of legal counsel, and to indemnify Janney and
related parties against liabilities, including liabilities under the federal
securities laws, arising out of its engagement.
Janney
has in the past provided certain investment banking services to Harleysville
National and has received compensation for such services and may provide, and
receive compensation for, such services in the future. Furthermore, in the
ordinary course of its business as a broker-dealer, Janney may, from time to
time, have a long or short position in, and buy or sell, debt or equity
securities of Harleysville National or Willow Financial for its own account or
for the accounts of its customers.
WILLOW FINANCIALS REASONS FOR THE
MERGER
After
careful consideration, the Willow Financial board of directors has determined
that the merger is advisable and fair to, and in the best interests of, Willow
Financial and its shareholders, approved the merger agreement and the
transactions contemplated thereby, including the merger, and unanimously
recommended that its shareholders approve the merger and approve and adopt the
merger agreement. Accordingly, Willow Financials board of directors unanimously
recommends that Willow Financials shareholders vote
FOR
the approval of the
merger and the adoption of the merger agreement.
In
reaching its decision to approve the merger agreement, the Willow Financial
board of directors consulted with management, as well as with Willow Financials
financial advisors and legal counsel, and considered the following material
factors:
-
Willow Financial board of directors familiarity
with and review of information concerning its business,
results of operation, financial condition, competitive
position and future prospects, as well as risks
involved in achieving these prospects;
-
The nature of Willow Financials business and the
industry in which it competes, and current industry,
economic and market conditions, including the increasing consolidation
within the banking industry;
-
Based on the closing price of Harleysville
National common stock on May 20, 2008, the merger
consideration represented a 32.8% premium over the per share closing
price of Willow Financial common
stock on May
20, 2008, the date prior to the date on which the merger was publicly
announced;
-
The terms of the merger agreement by which 100% of
the merger consideration is to take the form of Harleysville National common
stock, enabling Willow Financial shareholders to participate in anticipated
future growth and stock appreciation of the combined Harleysville
National-Willow Financial franchise;
-
Based on the exchange ratio and assuming
continuation of Harleysville Nationals current per share dividend rate of
$0.20 per quarter, an anticipated quarterly dividend increase of $0.031
per share for holders of Willow Financial common stock, which is an
approximate 27.0% increase over Willow Financials current
dividend;
-
The anticipated accretion for Willow Financial
shareholders of the projected dividend rate and earnings per
share;
-
The strategic value of Willow Financial to
potential buyers compared to its value as an independent
institution;
45
-
Willow Financial board of directors conclusion,
after review of the possible alternatives to a sale of Willow Financial,
including remaining independent and growing its business organically and
pursuing a strategy of growth through acquisitions, the value to its
shareholders of such alternatives, and the timing and likelihood of actually
achieving additional value from these alternatives, that none of these
alternatives was reasonably likely to result in value for its shareholders
greater than the consideration to be received in the merger;
-
The fact that Willow Financial through its
financial advisor contacted numerous prospective partners to discuss a
possible transaction during a period of more than six months and that,
although these parties were each afforded ample time to conduct due diligence
and submit an offer, none of these parties made a firm offer superior to that
of Harleysville National;
-
The overall historical performance of Harleysville
National and the perceived strong future business and growth prospects of
Harleysville National, especially compared to Company D;
-
The results of Willow Financials due diligence
review of Harleysville National;
-
The fundamental similarity of Harleysville
Nationals culture and business philosophy with Willow Financials culture and
business philosophy, thereby increasing the probability of a successful
integration;
-
The belief that Harleysville Nationals business
strategy is consistent with Willow Financial Banks customer-focused community
banking operating model. The larger size of the combined company would place
the combined company in a stronger position to satisfy the financial needs of
its expanded customer base;
-
The complementary strengths of the businesses of
Willow Financial and Harleysville National, and the benefits to be realized by
an increased scale of operations and expanded product and service
offerings.
-
The potential for operating synergies and cross
marketing of products in light of the fact that Harleysville National and
Willow Financial serve contiguous market areas with similar and complementary
customer bases;
-
The proposed board and management arrangements of
the combined company, including the inclusion of two of Willow Financials
directors on Harleysville Nationals board of directors and Ms. Coughey as
executive vice president, which Willow Financials board of directors believes
positions the combined company with strong leadership and experienced
management;
-
The likelihood of employment arrangements with key
Willow Financial employees which would help assure the continuity of
management, the likelihood of successful integration and the successful
operation of the combined company;
-
The effects of the merger on Willow Financials
employees, including the prospects for continued employment and severance and
other benefits agreed to be provided to Willow Financial
employees;
-
The ability of Willow Financials board of
directors, under the limitations and requirements in the merger agreement, to
furnish information to and conduct negotiations with a third party and to
accept an alternative acquisition proposal upon the payment to Harleysville
National of a termination fee of $7,000,000;
-
The merger agreement provides reasonable certainty
of consummation, because it includes limited conditions to Harleysville
Nationals obligation to complete the merger, including: accuracy of Willow
Financials representations and warranties and compliance with its obligations
under the merger agreement, the absence of a material adverse effect upon
Willow Financial, the completion of regulatory approvals and the maintenance
of the employment agreement between Ms. Coughey and Harleysville
National;
-
Harleysville National is generally obligated to
close the merger notwithstanding any breaches of Willow Financials
representations and warranties, unless those breaches would have a material
adverse effect on Willow Financial;
46
-
The likelihood that regulatory approvals needed to
complete the transaction will be obtained;
-
The structural protections included in the merger
agreement such as the ability of Willow Financial to terminate the merger
agreement in the event of any change or development affecting Harleysville
National since the date of the merger agreement and continuing immediately
prior to the closing of the merger agreement which has, or is reasonably
likely to have, a material adverse effect on Harleysville
National;
-
The oral and written opinion Sandler ONeill &
Partners, L.P., Willow Financials financial advisor, dated May 20, 2008 that,
as of the date of the opinion, the merger consideration was fair to Willow
Financials shareholders from a financial point of view. The full text of
Sandler ONeills written opinion is attached to this joint proxy
statement/prospectus as Annex C and is incorporated by reference into this
joint proxy statement/prospectus. Willow Financial urges all Willow Financial
shareholders to read this opinion carefully in its entirety for a description
of the assumptions made, procedures followed, matters considered and
limitations on the review undertaken in connection with the opinion. For a
summary of the presentation of Sandler ONeill, see Opinion of Willow
Financials Financial Advisor below.
-
The general terms and conditions of the merger
agreement, including the parties representations, warranties and covenants,
the conditions to their respective obligations as well as the likelihood of
the consummation of the merger, the proposed transaction structure, the
termination provisions of the agreement and evaluation by Willow Financials
board of directors of the likely time period necessary to close the
transaction
.
In the
course of its deliberations, Willow Financials board of directors also
considered a variety of risks and other potentially negative factors, including
the following:
-
Willow Financial will no longer exist as an
independent company and its shareholders will forgo any
future increase in its value that might result from its
possible growth;
-
The fixed exchange ratio will not adjust upwards
to compensate for declines in Harleysville Nationals
stock price prior to completion of the merger;
-
There are risks and uncertainties related to the
announcement and pendency of the merger, including the
impact of the merger on Willow Financials employees, customers and its
relationship with third parties;
-
The merger agreement precludes Willow Financial
from soliciting alternative proposals;
-
Certain of Willow Financials directors and
officers may have conflicts of interest in connection with the
merger, as they may receive certain benefits that are
different from, and in addition to, those of our other
shareholders. See The Merger- Interests of Management and Others in
the Merger;
-
Willow Financial may incur significant risks and
costs if the merger does not close, including the diversion of management and
employee attention during the period after the signing of the merger
agreement, potential employee attrition and the potential effect on its
business and customer relations. In that regard,
under
the merger agreement, Willow Financial must conduct its business in the
ordinary course and
it is subject to a variety of other restrictions on
the conduct of its business prior to completion of the merger or termination
of the merger agreement, which may delay or prevent it from undertaking
business opportunities that may arise; and
-
Willow Financial is obligated to pay to
Harleysville National a termination fee of $7,000,000 if the merger
agreement is terminated under certain circumstances. It is
possible that these provisions could discourage
a competing proposal to
acquire Willow Financial or reduce the price in an alternative
transaction.
The
foregoing discussion of the information and factors considered by the Willow
Financial board of directors is not intended to be exhaustive, but Willow
Financial believes it addresses all material factors considered by its board of
directors, including factors that support the merger as well as those that may
weigh against it. In view of the number and variety of factors and the amount of
information considered, Willow Financials board of directors did not find it
practicable to make specific assessments of, quantify or otherwise assign
relative weights to, the specific factors considered in reaching its
determination. In addition, Willow Financials board of directors did not
undertake to make any specific determination as to whether any particular
factor, or any aspect of any particular factor, was
47
favorable or unfavorable to its
ultimate determination, and individual members of Willow Financials board of
directors may have given different weights to different factors. This
explanation of the Willow Financial board of directors reasoning and all other
information presented in this section is forward-looking in nature and,
therefore, should be read in light of the discussion under the heading A
Warning About Forward-Looking Information.
RECOMMENDATION OF THE WILLOW
FINANCIAL BOARD OF DIRECTORS
Willow
Financials board of directors has adopted and approved the merger agreement and
unanimously recommends that its shareholders vote for approval of the merger and
approval and adoption of the merger agreement.
OPINION OF WILLOW FINANCIALS
FINANCIAL ADVISOR
By letter
dated January 9, 2008, Willow Financial retained Sandler ONeill to act as its
financial advisor in connection with a possible business combination. Sandler
ONeill is a nationally recognized investment banking firm whose principal
business specialty is financial institutions. In the ordinary course of its
investment banking business, Sandler ONeill is regularly engaged in the
valuation of financial institutions and their securities in connection with
mergers and acquisitions and other corporate transactions.
Sandler
ONeill acted as financial advisor to Willow Financial in connection with the
proposed transaction and participated in certain of the negotiations leading to
the execution of a definitive merger agreement with Harleysville National on May
20, 2008. At the May 20, 2008 meeting at which Willow Financials board of
directors considered and approved the merger agreement, Sandler ONeill
delivered to the board of directors its oral opinion, subsequently approved in
writing, that, as of such date, the merger consideration was fair to Willow
Financial from a financial point of view.
The
full text of Sandler ONeills opinion is attached as Annex C to this joint
proxy statement/prospectus. The opinion outlines the procedures followed,
assumptions made, matters considered and qualifications and limitations on the
review undertaken by Sandler ONeill in rendering its opinion. The description
of the opinion set forth below is qualified in its entirety by reference to the
full text of the opinion. Willow Financials shareholders are urged to read the
entire opinion carefully in connection with their consideration of the proposed
merger.
Sandler ONeills opinion speaks only as of the date of the opinion. The
opinion was directed to the Willow Financial board of directors and is directed
only to the fairness of the merger consideration to Willow Financial from a
financial point of view. It does not address the underlying business decision of
Willow Financial to engage in the merger or any other aspect of the merger and
is not a recommendation to any Willow Financial shareholder as to how such
shareholder should vote at the special meeting with respect to the merger or any
other matter.
In
connection with rendering its May 20, 2008 opinion, Sandler ONeill reviewed and
considered, among other things:
|
1.
|
|
The merger
agreement.
|
|
|
|
2.
|
|
Certain publicly available
financial statements and other historical financial information of Willow
Financial that Sandler ONeill deemed relevant.
|
|
|
|
3.
|
|
Certain publicly available
financial statements and other historical financial information of
Harleysville National that Sandler ONeill deemed relevant.
|
|
|
|
4.
|
|
Internal financial projections
for Willow Financial for the year ending December 31, 2008 as prepared by
and reviewed with senior management of Willow Financial and growth and
performance guidance for the years ending December 31, 2009 through 2012
as provided by and reviewed with senior management of Willow
Financial.
|
|
|
|
5.
|
|
Internal financial projections
for Harleysville National for the year ending December 31, 2008 as
prepared by and reviewed with senior management of Harleysville National
and growth and performance guidance for the years ending December 31, 2009
through 2012 as provided by and reviewed with senior management of
Harleysville National.
|
48
|
6.
|
|
The
pro forma
financial impact of
the merger on Harleysville National based on assumptions relating to
transaction expenses, purchase accounting adjustments and cost savings
determined by the senior managements of Willow Financial and Harleysville
National.
|
|
|
|
7.
|
|
The publicly reported historical
price and trading activity for Willow Financials and Harleysville
Nationals respective common stock, including a comparison of certain
financial and stock market information for Willow Financial and
Harleysville National with similar publicly available information for
certain other companies the securities of which are publicly
traded.
|
|
|
|
8.
|
|
The financial terms of certain
recent business combinations in the commercial banking industry, to the
extent publicly available.
|
|
|
|
9.
|
|
The current market environment
generally and the banking environment in particular.
|
|
|
|
10.
|
|
Such other information, financial
studies, analyses and investigations and financial, economic and market
criteria as Sandler ONeill considered
relevant.
|
Sandler
ONeill also discussed with certain members of senior management of Willow
Financial the business, financial condition, results of operations and prospects
of Willow Financial and held similar discussions with certain members of senior
management of Harleysville National regarding the business, financial condition,
results of operations and prospects of Harleysville National.
In
performing its reviews and analyses and in rendering its opinion, Sandler
ONeill relied upon the accuracy and completeness of all the financial and other
information that was available to them from public sources, that was provided to
Sandler ONeill by Willow Financial or Harleysville National or their respective
representatives or that was otherwise reviewed by Sandler ONeill and has
assumed such accuracy and completeness for purposes of rendering this opinion.
Sandler ONeill further relied on the assurances of the management of each of
Willow Financial and Harleysville National that they are not aware of any facts
or circumstances that would make any of such information inaccurate or
misleading. Sandler ONeill has not been asked to undertake, and has not
undertaken, an independent verification of any of such information and Sandler
ONeill does not assume any responsibility or liability for the accuracy or
completeness thereof. Sandler ONeill did not make an independent evaluation or
appraisal of the specific assets, the collateral securing the assets or the
liabilities (contingent or otherwise) of Willow Financial or Harleysville
National or any of their subsidiaries, or the collectibility of any such assets,
nor has Sandler ONeill been furnished with any such evaluations or appraisals.
Sandler ONeill did not make an independent evaluation of the adequacy of the
allowance for loan losses of Willow Financial or Harleysville National nor has
Sandler ONeill reviewed any individual credit files relating to Willow
Financial or Harleysville National. Sandler ONeill assumed, with Willow
Financials consent, that the respective allowances for loan losses for both
Willow Financial and Harleysville National were adequate to cover such losses
and will be adequate on a
pro
forma
basis for the combined
entity.
The
internal projections and growth and performance guidance used and relied upon by
Sandler ONeill in its analyses of Willow Financial and Harleysville National,
respectively, were provided by and discussed with the senior managements of
Willow Financial and Harleysville National, respectively who confirmed to
Sandler ONeill that those projections and growth and performance guidance
reflected the best currently available estimates and judgments of the future
financial performance of Willow Financial and Harleysville National,
respectively. The projections of transaction costs, purchase accounting
adjustments and expected cost savings related to the merger were provided by or
reviewed with senior management of Willow Financial and such senior management
confirmed to Sandler ONeill that those projections reflected the best currently
available estimates and judgments of such senior management. Sandler ONeill
assumed that the financial performances reflected in all projections, growth and
performance guidance, estimates and projections used by it in its analyses would
be achieved. Sandler ONeill expressed no opinion as to such budgets, estimates
or projections or the assumptions on which they were based. Sandler ONeill also
assumed that there has been no material change in the assets, financial
condition, results of operations, business or prospects of Willow Financial or
Harleysville National since the date of the last financial statements made
available to them and that Willow Financial and Harleysville National will
remain as going concerns for all periods relevant to the analyses.
49
With
respect to the merger agreement, Sandler ONeill assumed that all of the
representations and warranties contained in the merger agreement and all related
agreements are true and correct, that each party to such agreements will perform
all of the covenants required to be performed by such party under the
agreements, that the conditions precedent in the merger agreement are not waived
and that the merger will be a tax-free reorganization for federal income tax
purposes.
Sandler
ONeills opinion was approved by Sandler ONeills fairness opinion committee.
Sandler ONeill did not express any opinion as to the fairness of the amount or
nature of the compensation to be received in the merger by Willow Financials
officers, directors, or employees, or class of such persons, relative to the
compensation to be received in the merger by any other shareholders of Willow
Financial. Finally, with Willow Financials consent, Sandler ONeill relied upon
the advice received from Willow Financials legal, accounting and tax advisors
as to all legal, accounting and tax matters relating to the merger agreement and
the other transactions contemplated by the agreement.
Sandler
ONeills opinion was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of its
opinion. Events occurring after the date of the opinion could materially affect
the opinion. Sandler ONeill has not undertaken to update, revise, reaffirm or
withdraw its opinion or otherwise comment upon events occurring after the date
hereof. Sandler ONeill expressed no opinion as to what the value of Willow
Financials common stock will be when issued to Harleysville Nationals
shareholders pursuant to the agreement or the prices at which the common stock
of Willow Financial or Harleysville National may trade at any time.
In
rendering its May 20, 2008 opinion, Sandler ONeill performed a variety of
financial analyses. The following is a summary of the material analyses
performed by Sandler ONeill, but is not a complete description of all the
analyses underlying Sandler ONeills opinion. The summary includes information
presented in tabular format.
In order to fully
understand the financial analyses, these tables must be read together with the
accompanying text. The tables alone do not constitute a complete description of
the financial analyses.
The preparation of a
fairness opinion is a complex process involving subjective judgments as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances. The process, therefore, is not
necessarily susceptible to a partial analysis or summary description. Sandler
ONeill believes that its analyses must be considered as a whole and that
selecting portions of the factors and analyses to be considered without
considering all factors and analyses, or attempting to ascribe relative weights
to some or all such factors and analyses, could create an incomplete view of the
evaluation process underlying its opinion. Also, no company included in Sandler
ONeills comparative analyses described below is identical to Willow Financial
or Harleysville National and no transaction is identical to the merger.
Accordingly, an analysis of comparable companies or transactions involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values or merger transaction values, as the case may be, of
Willow Financial and Harleysville National and the companies to which they are
being compared.
In
performing its analyses, Sandler ONeill also made numerous assumptions with
respect to industry performance, business and economic conditions and various
other matters, many of which cannot be predicted and are beyond the control of
Willow Financial, Harleysville National and Sandler ONeill. The analysis
performed by Sandler ONeill is not necessarily indicative of actual values or
future results, both of which may be significantly more or less favorable than
suggested by such analyses. Sandler ONeill prepared its analyses solely for
purposes of rendering its opinion and provided such analyses to Willow
Financials board of directors at the boards May 20, 2008 meeting. Estimates on
the values of companies do not purport to be appraisals or necessarily reflect
the prices at which companies or their securities may actually be sold. Such
estimates are inherently subject to uncertainty and actual values may be
materially different. Accordingly, Sandler ONeills analyses do not necessarily
reflect the value of the Willow Financial common stock or the prices at which
Willow Financial common stock may be sold at any time. The combined analysis of
Sandler ONeill and the opinions provided by each were among a number of factors
taken into consideration by Willow Financials board of directors in making its
determination to adopt the plan of merger contained in the merger agreement and
the analyses described below should not be viewed as determinative of the
decision of Willow Financials board of directors or management with respect to
the fairness of the merger.
50
In
arriving at its opinion Sandler ONeill did not attribute any particular weight
to any analysis or factor that it considered. Rather it made qualitative
judgments as to the significance and relevance of each analysis and factor. The
financial analyses summarized below include information presented in tabular
format. Sandler ONeill did not form an opinion as to whether any individual
analysis or factor (positive or negative) considered in isolation supported or
failed to support their respective opinions; rather Sandler ONeill made its
determination as to the fairness of the per share consideration on the basis of
its experience and professional judgment after considering the results of all
their analyses taken as a whole. Accordingly, Sandler ONeill believes that the
analysis and the summary of the analysis must be considered as a whole and that
selecting portions of the analysis and factors or focusing on the information
presented below in tabular format, without considering all analyses and factors
or the full narrative description of the financial analyses, including
methodologies and assumptions underlying the analyses, could create a misleading
or incomplete view of the process underlying their analyses and opinions. At the
May 20, 2008 meeting of Willow Financials board of directors, Sandler ONeill
presented certain financial analyses of the merger. The summary and tables below
do not represent a complete description of the analyses underlying the opinion
of Sandler ONeill or the presentation made by Sandler ONeill to Willow
Financials board of directors, but is instead a summary of the material
analyses performed and presented in connection with the opinion.
Summary of
Proposal
Sandler
ONeill reviewed the financial terms of the proposed transaction. Using the
fixed exchange ratio of 0.73 of Harleysville National no par common stock for
each share of Willow Financial common stock and Willow Financials options
exchanged for Harleysville Nationals options, Harleysville Nationals 1-week
average closing stock price of $14.26 as of May 19, 2008. Based upon financial
information for Willow Financial as of and for the twelve month period ended
September 30, 2007, Sandler ONeill calculated the following transaction ratios:
Transaction Ratios
Transaction Value/Last Twelve Months Net Income
|
26.7
|
x
|
Transaction
Value/Estimated 2009 Net Income
(1)
|
27.5
|
x
|
Transaction Value/Tangible Book Value
|
179
|
%
|
Tangible Book
Premium/ Core Deposits
(2)
|
9.7
|
%
|
Premium over Current Market Price
|
35.2
|
%
|
____________________
(1)
|
|
Based on Willow Financials management estimate of $0.38 Earnings
per share for 2009
|
|
(2)
|
|
Core deposits exclude time deposits with account balances greater
than $100,000. Tangible book premium/core deposits calculated by dividing
the excess of the aggregate transaction value over tangible book value by
core deposits.
|
Comparable Company
Analysis
Sandler
ONeill used publicly available information to perform a comparison of selected
financial and market trading information for Willow Financial and Harleysville
National. Sandler ONeill used publicly available information to compare
selected financial and market trading information for Willow Financial and a
group of financial institutions selected by Sandler ONeill. The Willow
Financial peer group consisted of selected publicly traded thrifts headquartered
in New York, New Jersey, Pennsylvania and Delaware:
Abington
Bancorp, Inc.
|
|
Provident New
York Bancorp
|
ESB Financial
Corporation
|
|
OceanFirst
Financial Corporation
|
Flushing
Financial Corporation
|
|
WSFS Financial
Corporation
|
Parkvale
Financial Corporation
|
|
|
The
analysis compared publicly available financial information for Willow Financial
and the high, low, mean and median financial and market trading data for the
Willow Financial peer group. The table below sets forth the data for Willow
Financial as of and for the twelve months ended September 30, 2007 and the
median data for the Willow Financials peer group as of and for the twelve
months ended March 31, 2008, with pricing data as of May 19, 2008.
51
Comparable Group
Analysis
|
|
|
|
|
Comparable
|
|
|
Willow
|
|
Group
|
|
|
Financ
ial
|
|
Median Result
|
Total Assets
(in
millions)
|
|
$
|
1,569
|
|
$
|
1,920
|
Tangible Equity
/ Tangible Assets
|
|
|
6.19%
|
|
|
6.47%
|
Return on Average Assets
|
|
|
0.38%
|
|
|
0.72%
|
Return on
Average Equity
|
|
|
2.89%
|
|
|
8.53%
|
Net Interest Margin
|
|
|
3.10%
|
|
|
2.77%
|
Efficiency
Ratio
|
|
|
82.2%
|
|
|
63.8%
|
Nonperforming Assets / Assets
|
|
|
0.30%
|
|
|
1.82%
|
Price / Tangible
Book Value
|
|
|
131%
|
|
|
146%
|
Price / Last Twelve Months Earnings per Share
|
|
|
19.5x
|
|
|
17.0x
|
Price /
Estimated 2008 Earnings per Share
(1)
|
|
|
44.6x
|
|
|
13.7x
|
Dividend Yield
|
|
|
6.09%
|
|
|
2.80%
|
Market
Capitalization
(in millions)
|
|
$
|
118
|
|
$
|
256
|
____________________
(1)
|
|
Based on
First Call median estimates outstanding for peers and the financial
projection provided by Willow Financials
management
|
Harleysville Nationals peer group consisted of selected publicly traded
commercial banks headquartered in Pennsylvania, New Jersey, Delaware, Maryland
and New York:
Community Bank
Systems, Inc.
|
|
Sandy Spring
Bancorp, Inc.
|
First
Commonwealth Financial
|
|
Sun Bancorp,
Inc.
|
S&T Bancorp,
Inc.
|
|
WesBanco
Inc.
|
The
analysis compared publicly available financial and market trading information
for Harleysville National and the high, low, mean, and median data for
Harleysville National peer group. The table below sets forth the data for
Harleysville National and the median data for the Harleysville National peer
group as of and for the twelve months ended March 31, 2008, with pricing data as
of May 19, 2008.
Comparable Group
Analysis
|
|
|
|
|
Comparable
|
|
|
Harleysville
|
|
Group
|
|
|
Nation
al
|
|
Median Result
|
Total Assets
(in
millions)
|
|
$
|
3,894
|
|
$
|
4,061
|
Tangible Equity
/ Tangible Assets
|
|
|
5.88%
|
|
|
6.71%
|
Return on Average Assets
|
|
|
0.79%
|
|
|
0.95%
|
Return on
Average Equity
|
|
|
8.93%
|
|
|
9.22%
|
Net Interest Margin.
|
|
|
2.85%
|
|
|
3.55%
|
Efficiency
Ratio
|
|
|
61.7%
|
|
|
62.9%
|
Nonperforming Assets / Assets
|
|
|
0.65%
|
|
|
0.88%
|
Price / Tangible
Book Value
|
|
|
198%
|
|
|
199%
|
Price / Last Twelve Months Earnings per Share
|
|
|
15.8x
|
|
|
13.5x
|
Price /
Estimated 2008 Earnings per Share
(1)
|
|
|
12.4x
|
|
|
13.2x
|
Dividend Yield
|
|
|
5.65%
|
|
|
3.78%
|
Market
Capitalization
(in millions)
|
|
$
|
440
|
|
$
|
651
|
____________________
(1)
|
|
Based on
First Call median estimates outstanding for peers; Harleysville Nationals
management projections
|
52
Stock Trading
History
Sandler
ONeill reviewed the history of the publicly reported trading prices of Willow
Financial common stock for the three-year period ended May 19, 2008. Sandler
ONeill also reviewed the history of the reported trading prices and volume of
Harleysville National common stock for the three year period ended May 19, 2008.
Sandler ONeill then compared the relationship between the movements in the
price of Willow Financial common stock against the movements in the prices of
the Standard & Poors 500 Index, the NASDAQ Bank Index, and the Standard
& Poors Bank Index. Sandler ONeill also compared the relationship between
the movements in the prices of Harleysville National common stock to movements
in the prices of the Standard & Poors 500 Index, the NASDAQ Bank Index, and
the Standard & Poors Bank Index.
During
the three-year period ended May 19, 2008, Willow Financial common stock
underperformed all the various indices to which it was compared but the Standard
& Poors 500 Index.
Willow Financials Three-Year Stock
Performance
|
|
Beginning Index Value
|
|
Ending Index Value
|
|
|
May 19, 2005
|
|
May 19, 2008
|
Willow Financial
|
|
100.00
|
%
|
|
50.3
|
%
|
NASDAQ Bank
Index
|
|
100.00
|
|
|
83.7
|
|
S&P Bank Index
|
|
100.00
|
|
|
74.2
|
|
S&P 500
Index
|
|
100.00
|
|
|
119.8
|
|
During
the three-year period ended March 19, 2008, Harleysville National common stock
underperformed the various indices and outperformed the peer group to which it
was compared.
Harleysville Nationals Three-Year
Stock Performance
|
|
Beginning Index Value
|
|
Ending Index Value
|
|
|
May 19, 2005
|
|
May 19, 2008
|
Harleysville National
|
|
100.00
|
%
|
|
68.5
|
%
|
NASDAQ Bank
Index
|
|
100.00
|
|
|
83.7
|
|
S&P Bank Index
|
|
100.00
|
|
|
74.2
|
|
S&P 500
Index
|
|
100.00
|
|
|
119.8
|
|
Analysis of Selected Merger
Transactions
Sandler
ONeill reviewed 6 merger transactions announced nationwide from July 1, 2007
through May 19, 2008 involving thrifts as acquired institutions with announced
transaction values greater than $50 million and less than $1.0 billion. Sandler
ONeill reviewed the following multiples: transaction price at announcement to
last twelve months net income, transaction price at announcement to estimated
net income, transaction value to tangible book value, tangible book premium to
core deposits and premium to market price and then computed high, low, mean,
median multiples and premiums for the transactions. The median multiples were
applied to Willow Financials financial information as of and for the twelve
months ended September 30, 2007. As illustrated in the following tables, Sandler
ONeill derived an imputed range of values for a share of Willow Financial
common stock of $8.08 to $13.28 based upon the median multiples for the
comparable transactions.
Transaction Multiples
|
|
Median
|
|
Implied
|
|
|
Multi
ple
|
|
Value
|
Price per Share / Last twelve months Earnings
|
|
22.5
|
x
|
|
$
|
8.76
|
Price per Share
/ 2009 Estimated Earnings
|
|
21.4
|
x
|
|
$
|
8.08
|
Price per Share / Tangible Book Value
|
|
181
|
%
|
|
$
|
10.44
|
Core Deposit
Premium
(1)
|
|
12.3
|
%
|
|
$
|
13.28
|
Market Premium
|
|
18.6
|
%
|
|
$
|
9.13
|
____________________
(1)
|
|
Core deposits are defined as total deposits less time deposits over
$100,000. The core deposit premium is calculated by taking transaction
value, less tangible book value, divided by core
deposits.
|
53
Net Present Value
Analysis
Sandler
ONeill performed an analysis that estimated the net present value per share of
Willow Financial common stock under various circumstances. In the analysis,
Sandler ONeill assumed Willow Financial performed in accordance with the 2008
net income projections provided by Willow Financials management and the
estimated growth and performance rate for the years ending December 31, 2009
through 2012 as provided by Willow Financial management. To approximate the
terminal value of Willow Financial common stock at December 31, 2012, Sandler
ONeill applied price to last twelve months earnings multiples of 11.0x to 16.0x
and multiples of tangible book value ranging from 100% to 200%. The terminal
values were then discounted to present values using different discount rates
ranging from 12.0% to 16.5% which were chosen by Sandler ONeill and reflected
different assumptions regarding required rates of return of holders or
prospective buyers of Willow Financials common stock. In addition, the net
present value of Willow Financial common stock at December 31, 2012 was
calculated using the same range of price to last twelve months earnings
multiples (11.0x 16.0x) applied to a range of discounts and premiums to budget
projections. The range applied to the budgeted net income was 25% under budget
to 25% over budget, using a discount rate of 14.09% for the analysis.
As illustrated in the following
tables, the analysis indicated an imputed range of values per share for Willow
Financial common stock of $3.97 to $6.29 when applying the price/earnings
multiples to the matched budget, $4.37 to $8.96 when applying multiples of
tangible book value to the matched budget, and $3.52 to $6.98 when applying the
price/earnings multiples to the -25% / +25% budget range.
Earnings Per Share Multiples
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
11.0x
|
|
12.0x
|
|
13.0x
|
|
14.0x
|
|
15.0x
|
|
16.0x
|
12.00%
|
|
|
$4.69
|
|
$5.01
|
|
$5.33
|
|
$5.65
|
|
$5.97
|
|
$6.29
|
12.75%
|
|
|
$4.56
|
|
$4.87
|
|
$5.18
|
|
$5.49
|
|
$5.80
|
|
$6.11
|
13.50%
|
|
|
$4.43
|
|
$4.73
|
|
$5.03
|
|
$5.33
|
|
$5.64
|
|
$5.94
|
14.25%
|
|
|
$4.31
|
|
$4.60
|
|
$4.89
|
|
$5.19
|
|
$5.48
|
|
$5.77
|
15.00%
|
|
|
$4.19
|
|
$4.47
|
|
$4.76
|
|
$5.04
|
|
$5.33
|
|
$5.61
|
15.75%
|
|
|
$4.08
|
|
$4.35
|
|
$4.63
|
|
$4.90
|
|
$5.18
|
|
$5.45
|
16.50%
|
|
|
$3.97
|
|
$4.24
|
|
$4.50
|
|
$4.77
|
|
$5.04
|
|
$5.30
|
|
Earnings Per Share Multiples
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Budget Variance
|
|
11.0x
|
|
12.0x
|
|
13.0x
|
|
14.0x
|
|
15.0x
|
|
16.0x
|
(25.00%
|
)
|
|
$3.52
|
|
$3.74
|
|
$3.97
|
|
$4.19
|
|
$4.41
|
|
$4.63
|
(20.00%
|
)
|
|
$3.69
|
|
$3.92
|
|
$4.16
|
|
$4.39
|
|
$4.63
|
|
$4.86
|
(15.00%
|
)
|
|
$3.85
|
|
$4.10
|
|
$4.35
|
|
$4.60
|
|
$4.85
|
|
$5.10
|
(10.00%
|
)
|
|
$4.01
|
|
$4.27
|
|
$4.54
|
|
$4.80
|
|
$5.07
|
|
$5.33
|
(5.00%
|
)
|
|
$4.17
|
|
$4.45
|
|
$4.73
|
|
$5.01
|
|
$5.29
|
|
$5.57
|
0.00%
|
|
|
$4.33
|
|
$4.63
|
|
$4.92
|
|
$5.22
|
|
$5.51
|
|
$5.81
|
5.00%
|
|
|
$4.50
|
|
$4.80
|
|
$5.11
|
|
$5.42
|
|
$5.73
|
|
$6.04
|
10.00%
|
|
|
$4.66
|
|
$4.98
|
|
$5.31
|
|
$5.63
|
|
$5.95
|
|
$6.28
|
15.00%
|
|
|
$4.82
|
|
$5.16
|
|
$5.50
|
|
$5.84
|
|
$6.17
|
|
$6.51
|
20.00%
|
|
|
$4.98
|
|
$5.33
|
|
$5.69
|
|
$6.04
|
|
$6.40
|
|
$6.75
|
25.00%
|
|
|
$5.14
|
|
$5.51
|
|
$5.88
|
|
$6.25
|
|
$6.62
|
|
$6.98
|
|
Tangible Book Value Per Share Multiples
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
100%
|
|
120%
|
|
140%
|
|
160%
|
|
180%
|
|
200%
|
12.00%
|
|
|
$5.17
|
|
$5.93
|
|
$6.68
|
|
$7.44
|
|
$8.20
|
|
$8.96
|
12.75%
|
|
|
$5.02
|
|
$5.76
|
|
$6.49
|
|
$7.22
|
|
$7.96
|
|
$8.69
|
13.50%
|
|
|
$4.88
|
|
$5.59
|
|
$6.30
|
|
$7.02
|
|
$7.73
|
|
$8.44
|
14.25%
|
|
|
$4.75
|
|
$5.44
|
|
$6.13
|
|
$6.81
|
|
$7.50
|
|
$8.19
|
15.00%
|
|
|
$4.62
|
|
$5.28
|
|
$5.95
|
|
$6.62
|
|
$7.29
|
|
$7.96
|
15.75%
|
|
|
$4.49
|
|
$5.14
|
|
$5.79
|
|
$6.43
|
|
$7.08
|
|
$7.73
|
16.50%
|
|
|
$4.37
|
|
$5.00
|
|
$5.63
|
|
$6.25
|
|
$6.88
|
|
$7.51
|
54
Harleysville National Net Present
Value Analysis
Sandler
ONeill also performed an analysis that estimated the net present value per
share of Harleysville National common stock under various circumstances. In the
analysis Sandler ONeill assumed Harleysville National performed in accordance
with the 2008 net income projection and estimated growth rate for the years
ended December 31, 2009 through 2012 provided by Harleysville National
management. To approximate the terminal value of Harleysville National common
stock at December 31, 2012, Sandler ONeill applied price to last twelve months
earnings multiples of 12.0x to 17.0x and multiples of tangible book value
ranging from 165% to 290%. The terminal values were then discounted to present
values using different discount rates ranging from 10.50% to 13.50% chosen by
Sandler ONeill to reflect different assumptions regarding required rates of
return of holders or prospective buyers of Harleysville National common stock.
In addition, the net present value of Harleysville National common stock at
December 31, 2012 was calculated using the same range of price to last twelve
months earnings multiples (12.0x to 17.0x) applied to a range of discounts and
premiums to budget projections. The range applied to the budgeted net income was
25% under budget to 25% over budget, using a discount rate of 12.08% for the
analysis.
As
illustrated in the following tables, the analysis indicated an imputed range of
values per share for Harleysville National common stock of $12.18 to $17.91 when
applying the price/earnings multiples to the matched budget, $11.76 to $20.12
when applying multiples of tangible book value to the matched budget, and $10.86
to $21.12 when applying the price/earnings multiples to the -25% / +25% budget
range.
Earnings Per Share Multiples
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
12.0x
|
|
13.0x
|
|
14.0x
|
|
15.0x
|
|
16.0x
|
|
17.0x
|
10.50%
|
|
|
$13.63
|
|
$14.48
|
|
$15.34
|
|
$16.20
|
|
$17.05
|
|
$17.91
|
11.00%
|
|
|
$13.37
|
|
$14.21
|
|
$15.05
|
|
$15.88
|
|
$16.72
|
|
$17.56
|
11.50%
|
|
|
$13.12
|
|
$13.94
|
|
$14.76
|
|
$15.58
|
|
$16.40
|
|
$17.22
|
12.00%
|
|
|
$12.88
|
|
$13.68
|
|
$14.48
|
|
$15.28
|
|
$16.09
|
|
$16.89
|
12.50%
|
|
|
$12.64
|
|
$13.42
|
|
$14.21
|
|
$14.99
|
|
$15.78
|
|
$16.57
|
13.00%
|
|
|
$12.40
|
|
$13.17
|
|
$13.94
|
|
$14.71
|
|
$15.48
|
|
$16.25
|
13.50%
|
|
|
$12.18
|
|
$12.93
|
|
$13.68
|
|
$14.44
|
|
$15.19
|
|
$15.94
|
|
Earnings Per Share Multiples
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Budget
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
12.0x
|
|
13.0x
|
|
14.0x
|
|
15.0x
|
|
16.0x
|
|
17.0x
|
(25.00%
|
)
|
|
$10.86
|
|
$11.49
|
|
$12.11
|
|
$12.74
|
|
$13.37
|
|
$14.00
|
(20.00%
|
)
|
|
$11.36
|
|
$12.03
|
|
$12.70
|
|
$13.37
|
|
$14.04
|
|
$14.71
|
(15.00%
|
)
|
|
$11.86
|
|
$12.58
|
|
$13.29
|
|
$14.00
|
|
$14.71
|
|
$15.42
|
(10.00%
|
)
|
|
$12.37
|
|
$13.12
|
|
$13.87
|
|
$14.63
|
|
$15.38
|
|
$16.14
|
(5.00%
|
)
|
|
$12.87
|
|
$13.66
|
|
$14.46
|
|
$15.26
|
|
$16.05
|
|
$16.85
|
0.00%
|
|
|
$13.37
|
|
$14.21
|
|
$15.05
|
|
$15.88
|
|
$16.72
|
|
$17.56
|
5.00%
|
|
|
$13.87
|
|
$14.75
|
|
$15.63
|
|
$16.51
|
|
$17.39
|
|
$18.27
|
10.00%
|
|
|
$14.38
|
|
$15.30
|
|
$16.22
|
|
$17.14
|
|
$18.06
|
|
$18.98
|
15.00%
|
|
|
$14.88
|
|
$15.84
|
|
$16.81
|
|
$17.77
|
|
$18.73
|
|
$19.70
|
20.00%
|
|
|
$15.38
|
|
$16.39
|
|
$17.39
|
|
$18.40
|
|
$19.40
|
|
$20.41
|
25.00%
|
|
|
$15.88
|
|
$16.93
|
|
$17.98
|
|
$19.03
|
|
$20.07
|
|
$21.12
|
|
Tangible Book Value Per Share Multiples
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
165%
|
|
190%
|
|
215%
|
|
240%
|
|
265%
|
|
290%
|
10.50%
|
|
|
$13.16
|
|
$14.55
|
|
$15.94
|
|
$17.33
|
|
$18.73
|
|
$20.12
|
11.00%
|
|
|
$12.91
|
|
$14.27
|
|
$15.64
|
|
$17.00
|
|
$18.36
|
|
$19.72
|
11.50%
|
|
|
$12.67
|
|
$14.00
|
|
$15.34
|
|
$16.67
|
|
$18.00
|
|
$19.34
|
12.00%
|
|
|
$12.44
|
|
$13.74
|
|
$15.05
|
|
$16.35
|
|
$17.66
|
|
$18.96
|
12.50%
|
|
|
$12.21
|
|
$13.48
|
|
$14.76
|
|
$16.04
|
|
$17.32
|
|
$18.60
|
13.00%
|
|
|
$11.98
|
|
$13.23
|
|
$14.49
|
|
$15.74
|
|
$16.99
|
|
$18.24
|
13.50%
|
|
|
$11.76
|
|
$12.99
|
|
$14.21
|
|
$15.44
|
|
$16.67
|
|
$17.89
|
55
In
connection with its analyses, Sandler ONeill considered and discussed with the
Willow Financial board of directors how the present value analyses would be
affected by changes in the underlying assumptions, including variations with
respect to net income. Sandler ONeill noted that the terminal value analysis is
a widely used valuation methodology, but the results of such methodology are
highly dependent upon the numerous assumptions that must be made, and the
results thereof are not necessarily indicative of actual values or future
results.
Pro Forma Merger
Analysis
Sandler
ONeill analyzed certain potential
pro forma
effects of the merger,
assuming the following: (1) the merger closes on December 31, 2008; (2) the deal
value per share is equal to a $10.41 per Willow Financial share, given the 0.73
fixed exchange ratio; (3) options for Willow Financial common stock will be
exchanged for options for Harleysville National; (4) 25% cost savings, or
approximately $14.1 million pretax in 2009; (5) $30.0 million in pre-tax deal
related expenses, with a 4.0% opportunity cost of cash; (6) a 4.0% core deposit
intangible, equaling $29.4 million in aggregate, amortized over 10 years on a
sum-of-the-years digits basis; (7) Willow Financial performed in accordance with
an estimated earnings per share growth rate for the year ending December 31,
2008 as discussed with senior management of Willow Financial and an estimated
growth rate for the years ended December 31, 2009 through 2012 as discussed with
senior management of Willow Financial; and (5) Harleysville National performed
in accordance with an estimated earnings per share growth rate for the year
ending December 31, 2008 as discussed with senior management of Harleysville
National and an estimated growth rate for the years ended December 31, 2009
through 2012 as discussed with senior management of Harleysville National. The
analyses indicated that for the year ending December 31, 2009, the merger would
be accretive to Harleysville Nationals projected earnings per share and, at
December 31, 2009 the merger would be accretive to Harleysville Nationals
tangible book value per share. From the standpoint of a Willow Financial
stockholder, for the year ending December 31, 2009, the merger would be
accretive to earnings per share, tangible book value per share and dividend per
share. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
Miscellaneous
Willow
Financial has agreed to pay Sandler ONeill a non-refundable fee in an amount
equal to 0.25% of the aggregate purchase price, due and payable in cash upon the
signing of a definitive agreement to effect a business combination, and a fee in
an amount equal to 0.75% of the aggregate purchase price, subject to closing. In
addition, Willow Financial has agreed to pay Sandler ONeill a non-refundable
retainer fee in an amount of $25,000, all of which is to be credited against the
transaction fee. Willow Financial has also agreed to reimburse Sandler ONeill,
upon request made from time to time, for its reasonable out-of-pocket expenses
incurred in connection with Sandler ONeills engagement, including the
reasonable fees and disbursements of its legal counsel, with such costs not to
exceed $15,000 without the prior written consent of Willow Financial.
In the
ordinary course of its respective broker and dealer businesses, Sandler ONeill
may purchase securities from and sell securities to Willow Financial and
Harleysville National and their affiliates. Sandler ONeill may also actively
trade the debt and/or equity securities of Willow Financial or their affiliates
for their own accounts and for the accounts of their customers and, accordingly,
may at any time hold a long or short position in such securities.
TERMS OF THE MERGER
Effect of the Merger
Upon
completion of the merger, Willow Financial will merge with and into Harleysville
National. Immediately thereafter, Willow Financial Bank, a wholly-owned
subsidiary of Willow Financial, will merge with and into Harleysville National
Bank, a wholly-owned subsidiary of Harleysville National. The articles of
incorporation and the bylaws of Harleysville National and Harleysville National
Bank in effect immediately prior to the merger will continue to
govern.
56
Merger Consideration
Willow Financial Common
Stock
Shareholders of Willow Financial will receive 0.73 shares of Harleysville
National common stock for each share of Willow Financial common stock they own.
Harleysville National will not issue fractional shares of common stock. See The
Merger - Terms of the Merger - Exchange Procedure below.
The
exchange ratio will be appropriately adjusted if there is a stock dividend or a
stock split, reverse stock split, or other similar event regarding Harleysville
National common stock before completion of the merger. By way of illustration,
if Harleysville National would declare and pay a stock dividend of 5% on or
prior to the effective date of the merger, the exchange ratio would be adjusted
upward by 5%. Consequently, those Willow Financial shareholders entitled to
receive Harleysville National common stock would receive 0.7665 shares of
Harleysville National common stock for each share of Willow Financial common
stock they own.
Willow Financial Stock
Options
As of
July 28, 2008, the record date of the special meeting of shareholders of Willow
Financial to approve and adopt the merger, various directors, officers, and
employees of Willow Financial held options to purchase a total of 859,004 shares
of Willow Financial common stock. When the merger takes place, each Willow
Financial option still outstanding will cease to be a right to purchase shares
of Willow Financial common stock and will be converted automatically into an
option to purchase shares of Harleysville National common stock at an exchange
ratio of 1:0.73. That is, each option to acquire one share of Willow Financial
common stock will become an option to acquire 0.73 shares of Harleysville
National common stock. The exchange ratio is subject to adjustment in accordance
with the terms of the merger agreement. Harleysville National will assume each
such option, in accordance with the terms of the Willow Financial stock option
plan, except that from and after the effective date of the merger, all of the
following will occur:
|
1.
|
|
Harleysville National
and a disinterested committee of its board of directors will be
substituted for Willow Financial and Willow Financials board of directors
or board committee to administer the Willow Financial stock option
plans.
|
|
|
|
2.
|
|
Each Willow Financial
stock option assumed by Harleysville National may be exercised solely for
shares of Harleysville National common stock. The number of shares of
Harleysville National common stock issuable upon the exercise of the
converted options and the exercise price for the converted option will be
appropriately adjusted to reflect the merger consideration. This
adjustment is described in the following two paragraphs.
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i.
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The number of shares of
Harleysville National common stock subject to each converted option will
be equal to the number of shares of Willow Financial common stock subject
to such option immediately prior to the effective date of the completion
of the merger multiplied by 0.73 and rounded down to the nearest share.
The exchange ratio is subject to adjustment in accordance with the terms
of the merger agreement.
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ii.
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The exercise price of each Willow
Financial option immediately after the effective date of the merger will
be equal to the quotient obtained by dividing the per share exercise price
of such option by 0.73 and rounded up to the nearest cent. The exchange
ratio is subject to adjustment in accordance with the terms of the merger
agreement.
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Harleysville National Common
Stock and Stock Options
Each
share of Harleysville National common stock and each option to purchase a share
of Harleysville National common stock outstanding immediately prior to
completion of the merger will remain outstanding and unchanged by the
merger.
57
Exchange Procedures
As soon
as reasonably practicable after the effectiveness of the merger, Harleysville
Nationals exchange agent will mail to each Willow Financial shareholder a
letter of transmittal with instructions for submitting his or her Willow
Financial stock certificates in exchange for Harleysville National common stock.
At that time, those Willow Financial shareholders will need
to carefully review the instructions, complete the materials enclosed with the
instructions, and return the materials along with their Willow Financial stock
certificates. After receipt of the properly completed letter of transmittal and
Willow Financial stock certificates, Harleysville Nationals exchange agent will
mail a certificate representing the whole number of shares of Harleysville
National common stock and a check representing the amount of cash in lieu of
fractional shares.
Certificates of shares of Harleysville National common stock will be
dated the effective date of the merger and will entitle the holders to dividends
and any other distributions to which all holders of Harleysville National common
stock are entitled. Until the certificates representing Willow Financial common
stock are surrendered for exchange after completion of the merger, holders of
such certificates will not receive any stock consideration, dividends, or
distributions on any Harleysville National common stock into which such shares
have been converted. When such certificates are surrendered, any unpaid
dividends or other distributions will be paid without interest.
Following
the effective date of the merger and until surrendered, each Willow Financial
stock certificate is evidence solely of the right to receive the merger
consideration. In no event will either Harleysville National or Willow Financial
be liable to any former Willow Financial shareholder for any amount paid in good
faith to a public official or agency pursuant to any applicable abandoned
property, escheat, or similar law.
Harleysville National will not issue fractional shares of its common
stock in connection with the merger. Each holder of Willow Financial common
stock who otherwise would have been entitled to a fraction of a share of
Harleysville National common stock shall receive cash in lieu thereof (without
interest) in an amount determined by the merger agreement. The merger agreement
calculates such cash amount by multiplying the fractional share to which such
holder would otherwise be entitled (after taking into account all shares of
Willow Financial common stock owned by such holder at the effective time of the
merger) by the average closing price of a share of Harleysville National common
stock. The merger agreement calculates the average closing price as the average
closing price of Harleysville National common stock on the NASDAQ Global Select
Market for each of the consecutive 20 trading days ending on and including the
eleventh day prior to the effective date of the merger. No such holder shall be
entitled to dividends, voting rights, or any other rights with respect to any
fractional share. Shares of Willow Financial common stock issued and held by
Willow Financial as treasury shares as of the effective date of the merger, if
any, will be canceled.
Harleysville National may issue shares to you in certificate form or in
uncertificated (book entry) form. Harleysville National plans to issue shares to
you in uncertificated form. Those shareholders who desire to have their shares
in certificated form may make a request after the effective date. However, if
Harleysville National decides to issue shares to you in certificate form, there
will be a time period between the effective date of the merger and delivery of
the certificate to you. Until you receive the stock certificate, you will not be
able to sell your Harleysville National shares in the open market and thus, will
not be able to avoid losses resulting from any decline in the market price of
Harleysville National common stock during this period.
Willow
Financial shareholders are urged to read carefully the information set forth
under the caption The Merger - Certain Federal Income Tax Consequences
beginning on page 76 and to consult their tax advisors for a full understanding
of the mergers tax consequences to them.
Effective Date
Subject
to the satisfaction or waiver of all conditions to the merger, including
obtaining shareholder and regulatory approvals, Harleysville National and Willow
Financial will file the articles of merger with the Pennsylvania Department of
State on (1) a date selected by Harleysville National after fulfillment of the
satisfaction or waiver of the conditions which is no later than ten business
days following the satisfaction or waiver of the conditions or (2) another date
to which Harleysville National and Willow Financial mutually agree. The merger
will become effective upon the filing of the articles of merger or on another
date specified therein. Harleysville National and Willow Financial presently
expect to close the merger in the fourth quarter of 2008. See The Merger
Terms of the Merger - Conditions to the Merger beginning on page 64 and The
Merger Terms of the Merger - Regulatory Approvals beginning on page
69.
58
Representations and
Warranties
The
merger agreement contains customary representations and warranties relating to,
among other things, the following:
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Organization of Harleysville National and Willow
Financial and their respective subsidiaries.
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Capital structures of Harleysville National and
Willow Financial.
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Due authorization, execution, delivery,
performance, and enforceability of the merger agreement.
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Receipt of consents or approvals of regulatory
authorities or third parties necessary to complete the
merger.
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Delivery of financial statements consistent with
generally accepted accounting principles.
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Absence of material adverse changes, since June
30, 2007, in the consolidated assets, liabilities, business, financial
condition, or results of operations of Harleysville National or any
subsidiary.
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Except as disclosed on SEC Form 10-K/A filed with
the SEC on May 5, 2008 for the fiscal year ended June 30, 2007 and the SEC
Form 10-Q filed on May 5, 2008 for the period ended September 30, 2007,
absence of material adverse changes, since September 30, 2007, in the
consolidated assets, liabilities, business, financial condition, or results of
operations of Willow Financial or any subsidiary.
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Filing of tax returns and payment of
taxes.
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Material contracts.
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Quality of title to assets and
properties.
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Sufficiency of reserved Harleysville Nationals
shares to be issued to former Willow Financial shareholders pursuant to the
merger agreement.
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Maintenance of adequate
insurance.
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Absence of undisclosed material pending or
threatened, legal, administrative, arbitration or other
proceedings, material claims, actions, governmental
investigations or regulatory inquiries of any nature.
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Compliance with applicable laws and
regulations.
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Employee benefits and labor
matters.
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Retirement and other employee plans and matters
relating to the Employee Retirement Income Security Act of
1974.
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Inapplicability of anti-takeover statutes or
regulations under Pennsylvania or federal law and of any such
provisions under Willow Financials articles of
incorporation or bylaws.
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Absence of undisclosed brokers or finders
fees.
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Absence of material environmental violations,
actions, or liabilities.
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Restriction of certain business activities of
Harleysville National and Willow Financial and their subsidiaries after May 9,
2008.
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Compliance with the Community Reinvestment Act of
1977, as amended.
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Accuracy of information supplied by Harleysville
National and Willow Financial for inclusion in this joint proxy
statement/prospectus, the registration statement, any filing pursuant to Rule
165 or Rule 425 under the Securities Act of 1933, as amended, or Rule 14a-12
under the Exchange Act of 1934, as amended, and all reports or any other
document filed with any other regulatory authority in connection with the
issuance of Harleysville National common stock in the merger and all
applications filed with regulatory authorities for approval of the
merger.
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Absence of certain related party
transactions.
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Validity and binding nature of loans reflected as
assets in the financial statements of Harleysville National and Willow
Financial.
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Documents filed with the SEC, the timeliness of
such filings, and the accuracy of information contained
therein.
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Registration of Willow Financial common stock
under Section 12 of Exchange Act and reporting requirements of Willow
Financial under Section 13 or 15(d) of Exchange Act.
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Receipt of a fairness opinion from each of Sandler
ONeill and Janney.
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Allowance for loan losses.
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Tax treatment of the merger.
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Harleysville National, Harleysville National Bank,
Willow Financial and Willow Financial Bank being well capitalized within the
meaning of the Federal Reserve Banks and FDIC regulations.
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Investment securities of Willow
Financial.
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Compliance and disclosure controls pursuant to
Sarbanes-Oxley Act.
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Equity plans and agreements granting equity
securities in Willow Financial or granting options or warrants for the
foregoing.
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Absence of certain changes since September 30,
2007 for Willow Financial.
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Intellectual property of Willow Financial.
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Accuracy of representation and warranties.
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Fiduciary accounts of Harleysville National and
Willow Financial.
Conduct of Business Pending
Merger
In the
merger agreement, we each agreed to use our reasonable good faith efforts to
preserve our business organizations intact, to maintain good relationships with
employees, and to preserve the goodwill of customers and others with whom we do
business.
In
addition, Willow Financial agreed to conduct its business and to engage in
transactions only in the ordinary course of business, consistent with past
practice, except as otherwise required by the merger agreement or consented to
by Harleysville National.
Willow
Financial also agreed in the merger agreement that it will not do any of the
following and will not permit any of its subsidiaries to do any of the following
without the written consent of Harleysville National:
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Change its articles of incorporation or
bylaws.
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Change the number of authorized or issued shares
of its capital stock; issue any shares of capital stock; except for the
issuance of Willow Financial common stock upon the valid exercise of any
Willow Financial options outstanding on May 20, 2008, repurchase any shares of
its capital stock; issue or grant options or similar rights with respect to
its capital stock or any securities convertible into its capital stock; or
redeem or otherwise acquire any shares of Willow Financial capital
stock.
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Declare, set aside, or pay any dividend or other
distribution in respect of its capital stock, except in either
of the following events:
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Willow Financial may pay a
regular quarterly cash dividend on the Willow Financial common stock in an
amount not to exceed $0.115 per share per calendar quarter for the last
three calendar quarters of the 2008 calendar year. To the extent
permissible under the merger agreement, Willow Financial may only pay one
cash dividend per calendar quarter. Furthermore, Willow Financial will
coordinate with Harleysville National so that no Willow Financial
shareholder will receive two dividends or fail to receive a single
dividend for any quarter with respect to their shares of Willow Financial
common stock and their shares of Harleysville National common stock
received in the merger.
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2.
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Any subsidiary of Willow
Financial may pay dividends to Willow Financial to the extent permitted by
applicable regulatory restrictions.
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Grant any severance or termination pay, except in
accordance with policies or agreements in effect on May 20, 2008; enter into,
renew, or amend any employment, consulting, severance, change-in-control or
termination contract or arrangement, or accelerate the vesting of any unvested
stock options except as required by applicable law or by the terms of the
relevant contract or arrangement.
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Grant any job promotions except in accordance with
past practice.
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Grant any pay increase or pay any bonus except for
routine periodic pay increases, selective merit pay increases, non-termination
payments that are required by the terms of an agreement that was entered into
on or prior to May 20, 2008, and pay-raises in connection with promotions of
employees, all in accordance with past practice, provided that such pay
increases and raises will not exceed 3.5% in the aggregate for all
employees.
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Merge or consolidate with any other person or
entity; sell or lease all or any substantial portion of its assets or
businesses; make any acquisition of all or any substantial portion of the
business or assets of any other person or entity, except for foreclosures,
settlements-in-lieu of foreclosures, sales of mortgage loans in the ordinary
course of business, troubled debt restructurings, and other similar
acquisitions in connection with securing or collection of debts previously
contracted in the ordinary course of business; enter into a purchase and
assumption transaction with respect to deposits, loans, or liabilities;
relocate or surrender its certificate of authority to maintain, or file an
application for the relocation of, any existing office; file an application
for a certificate of authority to establish a new office; change the status of
any office as to its supervisory jurisdiction; or fail to maintain and enforce
in any material respect its code of ethics and applicable compliance
procedures.
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Incur any indebtedness for borrowed money, other
than deposits, federal funds purchased, cash management accounts, federal home
loan bank borrowings that mature within one year and securities sold under
agreements to repurchase that mature within 90 days, in each case in the
ordinary course of
business consistent with past
practice, or assume, guarantee, endorse or otherwise as an
accommodation
become responsible for the obligations of any other
person, other than in the ordinary course of business consistent with past
practice or prepay any indebtedness.
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Enter into any new material line of business;
change its material lending, investment, underwriting, risk and asset
liability management, or other material banking and operating policies and
operations, except as required by applicable law, regulation, or policies
imposed by any regulatory authority, except in
the
ordinary course of business and in a manner not likely to have a material
adverse effect on Willow
Financial; or file any application or make any
contract with respect to opening or closing a branching or site location or
branching or site relocation.
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Sell or otherwise dispose of any material asset,
or subject any material asset to a lien, pledge, security interest or other
encumbrance, other than the sale of mortgage loans in the ordinary course of
business.
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Make any investment or commitment to invest in
real estate or in any real estate development project, other than by way of
foreclosure or acquisitions in a bona fide fiduciary capacity or in
satisfaction of a debt previously contracted in good faith, in each case in
the ordinary course of business and consistent
with
past practice.
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Take any action which would result in any of the
conditions to the closing of the merger to not be satisfied or that would
cause a material violation of any provision of the merger
agreement.
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Implement or adopt any change in accounting
methods, practices, or policies except as may be required by generally
accepted accounting principles, regulatory accounting principles, or
applicable law and with the concurrence of their accountants.
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Waive, release, grant, or transfer any rights of
material value; modify or change in any material respect any existing material
agreement to which it is a party, other than in the ordinary course of
business consistent with past practice; or settle or compromise any claim,
action, litigation, arbitration, suit, or
investigation to which Willow Financial or any of its subsidiaries is
or becomes a party, which settlement,
agreement or action would impose
any material restriction on the business of Willow Financial or any of its
subsidiaries or could have or could be likely to have a material adverse
effect on Willow Financial.
61
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Take any action or knowingly fail to take any
action which would reasonably be expected to prevent the merger from
qualifying as a reorganization within the meaning of section 368(a) of the
Internal Revenue Code.
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Take any action that is intended to materially
impede or delay the ability of the parties to obtain any necessary approvals
of any regulatory authority required for the transactions contemplated by the
merger.
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Implement or increase the benefits under any new
employee benefit plan or similar plan or amend any existing employee benefit
plan except as required by law.
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Amend or otherwise modify its underwriting and
other lending guidelines and policies or otherwise fail to conduct its lending
activities in the ordinary course of business consistent with past practice,
other than required by law, regulation, or regulatory
authorities.
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Enter into, renew, extend, or modify any
transaction, other than deposit and loan transactions in the ordinary course
of business and which comply with applicable laws and regulations, with any
affiliate of Willow Financial, excluding Willow Financial Bank and other
subsidiaries of Willow Financial so long as
done in
the ordinary course of business.
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Enter into any interest rate swap, floor, or cap
agreements or other similar arrangements excluding interest rate swaps for
customers of notional amounts not in excess of $2,000,000.
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Take any action that would give rise to a right to
a termination payment under any employment agreement or similar agreement
except for the execution of the merger agreement.
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Purchase any security for its investment portfolio
either (1) not rated AAA or higher by either Standard & Poors
Corporation or Moodys Investor Services, Inc. or (2) with a remaining
maturity of more than five years.
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Make any capital expenditure of $250,000 or more
or undertake or enter into any lease, contract, or other commitment, other
than in the ordinary course of business, involving an unbudgeted expenditure
of more than $250,000 or extending beyond six months from May 20,
2008.
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Make any new commercial loan, loan commitment,
letter of credit, or extension of credit in excess of $10,000,000 or a lesser
amount if the extension of credit plus outstanding balances to such customer
and related person or entity, as may be determined in accordance with current
regulatory standards, would
equal or exceed
$10,000,000.
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Agree or make a commitment to take any of the
foregoing prohibited actions.
Willow Financial also agreed in the
merger agreement, among other things, to do the following:
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Submit the merger agreement to its shareholders
for approval and adoption at a special meeting to be held
as soon as practicable along with a recommendation by its board of
directors, subject to compliance with
the fiduciary duties of its board
of directors, to approve and adopt the merger.
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Use its commercially reasonable efforts to
restate, complete, or provide, as applicable, such financial
statements or such other financial information including the audit
opinion of its outside independent
public accountants, as shall be
necessary, to comply with generally accepted accounting principles and
applicable regulatory authorities.
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Use its reasonable best efforts to identify those
persons who may be deemed to be affiliates of Willow
Financial within the meaning of Rule 145 promulgated by the SEC under
the Securities Act of 1933 and
to cause each such person to deliver to
Harleysville National as soon as practicable, and in any event prior
to the date of the Willow Financial special shareholders
meeting, a written agreement to comply with the
requirements of Rule
145 under the Securities Act of 1933 in connection with the sale or other
transfer of
Harleysville National common stock
received in the merger.
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Use its commercially reasonable efforts to prepare
and timely file all financial statements of Willow
Financial and its securities documents that are required to be prepared
and filed after May 20, 2008
(other than the SEC Forms 10-Q for the
period ended March 31, 2008). Willow Financial agrees to use all
commercially reasonable efforts to prepare and file its SEC
Forms 10-Q for the period ended March 31,
2008 as soon as
practicable.
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Terminate the Willow Financial combined 401(k)
Employee Stock Ownership Plan as of, or immediately
prior to, the effective date of the merger.
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Use its commercially reasonable efforts to obtain
all necessary and legally required consents and authorizations of landlords
and other persons regarding any lease or other material agreement to which
Willow Financial or Willow Financial Bank is a party or successor in interest
or by which its properties are bound.
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Permit Harleysville National, if Harleysville
National elects to do so, to cause a phase 1 environmental audit to be
performed at any physical location owned by Willow Financial or any of its
subsidiaries.
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Subject to any limitations imposed by law or GAAP,
establish, at the request of Harleysville National, such additional accruals
and reserves as may be reasonably necessary to conform Willow Financials
accounting and credit loss reserve practices and methods to those of
Harleysville National.
In
addition, Harleysville National also agreed in the merger agreement that it will
not do any of the following without the written consent of Willow
Financial:
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Amend, repeal or otherwise modify its articles of
incorporation, bylaws, or similar governing documents in a manner that would
materially and adversely affect the economic benefits of the merger to the
holders of Willow Financial common stock.
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Declare or pay any extraordinary or special
dividends on or make any other extraordinary or special distributions in
respect of any of its capital stock, provided, however, that nothing shall
prohibit Harleysville National from increasing the regular quarterly cash
dividend on the Harleysville National common stock
or
from issuing dividends on Harleysville National common stock in Harleysville
National common stock
consistent with Harleysville Nationals past
practices.
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Except in satisfaction of debts previously
contracted, make any material acquisition of, or investment in, assets or
stock of any other person that either (1) requires the approval of the
shareholders of Harleysville National or (2) would be reasonably expected to
prevent, delay, or materially impede the merger.
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Implement or adopt any change in its accounting
methods, practices or policies, except as may be required by generally
accepted accounting principles or regulatory accounting principles or
applicable law, in each case as concurred in by Harleysville Nationals
independent registered public accounting firm, provided,
however, that nothing shall prevent or prohibit Harleysville National
from adopting any such change prior
to the effective date of the
merger.
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Take any action, or knowingly fail to take any
action, which action or failure to act would be reasonably expected to prevent
the merger from qualifying as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code.
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Take any action that is intended or would
reasonably be expected to result in any of the conditions to the merger not
being satisfied or in a material violation of any provisions of the merger
agreement.
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Agree or make a commitment to take any of the
foregoing prohibited actions.
Harleysville National also agreed in
the merger agreement, among other things, to do all of the following:
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Submit the merger agreement to its shareholders
for approval and adoption at a special meeting to be held
as soon as practicable along with a recommendation by its board of
directors, subject to compliance with
the fiduciary duties of its board
of directors, to approve and adopt the merger.
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Use commercially reasonable efforts to file all
notices with the NASDAQ Global Select Market and take
all other action as necessary to ensure that the Harleysville National
common stock to be issued pursuant
to the merger agreement will be
listed on the NASDAQ Global Select Market.
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Endeavor to continue the employment of all current
Willow Financial employees that will contribute
to the
successful performance of the combined organization; make available
Harleysville National
employee benefit plans to Willow Financial
employees that continue with Harleysville National or one
of its subsidiaries; and provide severance to those Willow Financial
employees without an employment
or change-in-control agreement who are
terminated within a year of the effective date of the merger;
63
Harleysville
National has the right to freeze, merge or terminate the existing Willow
Financial benefit plans and where applicable transfer its assets into
Harleysville Nationals existing 401(k) plan. See The Merger - Terms of the
Merger - Employment; Severance.
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Elect two individuals mutually agreed upon by
Harleysville National and Willow Financial as directors of Harleysville
National and Harleysville National Bank.
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Indemnify and hold harmless each present and
former director, officer, employee, and agent of Willow Financial or one of
its subsidiaries, other than former directors under criminal indictment or
current criminal proceedings as of May 20, 2008, against any costs or expenses
in connection with any claim, action, suit, proceeding, or investigation,
whether civil, criminal, administrative, or investigative, arising out of
matters existing or occurring at or prior to the effective date of the merger
to the fullest extent provided by the Pennsylvania Business Corporation Law of
1988, as amended, and Harleysville Nationals articles of incorporation and
bylaws; and provide directors and officers liability insurance for such
indemnified present and former directors and officers
of Willow Financial as required by the merger
agreement.
We jointly agreed, among other
things, to do the following:
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Use reasonable efforts to cause the merger to
qualify as a reorganization within the meaning of section 368(a) of the
Internal Revenue Code.
-
Agree upon the form and substance of any press
release or public disclosure related to the proposed merger.
-
Cooperate and use reasonable best efforts to
promptly prepare and file regulatory documents; to effect applications,
notices, and filings; and to obtain as promptly as possible all approvals and
authorizations necessary to effect the merger.
-
Use reasonable best efforts to take all actions
and to do all things necessary, proper, or advisable under applicable laws and
regulations to consummate and effect the merger as soon as possible after May
20, 2008.
-
Provide access to the other to its business,
properties, assets, books, records, and personnel.
-
Maintain adequate insurance.
-
Maintain accurate books and
records.
-
File all tax returns and pay all taxes when
due.
-
Facilitate the integration of the businesses and
operating systems of Willow Financial and its subsidiaries with those of
Harleysville National and its subsidiaries.
-
Deliver to each other all public disclosure
documents that may be filed under the Securities Exchange Act of
1934.
-
Promptly advise the other of any change or event
which could have a material adverse effect on such entity or would likely
cause a material breach of any such entitys representations, warranties, or
covenants contained in the merger agreement.
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Through the closing date of the merger,
Harleysville National, Willow Financial, and, when appropriate, each of their
subsidiaries will use reasonable best efforts to take all actions and to do
all things necessary, proper, or advisable under applicable laws and
regulations to consummate and effect the merger as soon as practicable after
May 20, 2008.
Conditions to
Merger
Harleysville Nationals and Willow Financials obligations to complete
the merger are subject to various conditions, including the
following:
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Harleysville National and Willow Financial
shareholders shall duly approve and adopt the merger
agreement.
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The representations and warranties of each party
to the merger agreement must be true and correct as of
May 20, 2008 and as of the closing date of the merger except that
representations and warranties that by
their terms speak specifically
as of the date of the merger agreement or some other date shall be true
and
64
correct as
of such date. The representations and warranties will be deemed to be true and
correct unless the failure or failures of those representations and warranties
to be so true and correct, either individually or in the aggregate, has had or
would be reasonably likely to have a material adverse effect (as defined below)
on either Harleysville National or Willow Financial, as the case may
be.
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The others performance in all material respects
of all covenants and obligations required to be performed
by it at or prior to the effective date of the
merger.
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All necessary governmental approvals for the
merger shall have been obtained, all waiting periods
required by law or imposed by any governmental authority with respect
to the merger shall have expired,
and no approval shall contain any
condition or requirement which could adversely affect the contemplated
benefits from the merger. See The Merger - Terms of the
Merger - Regulatory Approvals beginning on
page 69.
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There shall not be any order, decree, or
injunction in effect preventing the completion of the transactions
contemplated by the merger
agreement.
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The effectiveness of the registration statement of
which this joint proxy statement/prospectus forms a part
and the approval of all state securities agencies deemed necessary by
Harleysville Nationals and Willow
Financials counsel with respect to
all transactions contemplated by this merger.
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The approval to list the Harleysville National
common stock to be issued to Willow Financial shareholders
on the NASDAQ Global Select Market.
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Harleysville National and Willow Financial shall
have received an opinion from their respective counsel
that the merger constitutes a reorganization within the meaning of
section 368(a) of the Internal Revenue
Code. See The Merger - Terms of
the Merger - Certain Federal Income Tax Consequences beginning on
page 76.
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No change in the business, assets, liabilities,
operations, or financial condition of Harleysville National
or the Harleysville National subsidiaries taken as a whole or Willow
Financial or the Willow Financial
subsidiaries shall have occurred
since May 20, 2008 and continue at the closing of the merger, which has
had or would reasonably be likely to have a material adverse
effect.
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Harleysville National shall have received the
Willow Financial Letter Agreement from the directors and
executive officers of Willow Financial, an executed Non-Competition and
Non-Solicitation Agreement
from each of the directors of Willow
Financial, and an executed Affiliates Letter in compliance with Rule
145 of the Securities Act of 1933 from the Willow Financial
directors appointed to the board of directors
of Harleysville National
pursuant to the merger agreement and after the effective date of the
merger.
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Donna M. Coughey will not have taken any action to
renounce or repudiate her termination of employment
and release agreement and employment agreement.
Under the
terms of the merger agreement, a material adverse effect means a change,
circumstance, event, or effect that has or would be reasonably expected to have
a material adverse effect on either of the following:
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1.
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The business, financial
condition or results of operations of Willow Financial on a consolidated
basis or Harleysville National on a consolidated basis other than, in each
case, any change, circumstance, event or effect relating to any of the
following:
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Any change occurring after May
20, 2008 in any federal or state law, rule or regulation, which change
affects banking institutions and their holding companies generally,
including any change affecting the Deposit Insurance Fund administered by
the FDIC.
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ii.
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Changes in general economic,
legal, regulatory, or political conditions affecting banking institutions
generally, including, but not limited to, changes in interest
rates.
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iii.
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Any action or omission of a party
(or any of its subsidiaries) taken pursuant to the terms of the merger
agreement or taken or omitted to be taken with the express written
permission of the other party.
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65
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iv.
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Any effect with respect to
Harleysville National or Willow Financial caused, in whole or in
substantial part, by the other party.
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v.
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Reasonable expenses, including
expenses associated with the retention of legal and financial advisors,
incurred by Willow Financial or Harleysville National in connection with
the negotiation, execution, and delivery of the merger agreement and the
consummation of the transactions contemplated thereby.
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vi.
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Willow Financials restatement of
its historical audited consolidated financial statements contained in its
Annual Report on Form 10-K for the fiscal year ended June 30, 2007,
including its restatement of its historical audited consolidated financial
statements for the fiscal years ended June 30, 2007 and June 30, 2006 and
Willow Financials restatement of its historical unaudited financial
statements for the quarter ended September 30, 2007.
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vii.
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Willow Financials failure to
file in a timely manner its Quarterly Reports on Form 10-Q for the
quarters ended September 30, 2007, December 31, 2007, and March 31, 2008
and its amendment to its Annual Report on Form 10-K for the fiscal year
ended June 30, 2007.
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viii.
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The review of Willow Financials
historical financial statements and transactions reflected therein by the
audit committee of Willow Financials board of directors and its
counsel.
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ix.
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The independent review of Willow
Financials historical financial statements and transactions reflected
therein by KPMG, Willow Financials auditors, and PricewaterhouseCoopers
LLP.
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x.
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Reasonable legal and accounting
expenses, incurred by Willow Financial in connection with the events set
forth in subparagraphs (vi) through (ix) above and in response to SEC
inquires and investigations in connection therewith. Provided, however,
that the exceptions under subparagraphs (vi) through (ix) shall not except
from the definition of material adverse effect any, penalties,
assessments, fines, civil or criminal sanctions, claims, damages, or any
other litigation by a third party relating to, arising from, or in
connection therewith.
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2.
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The ability of Harleysville
National, Willow Financial, or their banking subsidiaries to consummate
the merger on a timely basis.
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Except
for the requirements of Harleysville National and Willow Financial shareholder
approval; regulatory approvals; and the absence of any order, decree, or
injunction preventing the transactions contemplated by the merger agreement,
Harleysville National and Willow Financial each may waive each of the conditions
described above in the manner and to the extent described in The Merger - Terms
of the Merger - Amendment; Waiver below.
Amendment; Waiver
Subject to applicable law, at any
time prior to completion of the merger, Harleysville National and Willow
Financial may:
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1.
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Amend the merger
agreement;
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2.
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Extend the time for the
performance of any of the obligations or other acts of the other required
in the merger agreement;
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3.
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Waive any inaccuracies in the
representations and warranties of the other contained in the merger
agreement; and
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4.
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Waive compliance by the other
with any of the agreements or conditions contained in the merger agreement
though no waiver by either Harleysville National or Willow Financial will
be deemed a waiver of similar or dissimilar provisions.
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Harleysville National and Willow Financial cannot waive the requirements
of Harleysville National and Willow Financial shareholder approval; regulatory
approvals; and the absence of any order, decree, or injunction preventing the
transactions contemplated by this merger.
66
Termination
Harleysville National and Willow Financial may terminate the merger
agreement at any time prior to the closing date of the merger by mutual written
consent. Either party also may terminate the merger on any of the following
bases:
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1.
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Any material breach of any
representation, warranty, covenant, or other obligation of the other party
and in either such case such breach cannot be, or shall not have been,
remedied within 30 days after receipt by such party of written notice
specifying the nature of such breach and requesting that it be remedied or
which breach, by its nature, cannot be cured prior to the
closing.
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2.
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The failure to close the merger
prior to March 31, 2009 except that if the closing date shall not have
occurred by such date because of a breach of the merger agreement by
either party, such breaching party shall not be entitled to terminate the
merger agreement in accordance with this provision.
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3.
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The issuance of a (i) definitive
written denial from any regulatory authority whose approval or consent is
required for consummation of the merger and the time period for appeals
and requests for reconsideration has run or (ii) a final non-appealable
order from any regulatory authority of competent jurisdiction enjoining or
otherwise prohibiting the consummation of the merger or the other
transactions contemplated by the merger agreement.
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4.
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Failure of either the Willow
Financial shareholders or Harleysville National shareholders to approve
and adopt the merger agreement at the Willow Financial special meeting of
shareholder or at the Harleysville National special meeting of
shareholders respectively.
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Additionally, the Willow Financial board of directors may terminate the
merger agreement if it concludes, in good faith after consultation with its
legal and financial advisors, that it must agree to or endorse an acquisition
proposal from a third party and terminate the merger agreement with Harleysville
National in order to comply with its fiduciary duties. See The Merger - Terms
of the Merger - Termination Fee below for a definition of acquisition
proposal.
Additionally, Harleysville National may terminate the merger agreement if
Willow Financial or any of its subsidiaries enters into any term sheet, letter
of intent, agreement or similar type agreement with any other person or entity
which relates to an acquisition proposal. Harleysville National also may
terminate the merger agreement if Willow Financial withdraws, changes, or
modifies its recommendation to its shareholders in any manner adverse to
Harleysville National regarding the merger agreement or merger.
Approval
of the merger agreement by Harleysville Nationals shareholders will confer on
Harleysville Nationals board of directors the power to complete the merger
without any further action by, or re-solicitation of, the votes of Harleysville
National shareholders, except as may be required by applicable law and
regulation. Approval of the merger agreement by Willow Financials shareholders
will confer on Willow Financials board of directors the power to complete the
merger without any further action by, or re-solicitation of, the votes of Willow
Financial shareholders, except as may be required by applicable law and
regulation.
Willow
Financial shareholders should be aware that the market price of Harleysville
National common stock will fluctuate and could possibly decline. Accordingly,
the per share value of the Harleysville National common stock actually received
by holders of Willow Financial common stock at the time of the completion of the
merger may be more or less than the per share value of Harleysville National
common stock at the time of the special meeting and may be more or less than one
share of Willow Financial common stock at the time of the completion of the
merger.
Termination Fee
Willow
Financial has agreed to pay a fee of $7,000,000 to Harleysville National if
Willow Financial fails to complete the merger and Harleysville National is not
in material breach of the merger agreement after the occurrence of any one of
the following events:
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1.
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If the board of directors of
Willow Financial concludes, in good faith after consultation with its
legal and financial advisors, that it must agree to or endorse another
acquisition proposal and terminate the merger agreement in order to comply
with its fiduciary duties.
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67
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2.
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If Harleysville
National terminates the merger agreement due to (i) Willow Financial or
any of its subsidiaries entering into any term sheet, letter of intent,
agreement or similar type agreement with any other person or entity that
relates to an acquisition proposal or (ii) Willow Financial withdrawing,
changing, or modifying its recommendation to its shareholders in any
manner adverse to Harleysville National regarding the merger agreement or
merger.
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3.
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If a person or group,
other than Harleysville National or an affiliate of Harleysville National,
enters into an agreement, letter of intent, or memorandum of understanding
with Willow Financial or any Willow Financial subsidiary which relates to
an acquisition proposal.
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4.
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If Willow Financial
authorizes, recommends, or publicly proposes or publicly announces an
intention to authorize, recommend or propose an agreement to enter into an
acquisition proposal.
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5.
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If the Willow Financial
shareholders fail to approve the merger at the Willow Financial special
shareholder meeting, or the Willow Financial special shareholders meeting
is cancelled, and if prior to the shareholder vote or
cancellation:
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i.
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The Willow Financial board of
directors shall have (a) failed to recommend approval of the adoption of
the merger agreement by the shareholders of Willow Financial, (b)
withdrawn or modified its recommendation that Willow Financial
shareholders approve and adopt the merger agreement or (c) recommended
that the shareholders of Willow Financial approve or accept another
acquisition proposal with any person other than Harleysville National or
an affiliate of Harleysville National; or
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ii.
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Willow Financial has materially
breached its obligations under the merger agreement by failing to call,
give notice of, convene, and hold the Willow Financial special
shareholders meeting in accordance with the merger agreement.
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6.
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If the Willow Financial
special meeting of shareholders is cancelled and if prior to the
cancellation, any person or group, other than Harleysville National or an
affiliate of Harleysville National, shall have publicly announced,
communicated, or made known its intention, whether or not conditional, to
make another acquisition proposal and shall not have publicly withdrawn
such announcement, communication, or intention at least 30 days prior to
the Willow Financial special shareholders meeting to consider and approve
the adoption of the merger agreement and within 18 months after such event
Willow Financial or any Willow Financial Subsidiary enters into any term
sheet, letter of intent, agreement or similar type agreement with any
person or entity which relates to an acquisition proposal.
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7.
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If the Willow Financial
shareholders fail to approve the merger agreement at the Willow Financial
special meeting of shareholders and prior to the shareholder vote any
person or group, other than Harleysville National or an affiliate of
Harleysville National, shall have publicly announced, communicated, or
made known its intention, whether or not conditional, to make an
acquisition proposal and shall not have publicly withdrawn such
announcement, communication, or intention at least 30 days prior to the
Willow Financial special meeting of shareholders and within 18 months
after such event Willow Financial or any Willow Financial subsidiary
enters into any term sheet, letter of intent, agreement, or similar type
agreement with:
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i.
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Such person or entity which
relates to an acquisition proposal; or
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ii.
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Another person or entity which
relates to an acquisition proposal, pursuant to which such person or group
or any affiliate of such person or group would meet the definition of
acquisition proposal defined below except that the threshold percentages
would be 20% rather than 10%.
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The
merger agreement defines an acquisition proposal as any inquiry, proposal,
indication of interest, term sheet, offer, signed agreement, or disclosure of an
intention to do any of the foregoing from any person or group of persons
relating to any:
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1.
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Merger, consolidation, share
exchange, business combination, recapitalization, liquidation, dissolution
or similar transaction involving Willow Financial or any subsidiary of
Willow Financial, where the assets, revenue or income of such subsidiary
constitutes more than 10% of the consolidated assets, net revenue or net
income of Willow Financial;
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68
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2.
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Sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets (including for this
purpose the outstanding capital stock of any subsidiary of Willow
Financial and the capital stock of any entity surviving any merger or
business combination involving any subsidiary of Willow Financial) and/or
liabilities where the assets being disposed of constitute 10% or more of
the consolidated assets, net revenue or net income of Willow Financial and
its subsidiaries taken as a whole, either in a single transaction or
series of transactions; or
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3.
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Any direct or indirect purchase
or other acquisition or tender offer or exchange offer that, if
consummated, would result in a person or group of persons acting in
concert beneficially owning 10% or more of the outstanding shares of the
common stock of Willow Financial or any subsidiary of Willow Financial
where that subsidiary represents more than 10% of the consolidated assets,
net revenue or net income of Willow Financial, in each case other than the
transactions contemplated by the merger
agreement.
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No Solicitation of Other
Transactions
In the
merger agreement, Willow Financial agreed not to authorize or permit any of its
officers, directors, or employees or any investment banker, financial advisor,
attorney, accountant, or other representative retained by it to:
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1.
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Initiate, solicit, knowingly
encourage (including by way of furnishing information), or take any other
action to facilitate any inquiries or the making of any proposal which
constitutes any acquisition proposal;
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2.
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Enter into or maintain or
continue discussions or negotiate with any person in furtherance of an
acquisition proposal; or
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3.
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Agree to or endorse any
acquisition proposal.
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Notwithstanding the foregoing, if Willow Financials board of directors
concludes in good faith after consultation with its legal counsel, that failure
to take any of the following actions would constitute a breach of its fiduciary
duties to Willow Financials shareholders, Willow Financials board may,
following the receipt of a third partys acquisition proposal:
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1.
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Furnish confidential and
non-public information concerning Willow Financial to a third
party;
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2.
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Engage in discussions or
negotiations with a third party;
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3.
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Take and disclose to its
shareholders a position with respect to the acquisition proposal;
or
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4.
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Withdraw or modify its
recommendation of approval of the adoption of the merger
agreement.
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Willow
Financial has also agreed to notify Harleysville National no later than two
business days after receipt of any acquisition proposal or inquiry described
above is received by Willow Financial or any of its representatives or
agents.
For a
discussion of circumstances the occurrence of which could result in Willow
Financial paying a termination fee of $7,000,000, see The Merger - Terms of the
Merger - Termination Fee above.
Expenses
Except as
described in The Merger - Terms of the Merger - Termination above, the case of
a termination, each party will bear and pay all costs and expenses incurred by
it in connection with the transactions contemplated by the merger agreement,
including fees and expenses of its own financial consultants, accountants, and
counsel.
Regulatory Approvals
Completion of the transaction is subject to the prior receipt of all
consents or approvals of, and the provision of all notices to regulatory
authorities required to complete the merger of Harleysville National and Willow
Financial.
As of the
date of this joint proxy statement/prospectus, appropriate applications and
notice for approval have been filed or will be filed with the regulatory
authorities. Harleysville National and Willow Financial have agreed to use their
reasonable best efforts to obtain all regulatory approvals required to complete
the transaction. These
69
approvals include approval from the
Comptroller of the Currency, the regulator of national banks; a waiver or
approval from the Federal Reserve Bank of Philadelphia, acting under its
delegated authority from the Board of Governors of the Federal Reserve System
(the Federal Reserve Board); notification to the Office of the Thrift
Supervision, the regulator of federal savings banks; and approval from the
Pennsylvania Department of Banking, the primary regulator of
Pennsylvania-chartered deposit-taking institutions. The merger cannot proceed in
the absence of the required regulatory approvals.
Management and Operations After the
Merger
Upon the
consummation of the merger, Willow Financial will merge with and into
Harleysville National, and the separate existence of Willow Financial will
cease. The board of directors of Harleysville National and Harleysville National
Bank will consist of 13 directors, 11 of whom are the current directors of
Harleysville National and Harleysville National Bank. The continuing
Harleysville National and Harleysville National Bank directors are as
follows:
Class A Directors to Serve Until
2011
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Class B Director To Serve Until
2012
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Harold A.
Herr
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Demetra M.
Takes
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Stephanie S.
Mitchell
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LeeAnn B.
Bergey
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Brent L.
Peters
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Class C Directors to Serve Until
2009
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Class D Directors to Serve Until
2010
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Michael L.
Browne
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Walter E.
Daller, Jr.
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Paul D.
Geraghty
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Thomas C.
Leamer
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James A.
Wimmer
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A. Ross
Myers
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The
remaining two directors were mutually agreed to be John J. Cunningham,
III and James E. McErlane. Mr. Cunningham will serve as a Class A
director, and Mr. McErlane will serve as a Class B director each to
hold office until his successor is elected and qualified or otherwise in
accordance with applicable law, the articles of association, and bylaws of
Harleysville National and Harleysville National Bank.
Additionally, on and after the effective date of the merger, the officers
of Harleysville National duly elected and holding office immediately prior to
the effective date of the merger shall be the officers of Harleysville National,
as the surviving corporation in the merger, with the addition of Donna M.
Coughey, who shall become Executive Vice President of Harleysville National and
Harleysville National Bank, on and after the effective date of the merger,
pursuant to an employment agreement dated May 20, 2008.
Employment; Severance
Harleysville National will endeavor to continue the employment of all
current Willow Financial employees in positions that will contribute to the
successful performance of the combined organization. During the period prior to
the effective time of the merger, Harleysville will cooperate with Willow
Financial to identify the roles that Willow Financials current employees will
be expected to play with Harleysville National, Harleysville National Bank, or
other Harleysville National subsidiaries after the effective time of the merger.
If prior
to the effective time of the merger or within one year after such effective
time, Harleysville National elects to displace or eliminate a position of an
employee not subject to an employment or change in control agreement for reasons
other than cause, then Harleysville National will make severance payments to
that employee equal to two weeks of compensation for each year of the employees
combined service with Willow Financial and Willow Financial Bank (subject to
applicable taxes and withholding requirements), with a minimum of four weeks and
a maximum of 26 weeks. Terminated Willow Financial employees will have the right
to continue coverage under the group health plans of Harleysville National or
Harleysville National Bank in accordance with COBRA. During the severance
payment term or until the employee is enrolled in another health plan, whichever
occurs first, Harleysville National will continue to pay the employers share of
medical benefits that it pays for its employees generally, provided that any
coverage period required under COBRA shall run concurrently with the period that
Harleysville National pays the employers share of such health
coverage.
70
Employee Benefits
Willow
Financial employees who become employees of Harleysville National or its
subsidiaries will, immediately upon the effective time of the merger, be
eligible for all Harleysville National benefit plans that are generally
available to Harleysville National employees upon the terms of the Harleysville
National benefit plans applicable from time to time. Such employees will be
given full credit for years of service with Willow Financial for purposes of
eligibility and vesting under Harleysville Nationals applicable employee
benefit plans but not for purposes of calculating benefit amounts.
In
accordance with the merger agreement, Willow Financial will terminate its
combined 401(k) Employee Stock Ownership Plan on or before the merger effective
date. Each employee who becomes an employee of Harleysville National Bank who
satisfies the eligibility requirements of Harleysville National Banks 401(k)
Plan shall be eligible to participate in the 401(k) Plan on the first entry date
following the effective date of the merger.
INTERESTS OF MANAGEMENT AND OTHERS
IN THE MERGER
Share Ownership
As of
July 28, 2008, the record date for the special meetings of Harleysville National
and Willow Financial shareholders:
1.
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The directors and certain
executive officers of Harleysville National may be deemed to be the
beneficial owners of 1,704,149 shares, representing 5.4% of the
outstanding shares of Harleysville National common stock (excluding the
ownership of stock options).
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2.
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The directors and executive
officers of Willow Financial may be deemed to be the beneficial owners of
1,555,268 shares, representing 9.9% of the outstanding shares of Willow
Financial common stock excluding the ownership of stock options. See The
Merger - Terms of the Merger - Consideration - Willow Financial Stock
Options.
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3.
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The directors and executive
officers of Harleysville National may be deemed to be the beneficial
owners of 1,204 shares of Willow Financial common stock, or less than 1%
of the outstanding shares of Willow Financial common stock.
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4.
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The directors and executive
officers of Willow Financial may be deemed to be the beneficial owners of
0 shares of Harleysville National common stock.
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Board Positions and
Compensation
Upon
completion of the merger, Harleysville National and Willow Financial have
mutually agreed that John J. Cunningham, III and James E. McErlane will be
elected to the Harleysville National and Harleysville National Banks boards of
directors subject to satisfaction of the requirements of the merger agreement.
They will hold office until a successor is elected and qualified or otherwise in
accordance with applicable law, the articles of incorporation, and bylaws of
Harleysville National.
Each
Willow Financial director that serves as a Harleysville National director will
be compensated for such service after the effective date of the merger in the
same manner and in the same amounts as all other directors of Harleysville
National are compensated.
Indemnification and
Insurance
From and
after the effective time of the merger, Harleysville National agrees to
indemnify and hold harmless each present and former director, officer, employee
and agent of Willow Financial or a subsidiary of Willow Financial, as
applicable, determined as of the effective time of the merger, other than former
directors under criminal indictment or current criminal proceedings as of May
20, 2008, against any costs or expenses (including reasonable attorneys fees),
amounts paid in settlement as provided below, judgments, fines, losses, claims,
damages or liabilities incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of matters existing or occurring at or prior to the
effective time of the merger, whether
71
asserted or claimed prior to, at or
after the effective time of the merger, arising in whole or in part out of or
pertaining to the fact that he or she is or was a director, officer, or employee
of Willow Financial or, while a director, officer or employee of Willow
Financial, is or was serving at the request of Willow Financial as a director,
officer, employee or agent of another corporation, association, partnership,
joint venture, trust or other enterprise to the fullest extent which such
indemnified parties would be entitled under the Pennsylvania Business
Corporation Law and Harleysville Nationals articles of incorporation and bylaws
(which right to indemnification shall include the advancement of reasonable
attorneys fees and expenses in advance of the final disposition of any claim,
action, suit, proceeding or investigation upon receipt from an indemnified party
of any required undertaking).
Prior to
the effective date of the merger, Harleysville National agrees to use its
reasonable best efforts (and Willow Financial shall cooperate and assist prior
to the effective date of the merger in these efforts), at no expense to the
beneficiaries, to:
1.
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Maintain directors and officers
liability insurance for the indemnified parties with respect to matters
occurring at or prior to the effective time of the merger, issued by a
carrier assigned a claims-paying ability rating by A.M. Best & Co. of
A (Excellent) or higher; or
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2.
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Obtain coverage for prior acts
for the indemnified parties under a directors and officers tail
liability insurance policy.
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Harleysville National agrees to use its reasonable best efforts to effect
such coverage by the effective time of the merger, in either case, providing at
least the same coverage as the directors and officers liability insurance
currently maintained by Willow Financial and containing terms and conditions
which are no less favorable to the beneficiaries for a six-year period after the
effective date of the merger. However, Harleysville National shall not be
obligated to make annual premium payments for such six-year period in respect of
the directors and officers liability insurance which exceed, for the portion
related to Willow Financials directors and officers, 200% of the annual premium
payment, as of December 31, 2007, under Willow Financials current policy in
effect on the date of the merger agreement. If the amount of the premiums
necessary to maintain or procure such insurance coverage exceeds such amount,
Harleysville National shall use its reasonable best efforts to maintain the most
advantageous policies of directors and officers liability insurance obtainable
for a premium equal to that amount.
Any
indemnified party wishing to claim indemnification must promptly notify
Harleysville National upon learning of any such claim, action, suit, proceeding,
or investigation. In the event of any such claim, action, suit, proceeding, or
investigation, whether arising before or after the effective time of the merger,
all of the following apply:
1.
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Harleysville National shall have
the right to assume the defense thereof and shall not be liable to such
indemnified party for any legal expenses of other counsel or any other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof, except that if Harleysville National elects not
to assume such defense or counsel for the indemnified party and advises
the indemnified party that there are issues that raise conflicts of
interest between Harleysville National and the indemnified party, the
indemnified party may retain counsel which is reasonably satisfactory to
Harleysville National, and Harleysville National shall pay, promptly as
statements therefore are received, the reasonable fees and expenses of
such counsel for the indemnified party, which may not exceed one firm in
any jurisdiction;
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2.
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The indemnified party will
cooperate in the defense of any such matter;
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3.
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Harleysville National shall not
be liable for any settlement effected without its prior written consent
which shall not be unreasonably withheld; and
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4.
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Harleysville National shall have
no obligation hereunder in the event that a federal or state banking
agency or a court of competent jurisdiction shall determine that
indemnification of an indemnified party in the manner contemplated hereby
is prohibited by applicable laws and
regulations.
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Stock Options
Each
option to purchase Willow Financial common stock that remains unexercised on the
effective date of the merger will be converted into an option to purchase 0.73
shares of Harleysville National common stock. The number of shares subject to
each stock option and the exercise price for those shares will be adjusted to
prevent alteration
72
of the economic value of the option, as
measured immediately prior to and immediately following the effective date of
the merger, and all Willow Financial stock options shall become fully vested and
exercisable upon completion of the merger notwithstanding any contrary provision
in the applicable stock option plan or stock option agreement. In other
respects, the terms and conditions of the Willow Financial stock options will
not be changed and such options will remain outstanding and will be exercisable
according to the terms of the applicable option plan and stock option agreement.
See The Merger - Terms of the Merger - Merger Consideration beginning on page
57.
As of
July 28, 2008, Willow Financial directors and executive officers held stock
options for a total of 640,528 shares of Willow Financial common stock with a
weighted average exercise price of $9.88 per share, of which options for a total
of 4,123 shares were unvested. Certain of these unvested stock options may vest
in accordance with their terms prior to the completion of the merger.
Restricted Stock
Awards
All
outstanding restricted stock awards under the 1999, 2002, and 2005 Recognition
and Retention Plans and Trust Agreements with respect to the common stock of
Willow Financial, which are outstanding immediately prior to the completion of
the merger will become fully vested and earned as of the closing of the merger
and thus will receive the merger consideration provided by the merger agreement.
The directors and executive officers of Willow Financial held a total of 57,351
unvested shares of restricted stock as of July 28, 2008. Based on the 0.73
exchange ratio such shares would result in the issuance of 41,866 shares with a
total value of $563,935, using the closing market price of Harleysville National
common stock on July 28, 2008. Certain of the unvested awards may vest in
accordance with their terms prior to the completion of the merger.
Executive Employment Agreements and
Benefits
Donna M. Coughey
Termination and Release Agreement.
Donna M. Coughey, President and Chief Executive Officer of Willow Financial and
Willow Financial Bank, currently is employed in those capacities pursuant to an
employment agreement dated July 15, 2005, as amended October 23, 2007. On May
20, 2008, she entered into a termination and release agreement with Willow
Financial and Harleysville National whereby she agreed to cancel her current
employment agreement with Willow Financial at the effective time of the merger
in exchange for $1,540,960. Of that sum, $1,500,000 represents cash severance
and $40,960 represents cash in lieu of continued benefits other than those
provided by the termination and release agreement. She further agreed to release
Willow Financial and Harleysville National and their subsidiaries from any
obligations under her current employment contract.
Furthermore, Harleysville National agreed to provide Ms. Coughey, her
spouse, and any dependents as of the effective date of the merger with continued
participation in the life, disability, health, and dental insurance plans and
any other group insurance plans Harleysville National offers to its employees
with no cost to Ms. Coughey. Harleysville National agreed to provide such
benefits for a period ending at the earlier of:
1.
|
Three years subsequent to the
effective date of the merger, or
|
|
2.
|
The date of Ms. Cougheys
full-time employment by an employer other than Harleysville National so
long as Ms. Coughey, her spouse, and her dependents are entitled to
substantially similar benefits as those described
above.
|
Employment Agreement.
As inducement to
the merger, a subsidiary of Harleysville National and Donna M. Coughey entered
into an employment agreement on May 20, 2008 for Ms. Cougheys employment as
Executive Vice-President of Harleysville National and Harleysville National
Bank. The agreement will be effective upon the effective date of the merger.
This
employment agreement is for a term of one year from the effective date of the
merger without the option to renew and provides for a salary of $350,000. The
agreement also contains a non-competition provision and a confidentiality
provision.
73
Equity
Awards.
All of the unvested stock options
that have been granted to Ms. Coughey under Willow Financials stock option
plans and all of the unvested shares of restricted stock that have been granted
to Ms. Coughey under Willow Financials Recognition and Retention Plans and
Trust Agreements will fully vest upon the effective time of the merger. As of
July 28, 2008, Ms. Coughey held unvested stock options for a total of 3,178
shares of Willow Financial common stock with a weighted average exercise price
of $11.18 per share. Ms. Coughey held a total of 13,040 unvested shares of
restricted stock as of July 28, 2008. Based on the 0.73 exchange ratio and using
the closing market price of Harleysville National common stock on July 28, 2008,
such shares would result in the issuance of 9,519 shares of Harleysville
National common stock with a total value of $128,221.
Deferred Compensation Plans.
Ms.
Coughey participates in Willow Financials deferred compensation plans. If these
plans are terminated in connection with the merger, Ms. Coughey will be entitled
to receive her account balance, which was approximately $153,767, as of July 25,
2008.
Messrs. Ammon J. Baus, Richard
Bertolet, Matthew Kelly and Neelesh Kalani
Employment Agreements.
Messrs.
Ammon J. Baus, Richard Bertolet and Matthew Kelly are each party to an
employment agreement with Willow Financial Bank that provides that if the
executive is terminated within twelve months following a change in control (as
defined in the employment agreements) other than for cause (as defined in the
employment agreements), disability, retirement or death, or if the executive
elects to terminate his employment for good reason (as defined in the employment
agreements), the executive will be entitled to receive two times his average
annual compensation (as defined in the employment agreements), benefits
continuation until the earlier of one year following the termination of
employment or becoming employed by another employer, and a lump sum cash amount
equal to the projected cost of providing the executive with benefits for a
period of twelve months pursuant to any other benefit plans, programs or
arrangements in which the executive was entitled to participate (excluding
equity plans, bonus plans and other items of cash compensation). If the change
in control provisions in these employment agreements are triggered, Messrs.
Ammon J. Baus, Richard Bertolet and Matthew Kelly may be entitled to receive
approximately $380,016, $390,000 and $364,460, respectively. These employment
agreements will be assumed by Harleysville National as a result of the
merger.
Change in Control Agreements.
Neelesh Kalani is party to a change in control agreement with Willow Financial
Bank that provides that if Mr. Kalani is terminated within twelve months
following a change in control (as defined in the agreement) other than for cause
(as defined in the agreement), disability, retirement or death, or if Mr. Kalani
elects to terminate his employment for good reason (as defined in the
agreement), Mr. Kalani will be entitled to receive one times his average annual
compensation (as defined in the agreement) and benefits continuation until the
earlier of one year following his termination of employment or the date on which
he becomes employed by another employer. If the change in control provision in
this agreement is triggered, Mr. Kalani would be entitled to receive
approximately $135,936. Harleysville will assume this contract as a result of
the merger.
Equity Awards.
All of the
unvested stock options that have been granted to Messrs. Ammon J. Baus, Richard
Bertolet, Matthew Kelly and Neelesh Kalani under Willow Financials stock option
plans and all of the unvested shares of restricted stock that have been granted
to such executive officers under Willow Financials Recognition and Retention
Plans and Trust Agreements will fully vest upon the effective time of the
merger. The chart set forth below contains information regarding each such
executives stock options and unvested shares of restricted stock as of July 28,
2008:
|
|
Number
of
|
|
Average
|
|
Number
of
|
|
Number
of
|
|
Value
of
|
|
|
Unvested
|
|
Exercise
Price
|
|
Unvested
Shares
|
|
Shares
After
|
|
Shares
After
|
Executive
|
|
Options
|
|
Per Share
|
|
of Restricted Stock
|
|
Conversion
|
|
Conversion
|
Ammon J. Baus
|
|
315
|
|
$14.50
|
|
4,133
|
|
3,017
|
|
$40,639
|
Richard
Bertolet
|
|
315
|
|
$14.50
|
|
2,306
|
|
1,683
|
|
$22,670
|
Matthew Kelly
|
|
315
|
|
$14.50
|
|
3,702
|
|
2,702
|
|
$36,396
|
Neelesh
Kalani
|
|
|
|
|
|
2,082
|
|
1,520
|
|
$20,474
|
Deferred Compensation
Plans.
Mr. Richard Bertolet participates in
Willow Financials deferred compensation plans. If these plans are terminated in
connection with the merger, Mr. Richard Bertolet will be entitled to receive his
account balance, which was approximately $609,990 as of July 25,
2008.
74
Other Employment
Agreements
Messrs.
Roy Johnston, Thomas Saunders and Colin N. Maropis have employment agreements
with Willow Financial Bank, which will be assumed by Harleysville National as a
result of the merger. Messrs. Russ Carlson, Kevin Roche, Michael Kerl, and
Robert McGinley have employment agreements with BeneServ, Inc. and Willow
Financial Bank, which will be assumed by Harleysville National as a result of
the merger. Each of these employment agreements, except for Russ Carlsons,
provide for certain change in control benefits that may be triggered by the
merger and the subsequent termination of the employees employment by
Harleysville National within 12 months following the effective date of the
merger other than for cause (as defined in the agreements), death, disability or
retirement, or by the employee for good reason (as defined in the agreements).
If the change in control provisions are triggered in all of these employment
agreements, the payments could equal in the aggregate approximately
$1,341,793.
Change in Control
Agreements
Certain
other executive officers and employees of Willow Financial have change in
control agreements that may be triggered by the merger and a subsequent
termination of employment by Harleysville National within 12 months following
the effective date of the merger other than for cause (as defined in the
agreements), death, disability or retirement, or by the employee for good reason
(as defined in the agreements). If all of the change in control agreements are
triggered, the payments could equal in the aggregate approximately
$1,941,847.
Supplemental Executive Retirement
Plans
Ms. Donna
Coughey and Messrs. Ammon J. Baus, Christopher Blakely, Matthew Kelly, Thomas
Saunders, and Allen Wagner each participate in Willow Financials supplemental
executive retirement plan. Their combined vested and unvested interests in the
plan equal approximately $296,335, $155,455, $22,508, $30,912, $44,348 and
$137,418, respectively. Upon the effective date of the merger, each individuals
interest in the plan will become fully vested.
Executive Survivor Income
Agreements
Ms. Donna
Coughey and Messrs. William Byrne, Colin Maropis, Matthew Kelly and G. Richard
Bertolet are each party to an executive survivor income agreement. These
agreements provide that if the executives employment is terminated within
twelve months following a change in control (as defined in the agreements) other
than for cause (as defined in the agreements) or by the executive for good
reason (as defined in the agreements), the executives named beneficiary will be
entitled to receive a death benefit if the executive dies before reaching age
85. The death benefit that Ms. Donna Cougheys and Messrs. William Byrnes,
Colin Maropis, Matthew Kellys and G. Richard Bertolets beneficiaries would be
entitled to receive in such a situation is $500,000, $150,000, $250,000,
$250,000 and $250,000, respectively.
Deferred Compensation
Plans
Deferred Compensation Plans
. Certain
other executive officers, employees and directors participate in Willow
Financials deferred compensation plans. If these plans are terminated in
connection with the merger, each participant will be entitled to receive his or
her account balance, which in the aggregate, totaled approximately $1,330,245 as
of May 19, 2008. This amount does not include the amounts described above for
Ms. Donna Coughey and Mr. Richard Bertolet.
Stock Purchase
Agreement
Mr. Russ
Carlson will receive a deferred incentive payment pursuant to the Stock Purchase
Agreement by and among Russ Carlson, Beneserv, Inc., and Willow Financial Bank
as a result of the merger in the amount of approximately $750,000.
Continued Employment
Upon
completion of the merger, Harleysville National will either offer employment to
each person who is then an employee of Willow Financial or pay severance
benefits as provided in the merger agreement. See The Merger Terms of the
Merger - Employment; Severance above.
75
ACCOUNTING TREATMENT
Harleysville National will account for the merger under the purchase
method of accounting. Harleysville National will record, at fair value, the
acquired tangible and identifiable intangible assets and assumed liabilities of
Willow Financial. Under generally accepted accounting principles, goodwill is
not amortized, but is assessed annually for impairment with any resulting
impairment losses included in net income. Harleysville National will include in
its results of operations the results of Willow Financials operations only
after completion of the merger.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES
The
following discussion addresses the material United States federal income tax
consequences of the merger to a Willow Financial shareholder who is a United
States person within the meaning of section 7701 (a)(30) of the Internal Revenue
Code of 1986 as amended (the Code), holds shares of Willow Financial common
stock as a capital asset and exchanges its shares of Willow Financial common
stock in the transaction solely for Harleysville National common stock and cash
in lieu of a fractional share of Harleysville National common stock. This
discussion is based upon the Code, Treasury regulations promulgated under the
Code, judicial authorities, published positions of the Internal Revenue Service
(the IRS) and other applicable authorities, all as in effect on the date of
this document and all of which are subject to change (possibly with retroactive
effect) and to differing interpretations. This discussion does not address all
aspects of United States federal income taxation that may be relevant to Willow
Financial shareholders in light of their particular circumstances and does not
address aspects of United States federal income taxation that may be applicable
to Willow Financial shareholders subject to special treatment under the Code
(including banks, tax-exempt organizations, insurance companies, dealers in
securities, traders in securities that elect to use a mark-to-market method of
accounting, investors in pass-through entities, Willow Financial shareholders
who hold their shares of Willow Financial common stock as part of a hedge,
straddle or conversion transaction, Willow Financial shareholders who acquired
their shares of Willow Financial common stock pursuant to the exercise of
employee stock options or otherwise as compensation, Willow Financial directors,
officers and employees that hold options to acquire Willow Financial common
stock, and Willow Financial shareholders who are not United States persons). In
addition, the discussion does not address any aspect of state, local or foreign
taxation. No assurance can be given that the IRS would not assert, or that a
court would not sustain a position contrary to any of the tax aspects set forth
below.
Willow
Financial shareholders are urged to consult their tax advisors with respect to
the particular United States federal, state, local and foreign tax consequences
to them of the transaction.
The
closing of the merger is conditioned upon the receipt by Harleysville National
of the opinion of its special counsel, Bybel Rutledge LLP, and receipt by Willow
Financial of the opinion of its counsel, Dechert LLP each dated as of the
effective date of the merger, substantially to the effect that, on the basis of
facts, representations and assumptions set forth or referred to in that opinion
(including factual representations contained in certificates of officers of
Willow Financial and Harleysville National) which are consistent with the state
of facts existing as of the effective date of the merger, the merger constitutes
a reorganization under Section 368(a) of the Code.
Willow
Financial shareholders are urged to consult their tax advisors with respect to
the particular United States federal, state, local and foreign tax consequences
of the merger to them.
The tax
opinions to be delivered in connection with the merger are not binding on the
IRS or the courts, and neither Willow Financial nor Harleysville National
intends to request a ruling from the IRS with respect to the United States
federal income tax consequences of the merger. Consequently, no assurance can be
given that the IRS will not assert, or that a court would not sustain, a
position contrary to any of those set forth below. In addition, if any of the
facts, representations or assumptions upon which the opinions are based is
inconsistent with the actual facts, the United States federal income tax
consequences of the merger could be adversely affected. Assuming that the merger
will be treated as reorganization within the meaning of Section 368(a) of the
Code, the discussion below sets forth the material United States federal income
tax consequences of the merger to Willow Financial shareholders who are United
States persons, hold shares of Willow Financial common stock as a capital asset
and exchange shares of Willow Financial common stock in the transaction solely
for Harleysville National common stock and cash in lieu of a fractional share of
Harleysville National common stock.
76
Exchange for Harleysville National
common stock
If,
pursuant to the merger, a Willow Financial shareholder exchanges all of his or
her shares of Willow Financial common stock actually owned by him or her solely
for shares of Harleysville National common stock, that holder will not recognize
any gain or loss except in respect of cash received in lieu of any fractional
share of Harleysville National common stock (as discussed below). The aggregate
adjusted tax basis of the shares of Harleysville National common stock received
in the merger will be equal to the aggregate adjusted tax basis of the shares of
Willow Financial common stock surrendered for Harleysville National common stock
(reduced by the tax basis allocable to any fractional share of Harleysville
National common stock for which cash is received), and the holding period of the
Harleysville National common stock will include the period during which the
shares of Willow Financial common stock were held by the Willow Financial
shareholder. If a Willow Financial shareholder has differing bases or holding
periods in respect of his or her shares of Willow Financial common stock, that
shareholder should consult his or her tax advisor prior to the exchange with
regard to identifying the bases or holding periods of the particular shares of
Harleysville National common stock received in the exchange.
Cash received in lieu of a
fractional share
Cash
received by a Willow Financial shareholder in lieu of a fractional share of
Harleysville National common stock generally will be treated as received in
redemption of the fractional share, and gain or loss generally will be
recognized based on the difference between the amount of cash received in lieu
of the fractional share and the portion of the shareholders aggregate adjusted
tax basis of the shares of Willow Financial common stock surrendered that is
allocable to the fractional share. The gain or loss generally will be long-term
capital gain or loss if the holding period for those shares of Willow Financial
common stock is more than one year.
Backup Withholding
If a
Willow Financial shareholder receives cash in exchange for surrendering shares
of Willow Financial common stock, the shareholder may be subject to backup
withholding at a rate of 28% if the shareholder is a non-corporate United States
person and (1) fails to provide an accurate taxpayer identification number; (2)
is notified by the IRS that it has failed to report all interest or dividends
required to be shown on its federal income tax returns, or (3) in certain
circumstances, fails to comply with applicable certification requirements.
Amounts withheld under the backup withholding rules will be allowed as a refund
or credit against a shareholders United States federal income tax liability
provided that the shareholder furnishes the required information to the IRS.
The
foregoing discussion is not intended to be a complete analysis or description of
all potential United States federal income tax consequences of the merger. In
addition, this discussion does not address tax consequences that may vary with,
or are contingent on, a Willow Financial shareholders individual status or
circumstances. Moreover, the discussion does not address (1) the potential
United States federal income tax consequences of the transaction to Willow
Financial shareholders who are not United States persons, (2) any non-income tax
consequences of the transaction, (3) any foreign, state or local tax
consequences of the transaction, or (4) the tax consequences of the merger to
holders of Willow Financial stock options. Accordingly, Willow Financial
shareholders are strongly urged to consult with their tax advisors to determine
the particular United States federal, state, local and foreign tax consequences
to them of the merger.
UNAUDITED
PRO FORMA
COMBINED
FINANCIAL INFORMATION
The
following unaudited
pro forma
combined financial information and explanatory notes present
how the combined financial statements of Harleysville National and Willow
Financial may have appeared had the businesses actually been combined as of the
date indicated. The unaudited
pro
forma
combined balance sheet at March 31,
2008 assumes the merger was completed on that date. The unaudited
pro forma
combined income statement for the year ended December 31, 2007 and three months
ended March 31, 2008 gives effect to the merger as if the merger had been
completed on January 1, 2007 and January 1, 2008, respectively. The unaudited
pro forma
combined financial information shows the impact of the merger on Harleysville
Nationals and Willow Financials combined financial position and results of
operations under the purchase method of accounting with Harleysville National
treated as the acquiror. Under this method of accounting, Harleysville National
will be required to record the assets and liabilities of Willow Financial at
their estimated fair values as of the date the merger is completed.
77
The
unaudited
pro forma
combined financial information has been derived from and should be read
in conjunction with the historical consolidated financial statements and the
related notes of both Harleysville National and Willow Financial that can be
found elsewhere in this joint proxy statement/prospectus.
The
unaudited
pro
forma
combined financial information
is presented for illustrative purposes only and does not indicate the financial
results of the combined company had the companies actually been combined at the
beginning of the period presented. Furthermore, the information does not include
the impact of possible revenue enhancements, expense efficiencies, asset
dispositions and share repurchases, among other factors. In addition, as
explained in more detail in the accompanying notes to unaudited
pro forma
combined financial information, the allocation of the
purchase price reflected in the unaudited
pro forma
combined financial
information is subject to adjustment and will vary from the actual purchase
price allocation that will be recorded upon completion of the merger based upon
changes in the balance sheet including fair value estimates.
78
HARLEYSVILLE NATIONAL
CORPORATION
UNAUDITED
PRO
FORMA
COMBINED BALANCE
SHEET
MARCH 31, 2008
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Harleysville
|
|
Willow
|
|
Pro-Forma
|
|
Harleysville
|
(Dollars in thousands)
|
|
National
|
|
Financial(m)(n)
|
|
Adjustme
nts
|
|
National
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
71,905
|
|
|
$
|
33,099
|
|
|
$
|
(21,000)
|
(a)
|
|
$
|
84,004
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
33,900
|
|
|
|
|
|
|
|
|
|
|
|
33,900
|
|
Interest-bearing
deposits in banks
|
|
|
4,295
|
|
|
|
21,907
|
|
|
|
|
|
|
|
26,202
|
|
Total cash and cash equivalents
|
|
|
110,100
|
|
|
|
55,006
|
|
|
|
(21,000
|
)
|
|
|
144,106
|
|
Residential
mortgage loans held for sale
|
|
|
2,219
|
|
|
|
24,155
|
|
|
|
|
|
|
|
26,374
|
|
Investment securities - trading
|
|
|
|
|
|
|
1,262
|
|
|
|
|
|
|
|
1,262
|
|
Investment
securities available for sale, at fair value
|
|
|
992,798
|
|
|
|
170,184
|
|
|
|
|
|
|
|
1,162,982
|
|
Investment securities held to maturity
|
|
|
56,117
|
|
|
|
79,146
|
|
|
|
(1,641
|
)(b)
|
|
|
133,622
|
|
Loans and
leases
|
|
|
2,479,711
|
|
|
|
1,141,272
|
|
|
|
1,238
|
(b)
|
|
|
3,622,221
|
|
Less: Allowance for loan losses
|
|
|
(28,490
|
)
|
|
|
(13,224
|
)
|
|
|
|
|
|
|
(41,714
|
)
|
Net loans
|
|
|
2,451,221
|
|
|
|
1,128,048
|
|
|
|
1,238
|
|
|
|
3,580,507
|
|
Premises and equipment, net
|
|
|
33,164
|
|
|
|
11,251
|
|
|
|
|
|
|
|
44,415
|
|
Accrued interest
receivable
|
|
|
16,782
|
|
|
|
6,631
|
|
|
|
|
|
|
|
23,413
|
|
Goodwill
|
|
|
110,615
|
|
|
|
56,774
|
|
|
|
33,849
|
(c)
|
|
|
201,238
|
|
Core deposit
intangibles, net
|
|
|
7,826
|
|
|
|
9,620
|
|
|
|
20,405
|
(d)
|
|
|
37,851
|
|
Other intangibles, net
|
|
|
5,882
|
|
|
|
5,615
|
(d)
|
|
|
|
|
|
|
11,497
|
|
Bank-owned life
insurance
|
|
|
72,953
|
|
|
|
12,289
|
|
|
|
|
|
|
|
85,242
|
|
Other assets
|
|
|
34,342
|
|
|
|
24,488
|
|
|
|
|
|
|
|
58,830
|
|
Total assets
|
|
$
|
3,894,019
|
|
|
$
|
1,584,469
|
|
|
$
|
32,851
|
|
|
$
|
5,511,339
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
355,027
|
|
|
$
|
125,809
|
|
|
|
|
|
|
$
|
480,836
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking
|
|
|
399,178
|
|
|
|
126,705
|
|
|
|
|
|
|
|
525,883
|
|
Money
market
|
|
|
854,831
|
|
|
|
419,112
|
|
|
|
|
|
|
|
1,273,943
|
|
Savings
|
|
|
171,337
|
|
|
|
78,974
|
|
|
|
|
|
|
|
250,311
|
|
Time
deposits
|
|
|
1,207,534
|
|
|
|
270,185
|
|
|
|
3,456
|
(b)
|
|
|
1,481,175
|
|
Total deposits
|
|
|
2,987,907
|
|
|
|
1,020,785
|
|
|
|
3,456
|
|
|
|
4,012,148
|
|
Short-term
securities sold under agreements to repurchase
|
|
|
99,339
|
|
|
|
|
|
|
|
|
|
|
|
99,339
|
|
Other short-term borrowings
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
Long-term
borrowings
|
|
|
313,774
|
|
|
|
367,094
|
|
|
|
12,727
|
(b)
|
|
|
693,595
|
|
Accrued interest payable
|
|
|
30,387
|
|
|
|
1,882
|
|
|
|
|
|
|
|
32,269
|
|
Subordinated
debt
|
|
|
82,992
|
|
|
|
25,774
|
|
|
|
(2,009
|
)(b)
|
|
|
106,757
|
|
Other liabilities
|
|
|
36,007
|
|
|
|
11,375
|
|
|
|
5,000
|
(a)
|
|
|
|
|
Other
liabilities
|
|
|
|
|
|
|
|
|
|
|
2,040
|
(e)
|
|
|
54,422
|
|
Total liabilities
|
|
|
3,550,737
|
|
|
|
1,426,910
|
|
|
|
21,214
|
|
|
|
4,998,861
|
|
Shareholders
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
31,507
|
|
|
|
175
|
|
|
|
(175
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,511
|
(g)
|
|
|
43,018
|
|
Additional paid-in
capital
|
|
|
231,040
|
|
|
|
191,072
|
|
|
|
(191,072
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,685
|
(g)
|
|
|
388,725
|
|
Retained
earnings
|
|
|
83,345
|
|
|
|
698
|
|
|
|
(698
|
)(f)
|
|
|
83,345
|
|
Accumulated other comprehensive
income (loss)
|
|
|
75
|
|
|
|
(1,730
|
)
|
|
|
1,730
|
(f)
|
|
|
75
|
|
Treasury stock, at
cost
|
|
|
(2,685
|
)
|
|
|
(30,258
|
)
|
|
|
30,258
|
(f)
|
|
|
(2,685
|
)
|
Obligation of deferred compensation
plan
|
|
|
|
|
|
|
1,287
|
|
|
|
(1,287
|
)(f)
|
|
|
|
|
Unallocated common
stock held by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Ownership Plan
|
|
|
|
|
|
|
(2,437
|
)
|
|
|
2,437
|
(f)
|
|
|
|
|
Recognition and Retention Plan Trust
|
|
|
|
|
|
|
(1,248
|
)
|
|
|
1,248
|
(f)
|
|
|
|
|
Total shareholders equity
|
|
|
343,282
|
|
|
|
157,559
|
|
|
|
11,637
|
|
|
|
512,478
|
|
Total liabilities and shareholders equity
|
|
$
|
3,894,019
|
|
|
$
|
1,584,469
|
|
|
$
|
32,851
|
|
|
$
|
5,511,339
|
|
See Notes to Unaudited
Pro Forma
Combined
Financial Information
79
HARLEYSVILLE NATIONAL
CORPORATION
UNAUDITED
PRO
FORMA
COMBINED INCOME
STATEMENT
FOR THE THREE MONTHS ENDED
MARCH 31, 2008
|
|
Harleysville
|
|
Willow
|
|
Pro-Forma
|
|
Proforma Combined
|
(Dollars in
thousands, except per share information)
|
|
National
|
|
Financial(m)(n)
|
|
Adjustmen
ts
|
|
Harleysville
National
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases, including fees
|
|
$
|
38,997
|
|
$
|
17,738
|
|
|
$
|
(39
|
)(h)
|
|
|
$
|
56,696
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
9,754
|
|
|
3,429
|
|
|
|
82
|
(h)
|
|
|
|
13,265
|
|
Exempt from
federal taxes
|
|
|
2,971
|
|
|
391
|
|
|
|
|
|
|
|
|
3,362
|
|
Federal funds sold and securities purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under agreements to
resell
|
|
|
658
|
|
|
|
|
|
|
(210
|
)(i)
|
|
|
|
448
|
|
Deposits in banks
|
|
|
36
|
|
|
21
|
|
|
|
|
|
|
|
|
57
|
|
Total interest income
|
|
|
52,416
|
|
|
21,579
|
|
|
|
(167
|
)
|
|
|
|
73,828
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market
|
|
|
8,095
|
|
|
3,549
|
|
|
|
|
|
|
|
|
11,644
|
|
Time deposits
|
|
|
14,501
|
|
|
3,202
|
|
|
|
(864
|
)(h)
|
|
|
|
16,839
|
|
Short-term borrowings
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
658
|
|
Long-term borrowings
|
|
|
4,955
|
|
|
4,051
|
|
|
|
(618
|
)(h)
|
|
|
|
8,388
|
|
Total interest expense
|
|
|
28,209
|
|
|
10,802
|
|
|
|
(1,482
|
)
|
|
|
|
37,529
|
|
Net
interest income
|
|
|
24,207
|
|
|
10,777
|
|
|
|
1,315
|
|
|
|
|
36,299
|
|
Provision for loan losses
|
|
|
1,960
|
|
|
824
|
|
|
|
|
|
|
|
|
2,784
|
|
Net interest income after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for loan
losses
|
|
|
22,247
|
|
|
9,953
|
|
|
|
1,315
|
|
|
|
|
33,515
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
3,113
|
|
|
974
|
|
|
|
|
|
|
|
|
4,087
|
|
Gain (loss) on sales of investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities, net
|
|
|
128
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
67
|
|
Wealth management
|
|
|
4,277
|
|
|
1,840
|
|
|
|
|
|
|
|
|
6,117
|
|
Bank-owned life insurance
|
|
|
684
|
|
|
120
|
|
|
|
|
|
|
|
|
804
|
|
Other income
|
|
|
2,630
|
|
|
1,628
|
|
|
|
|
|
|
|
|
4,258
|
|
Total noninterest income
|
|
|
10,832
|
|
|
4,501
|
|
|
|
|
|
|
|
|
15,333
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits
|
|
|
13,859
|
|
|
8,032
|
|
|
|
|
|
|
|
|
21,891
|
|
Occupancy
|
|
|
2,585
|
|
|
1,608
|
|
|
|
|
|
|
|
|
4,193
|
|
Furniture and equipment
|
|
|
1,094
|
|
|
786
|
|
|
|
|
|
|
|
|
1,880
|
|
Marketing
|
|
|
436
|
|
|
521
|
|
|
|
|
|
|
|
|
957
|
|
Amortization of intangibles
|
|
|
688
|
|
|
621
|
|
|
|
928
|
(k)
|
|
|
|
2,237
|
|
Other expense
|
|
|
5,056
|
|
|
4,655
|
|
|
|
|
|
|
|
|
9,711
|
|
Total noninterest expense
|
|
|
23,718
|
|
|
16,223
|
|
|
|
928
|
|
|
|
|
40,869
|
|
Income (loss) before income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax expense
(benefit)
|
|
|
9,361
|
|
|
(1,769
|
)
|
|
|
387
|
|
|
|
|
7,979
|
|
Income tax expense (benefit)
|
|
|
2,057
|
|
|
(92
|
)
|
|
|
135
|
|
|
|
|
2,100
|
|
Net income (loss)
|
|
$
|
7,304
|
|
$
|
(1,677
|
)
|
|
$
|
252
|
|
|
|
$
|
5,879
|
|
Net income (loss) per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.23
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
$
|
0.14
|
|
Cash dividends per share
|
|
$
|
0.20
|
|
$
|
0.12
|
|
|
|
|
|
|
|
$
|
0.20
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,346,833
|
|
|
15,257,712
|
|
|
|
(3,746,576
|
)(l)
|
|
|
|
42,857,969
|
|
Diluted
|
|
|
31,522,736
|
|
|
15,305,581
|
|
|
|
(3,794,445
|
)(l)
|
|
|
|
43,033,872
|
|
See Notes to Unaudited
Pro Forma
Combined
Financial Information
80
HARLEYSVILLE NATIONAL
CORPORATION
UNAUDITED
PRO FORMA
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER
31, 2007
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Harleysville
|
|
Willow
|
|
Pro-Forma
|
|
Harleysville
|
(Dollars in thousands, except per
share information)
|
|
National
|
|
Financial(m)(n)
|
|
Adjustmen
ts
|
|
National
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and
leases, including fees
|
|
$
|
145,319
|
|
$
|
69,889
|
|
|
$
|
(155
|
)(h)
|
|
$
|
215,053
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
34,803
|
|
|
14,686
|
|
|
|
328
|
(h)
|
|
|
49,817
|
|
Exempt from federal
taxes
|
|
|
10,863
|
|
|
1,001
|
|
|
|
|
|
|
|
11,864
|
|
Federal funds
sold and securities purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under agreements to resell
|
|
|
3,084
|
|
|
|
|
|
|
(840
|
)(i)
|
|
|
2,244
|
|
Deposits in banks
|
|
|
492
|
|
|
732
|
|
|
|
|
|
|
|
1,224
|
|
Total
interest income
|
|
|
194,561
|
|
|
86,308
|
|
|
|
(667
|
)
|
|
|
280,202
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and
money market
|
|
|
47,980
|
|
|
16,864
|
|
|
|
|
|
|
|
64,844
|
|
Time deposits
|
|
|
41,309
|
|
|
14,695
|
|
|
|
(3,456
|
)(h)
|
|
|
52,548
|
|
Short-term
borrowings
|
|
|
5,431
|
|
|
|
|
|
|
|
|
|
|
5,431
|
|
Long-term borrowings
|
|
|
17,407
|
|
|
12,817
|
|
|
|
(2,473
|
)(h)
|
|
|
27,751
|
|
Total
interest expense
|
|
|
112,127
|
|
|
44,376
|
|
|
|
(5,929
|
)
|
|
|
150,574
|
|
Net interest income
|
|
|
82,434
|
|
|
41,932
|
|
|
|
5,262
|
|
|
|
129,628
|
|
Provision for
loan losses
|
|
|
10,550
|
|
|
1,414
|
|
|
|
|
|
|
|
11,964
|
|
Net interest income after provision for loan losses
|
|
|
71,884
|
|
|
40,518
|
|
|
|
5,262
|
|
|
|
117,664
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
9,690
|
|
|
3,726
|
|
|
|
|
|
|
|
13,416
|
|
Gain (loss) on
sales of investment securities, net
|
|
|
1,132
|
|
|
139
|
|
|
|
|
|
|
|
1,271
|
|
Gain on sale-leaseback of bank properties
|
|
|
2,788
|
|
|
|
|
|
|
|
|
|
|
2,788
|
|
Wealth
management
|
|
|
18,642
|
|
|
5,493
|
|
|
|
|
|
|
|
24,135
|
|
Bank-owned life insurance
|
|
|
2,489
|
|
|
430
|
|
|
|
|
|
|
|
2,919
|
|
Other
income
|
|
|
8,597
|
|
|
4,302
|
|
|
|
|
|
|
|
12,899
|
|
Total noninterest income
|
|
|
43,338
|
|
|
14,090
|
|
|
|
|
|
|
|
57,428
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits
|
|
|
48,832
|
|
|
26,686
|
|
|
|
|
|
|
|
75,518
|
|
Occupancy
|
|
|
7,008
|
|
|
5,785
|
|
|
|
|
|
|
|
12,793
|
|
Furniture and equipment
|
|
|
3,941
|
|
|
2,892
|
|
|
|
|
|
|
|
6,833
|
|
Marketing
|
|
|
1,617
|
|
|
1,951
|
|
|
|
|
|
|
|
3,568
|
|
Goodwill impairment
|
|
|
|
|
|
40,000
|
|
|
|
(40,000
|
)(j)
|
|
|
|
|
Amortization of
intangibles
|
|
|
1,225
|
|
|
2,063
|
|
|
|
3,710
|
(k)
|
|
|
6,998
|
|
Other expense
|
|
|
18,732
|
|
|
11,550
|
|
|
|
|
|
|
|
30,282
|
|
Total
noninterest expense
|
|
|
81,355
|
|
|
90,927
|
|
|
|
36,390
|
|
|
|
135,992
|
|
Income (loss) before income tax expense (benefit)
|
|
|
33,867
|
|
|
(36,319
|
)
|
|
|
41,552
|
|
|
|
39,100
|
|
Income tax
expense (benefit)
|
|
|
7,272
|
|
|
(126
|
)
|
|
|
543
|
|
|
|
7,689
|
|
Net income (loss)
|
|
$
|
26,595
|
|
$
|
(36,193
|
)
|
|
$
|
41,009
|
|
|
$
|
31,411
|
|
Net income
(loss) per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
$
|
(2.39
|
)
|
|
|
|
|
|
$
|
0.77
|
|
Diluted
|
|
$
|
0.90
|
|
$
|
(2.39
|
)
|
|
|
|
|
|
$
|
0.77
|
|
Cash dividends per share
|
|
$
|
0.80
|
|
$
|
0.46
|
|
|
|
|
|
|
$
|
0.80
|
|
Weighted average
number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,218,671
|
|
|
15,122,126
|
|
|
|
(3,610,990
|
)(l)
|
|
|
40,729,807
|
|
Diluted
|
|
|
29,459,898
|
|
|
15,270,114
|
|
|
|
(3,758,978
|
)(l)
|
|
|
40,971,034
|
|
See Notes to Unaudited
Pro Forma
Combined
Financial Information
81
NOTES TO UNAUDITED
PRO FORMA
COMBINED FINANCIAL INFORMATION
NOTE 1 ALLOCATION OF PURCHASE
PRICE
The allocation
of the purchase price is as follows
Purchase Price:
|
|
March 31, 200
8
|
(Dollars in thousands, except share data)
|
|
|
|
Purchase Price
assigned to shares exchanged for stock:
|
|
|
|
Estimated Willow Financial common
shares outstanding
|
|
15,768,680
|
|
Exchange
Ratio
|
|
0.73
|
|
Harleysville National shares to be
issued as consideration
|
|
11,511,136
|
|
Average per
share stock price for Harleysville National shares to be issued in the
merger
|
$
|
14.68
|
|
Purchase price for Willow Financial
common shares
|
$
|
168,983
|
|
Additional
value ascribed to Willow Financial stock options that vest upon the merger
date
|
|
213
|
|
Total value of the equity issued in
the merger
|
|
169,196
|
|
Estimated
fees and expenses directly related to the merger
|
|
17,018
|
|
Total
purchase price
|
|
186,214
|
|
Net Assets Acquired:
|
|
|
|
Equity
of Willow Financial
|
|
148,577
|
|
Estimated adjustments to reflect assets acquired at fair
value:
|
|
|
|
Investments (5 year weighted
average life)
|
|
(1,641
|
)
|
Loans (8
year weighted average life)
|
|
1,238
|
|
Core deposit intangibles, net of
Willow Financials historical core deposit intangible
|
|
|
|
(5.5
year weighted average life)
|
|
20,405
|
|
Estimated adjustments to reflect liabilities assumed at
fair value:
|
|
|
|
Time deposits (1 year weighted
average life)
|
|
(3,456
|
)
|
Long-term
borrowings (5 year weighted average life)
|
|
(12,727
|
)
|
Subordinated Debt (28 year weighted
average life)
|
|
2,009
|
|
Deferred
tax liability
|
|
(2,040
|
)
|
Net
assets acquired
|
|
152,365
|
|
Goodwill
|
$
|
33,849
|
|
The
pro forma
adjustments included in the unaudited pro forma combined
balance sheet and income statements are as follows:
(a)
|
Direct merger costs associated with the transactions including cash
outlays for one-time estimated direct merger costs such expenses as
investment banking, legal and accounting services, severance, contract
cancellations and third party data processing costs and litigation costs.
Willow Financials costs are reflected as a reduction of its equity, and
therefore, the equity number will not agree with Willow Financials
reported March 31, 2008 equity.
|
|
(b)
|
Adjustments to reflect assets acquired and liabilities assumed at
March 31, 2008 in the merger at estimated fair values in accordance with
SFAS No. 141, Business Combinations. Although management expects the
transaction to be completed during 2008, if the transaction were to close
in 2009, the acquisition would be accounted for in accordance with SFAS
No. 141(R), Business Combinations (revised 2007).
|
|
(c)
|
To record estimated goodwill associated with the
transaction.
|
|
(d)
|
To record the estimated core deposit intangible (CDI) associated
with the transaction. It is assumed that CDI represents approximately 4.0%
of core deposits acquired. Customer identifiable intangibles with a
historical balance of $5.6 million are estimated to approximate fair
value.
|
|
(e)
|
To record the net deferred tax impact arising from adjustments to
record fair value of assets and liabilities. The tax effect of proforma
adjustments are reflected at an assumed tax rate of 35%.
|
|
(f)
|
Adjustment to eliminate Willow Financials historical equity
balances.
|
82
NOTES TO UNAUDITED
PRO FORMA
COMBINED FINANCIAL INFORMATION
NOTE 1 ALLOCATION OF PURCHASE
PRICE (Continued)
(g)
|
To record the estimated issuance of 11,511,136 shares of
Harleysville National common stock in connection with the merger based on
the fixed conversion ratio of 100% of outstanding Willow Financial common
stock into shares of Harleysville National common stock at the fixed
exchange ratio of 0.73 in the merger agreement at an estimated average
purchase price of $14.68. The purchase price is based upon the average
Harleysville National stock price for ten days prior to March 31, 2008. It
is further assumed that none of the holders of options for Willow
Financial shares decide to exercise their options.
|
|
(h)
|
Fair value related amortization over the estimated life of the
related asset/liability on a straight-line method and this method
approximates the effective yield method.
|
|
(i)
|
Foregone interest income assumed to have been earned on the cash
used to pay the one-time direct merger costs associated with the
transaction at an assumed rate of 4.00% per annum.
|
|
(j)
|
The
pro forma
reflects Willow Financial assets at fair
value, therefore the statement reflects the elimination of the impairment
created by Willow Financial that occurred during the fourth quarter of
2007.
|
|
(k)
|
Adjustment for amortization of core deposit intangible created as a
result of the transaction based upon an expected life of ten years and
using the sum of the years digits basis.
|
|
(l)
|
Additional estimated weighted average shares to be issued in the
merger with Willow Financial utilizing the fixed exchange ratio of 0.73 in
the merger agreement.
|
|
(m)
|
Willow
Financial traditionally reports its year ended as of June 30, 2007. These
statements reflect Willow Financials 12 months ended December 31, 2007 to
be comparable to Harleysville National.
|
|
|
(n)
|
Certain items in the
pro forma
combined statements have
been reclassified for Willow Financial in order to conform with
Harleysville Nationals historical
classifications.
|
83
INFORMATION ABOUT HARLEYSVILLE
NATIONAL
GENERAL
Harleysville National was incorporated June 1, 1982. On January 1, 1983,
Harleysville National became the parent bank holding company of Harleysville
National Bank, established in 1909, a wholly owned subsidiary of Harleysville
National. Investment Management and Trust Services are provided through
Millennium Wealth Management, a division of Harleysville National Bank.
Harleysville National is registered as a bank holding company under the Bank
Holding Company Act of 1956.
Since
commencing operations, Harleysville Nationals business has consisted primarily
of providing financial services through its subsidiaries and has acquired eight
financial institutions since 1991 including the recent acquisition of East Penn
Financial Corporation (East Penn Financial) and its banking subsidiary, East
Penn Bank in November 2007. Additionally, Harleysville National completed the
acquisition of the Cornerstone Companies (registered investment advisors) in
January 2006. Harleysville National is also the parent holding company of HNC
Financial Company and HNC Reinsurance Company. HNC Financial Company was
incorporated on March 17, 1997 as a Delaware Corporation and its principal
business function is to expand the investment opportunities of Harleysville
National. HNC Reinsurance Company was incorporated on March 30, 2001 as an
Arizona Corporation and reinsures consumer loan credit life and accident and
health insurance.
Harleysville National stock is traded under the symbol HNBC and is
listed on the NASDAQ Global Select Market. For more information on Harleysville
National, see Part I of Harleysvilles Annual Report on Form 10-K for the year
ended December 31, 2007, incorporated herein by reference. See Where You Can
Find More Information on page 242 and Incorporation of Certain Information by
Reference on page 242.
MANAGEMENT AND ADDITIONAL
INFORMATION
Financial
and other information relating to Harleysville National, including information
relating to Harleysville Nationals directors and executive officers and the
ownership of Harleysville National common stock by its directors, officers and
significant shareholders, is set forth in Harleysville Nationals 2007 Annual
Report on Form 10-K (which incorporate certain portions of Harleysville
Nationals proxy statement for its 2008 annual meeting of shareholders),
Harleysville Nationals Quarterly Report on Form 10-Q for March 31, 2008, and
Harleysville Nationals 2008 Current Reports on Form 8-K, all of which are
incorporated by reference in this document. Harleysville National will furnish
you with copies of the documents incorporated by reference upon request. See
Where You Can Find More Information, on page 242.
NEW HARLEYSVILLE NATIONAL AND
HARLEYSVILLE NATIONAL BANK DIRECTORS
If the
merger is completed, John J. Cunningham, III and James E. McErlane, current
directors of Willow Financial, will serve as a director of both Harleysville
National and Harleysville National Bank. The following table provides
information regarding John J. Cunningham, III and James E. McErlane:
Name
|
|
Age
|
|
Principal Occupation During the
Past Five Years
|
John J. Cunningham, III
|
|
65
|
|
Director of Willow Financial.
Vice Chairman of the law firm of Cozen OConnor, Philadelphia,
Pennsylvania and prior thereto Managing Partner and Chairman of the
Business Law Department of Cozen OConnor since March 2000. Mr. Cunningham
previously served as a director of Chester Valley Bancorp and First
Financial Bank from 1998 to 2005.
|
James E. McErlane
|
|
64
|
|
Director of Willow Financial.
Attorney and Principal of the law firm of Lamb McErlane, West Chester,
Pennsylvania, since 1971. Interim President of Chester Valley Bancorp and
First Financial Bank from June to November 2000. Mr. McErlane previously
served as a director of Chester Valley Bancorp and First Financial Bank
from 1991 to 2005 and Chairman from 2000 to 2005
.
|
Under the NASDAQ Stock Market
standard for independence, John J. Cunningham, III and James E. McErlane were
independent directors of Willow Financial and will be independent directors of
Harleysville National.
84
INFORMATION ABOUT WILLOW
FINANCIAL
DESCRIPTION OF
BUSINESS
General
Willow
Financial is a Pennsylvania corporation and parent holding company for Willow
Financial Bank. Willow Financial operates out of its corporate headquarters and
operations center located in Wayne, Pennsylvania. Willow Financial Bank, which
was originally organized in 1909, is a Federally chartered savings bank and
wholly owned subsidiary of Willow Financial. Willow Financial Banks business
consists primarily of making commercial business and consumer loans as well as
real estate loans, both commercial and residential, funded primarily by retail
and business deposits along with borrowings obtained from the Federal Home Loan
Bank of Pittsburgh, or borrowings obtained from third parties through repurchase
agreements. Willow Financial Bank operates a branch banking network consisting
of 29 full-service offices which are located in neighboring Chester County,
Montgomery County and Bucks County, Pennsylvania, as well as
Philadelphia.
Effective
on September 21, 2006, Willow Grove Bancorp, Inc. and Willow Grove Bank changed
their names to Willow Financial Bancorp, Inc. and Willow Financial Bank,
respectively. As contained in this joint proxy statement/ prospectus, references
to Willow Financial include both Willow Financial Bancorp, Inc. and Willow Grove
Bancorp, Inc. and references to Willow Financial Bank include both Willow
Financial Bank and Willow Grove Bank. Coincident with the name change, Willow
Financials trading symbol on the NASDAQ Global Select Market was changed from
WGBC to WFBC.
After the
close of business on August 31, 2005, Willow Financial completed its acquisition
of Chester Valley Bancorp Inc. (Chester Valley), a registered bank holding
company headquartered in Downingtown, Pennsylvania, that had over $654 million
in assets. Chester Valley had two wholly owned subsidiaries, First Financial
Bank, a Pennsylvania chartered commercial bank (FFB) with 13 full-service
banking offices, and Philadelphia Corporation for Investment Services, a
registered investment advisor and broker dealer (PCIS). Pursuant to the
Agreement and Plan of Chester Valley Merger, dated as of January 20, 2005 (the
Chester Valley Merger Agreement), Chester Valley was merged with and into
Willow Financial, with Willow Financial as the surviving corporation (the
Chester Valley Merger), and FFB was merged with and into Willow Financial Bank
with Willow Financial Bank as the surviving bank (the FFB Bank Chester Valley
Merger). PCIS, doing business as Willow Investment Services (WIS) since March
2007, now operates as a business segment of Willow Financial Bank. As a result
of the Chester Valley Merger, each outstanding share of Chester Valley common
stock, par value $1.00 per share (the Chester Valley Common Stock), was
converted into the right to receive, at the election of the shareholder, either
$27.90 in cash or 1.4823 shares of Willow Financial common stock, par value
$0.01 per share, subject to the allocation and pro ration provisions set forth
in the Chester Valley Merger Agreement. The acquisition resulted in Willow
Financials issuance of an aggregate of 4,977,256 shares of Willow Financial
common stock and $51.0 million in cash, resulting in a total Chester Valley
Merger consideration paid for Chester Valley Common Stock of $145.3 million.
This included capitalized acquisition costs and the value of Chester Valley
vested stock options, which were converted to options of Willow Financial.
Willow Financial used general corporate funds to pay the aggregate cash
consideration of approximately $51.0 million for the shares of Chester Valley
Common Stock acquired in the Chester Valley Merger for cash, as well as the
approximate $3.2 million in acquisition costs.
The
Chester Valley Merger has been accounted for using the purchase method of
accounting, which requires that Willow Financials financial statements include
activity of Chester Valley only subsequent to the acquisition date of August 31,
2005. Accordingly, Willow Financials consolidated financial statements and the
information herein include the combined results of Chester Valley and its former
subsidiaries, FFB and PCIS, since September 1, 2005.
Effective
February 28, 2006, Willow Financial completed the sale of all outstanding shares
of capital stock of WIS, formerly PCIS, to Uvest BD-A, Inc., a North Carolina
corporation and registered broker-dealer (Uvest) for consideration of $100 but
providing that such shares may be repurchased for $100 at any time after the
closing date of the stock sale. Concurrently with the execution of the sale of
WIS, Willow Financial Bank and Uvest entered into a related Sub-Clearing and
Brokerage Services Agreement, which provides that an affiliate of Uvest provides
securities clearing and certain supervisory and compliance services for WIS, and
a Financial Services Agreement between WIS and Willow Financial Bank which
provides that Willow Financial Bank will be entitled to 90% of the revenue
generated by the securities brokerage and investment advisory activities
conducted at WIS and will bear
85
substantially all operational and
overhead expenses. Upon consummation of the sale of WIS stock to Uvest, WIS is
no longer a subsidiary of Willow Financial. However, under the provisions of
Financial Accounting Standards Board Interpretation No. 46R, Consolidation of
Variable Interest Entities, the results of WIS continue to be consolidated in
Willow Financials financial statements. The affiliation agreement with Uvest
has the primary effect of relieving WIS of direct responsibility for securities
clearing and certain back-office and oversight obligations.
On March
30, 2007, Willow Financial completed its acquisition of BeneServ, Inc.
(BeneServ) for a purchase price of up to $5.5 million in cash. The purchase
price includes a payment of $4.2 million at closing plus an additional amount up
to $1.3 million in payments through the three-year anniversary date of the
acquisition, subject to the achievement of certain performance thresholds.
BeneServ is an insurance agency serving the corporate employee benefit market
segment. BeneServ and Willow Financial share a target market in small businesses
located in Chester, Montgomery, Bucks, and Philadelphia counties, Pennsylvania,
thereby providing a number of cross selling opportunities for both companies.
Willow Financial recorded goodwill and other intangibles of $4.4 million as a
result of this acquisition based on the preliminary purchase price
allocation.
On
December 21, 2007, Willow Financial completed its acquisition of Carnegie Wealth
Management (Carnegie) for a purchase price of up to $4.8 million in cash plus
approximately $1.1 million in Willow Financials common stock. The purchase
price includes a payment of $2.3 million at closing plus an amount up to an
additional $2.5 million in payments through the three-year anniversary date of
the acquisition, subject to the achievement of certain performance thresholds.
Carnegie is a $200 million wealth management firm that provides professional
investment consulting services to retirement plan administrators, foundations,
corporations and high net worth investors. The acquisition expands Willow
Financials wealth management focus, bringing total assets under management to
approximately $700 million. Willow Financial recorded goodwill and other
intangibles of $3.2 million as a result of this acquisition based on the
preliminary purchase price allocation.
References to Willow Financial include its three business segments,
Willow Financial Bank, WIS, and BeneServ, unless the context of the reference
indicates otherwise. For periods after December 21, 2007, the WIS segment
includes the operations of Carnegie.
In recent
years, Willow Financials business plan has focused on the following primary
goalschanging operations to a full-service community bank and continued steady
growth while maintaining a high level of asset quality. Until the acquisition of
Chester Valley, the growth was accomplished through internal means.
Willow
Financial Banks customer deposits are insured to the maximum extent provided by
law, by the Federal Deposit Insurance Corporation (FDIC) through the Deposit
Insurance Fund (DIF). Willow Financial Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision and is also
regulated by the FDIC. Willow Financial Bank is also subject to reserve
requirements established by the Board of Governors of the Federal Reserve System
(the Federal Reserve Board or FRB), and is a member of the Federal Home Loan
Bank of Pittsburgh, one of the regional banks comprising the Federal Home Loan
Bank system.
Willow
Financials executive offices are located at 170 South Warner Road, Wayne,
Pennsylvania, and its telephone number is (610) 995-1700.
Market Area and
Competition
Willow
Financial Banks primary market area includes Bucks, Montgomery, Chester and
Philadelphia Counties in Pennsylvania. To a lesser extent, Willow Financial Bank
provides services to areas of Delaware, Berks and Lancaster Counties,
Pennsylvania as well as central and southern New Jersey and the state of
Delaware.
Willow
Financial Banks direct competition for attracting deposits and originating
loans has historically come from savings associations, other savings banks,
commercial banks and credit unions. Willow Financial Bank faces additional
competition for deposits from short-term money market funds and other corporate
and government securities funds, mutual funds, and other non-financial
institutions such as securities brokerage firms and insurance companies. Willow
Financial Bank competes for loans and deposits through competitive interest
rates, maturities and fees as well as providing quality service to its
customers.
86
Subsidiaries
As of
March 31, 2008, Willow Financials direct subsidiaries were Willow Financial
Bank and Carnegie Wealth Advisors, LLC, which was acquired as part of the
Carnegie acquisition. At such date, Willow Financial Bank had six direct
subsidiaries, including Willow Grove Investment Corporation, a Delaware
corporation which holds and manages certain securities investments, Willow Grove
Insurance Agency, LLC, a Pennsylvania limited liability company formed to
conduct permitted fixed-rate annuity sales and BeneServ, Inc, a corporate
benefit insurance firm acquired on March 31, 2007, while Carnegie Wealth
Advisors, LLC did not have any subsidiaries. As of June 30, 2007, Willow
Financial Banks aggregate investment in these three subsidiaries was $282.8
million. As a result of the Chester Valley Merger on August 31, 2005, D&S
Service Corporation (D&S Service) and First Financial Investments (FFI),
which previously were subsidiaries of Chester Valley, are now operating as
active subsidiaries of Willow Financial Bank. D&S Service has participated
in the development for sale of residential properties, in particular condominium
conversions, and development of commercial properties located in or within close
proximity of Chester Valleys market area and FFI conducts retail investment
service activities. D&S Service also operates two wholly owned subsidiaries,
Wildman Projects and D&F Projects, Inc. As of June 30, 2007, Willow
Financial Bank had $1.7 million invested in D&S Service and its
subsidiaries.
Effective
February 28, 2006, Willow Financial completed the sale of all outstanding shares
of capital stock of WIS, formerly PCIS, to Uvest BD-A, Inc., a North Carolina
corporation and registered broker-dealer (Uvest), for consideration of $100
but providing that such shares may be repurchased for $100 at any time after the
closing date of the stock sale. Concurrently with the execution of the sale of
WIS, Willow Financial Bank and Uvest entered into a related Sub-Clearing and
Brokerage Services Agreement, which provides that an affiliate of Uvest will
provide securities clearing and certain supervisory and compliance services for
Willow Financial Bank, and a Financial Services Agreement between WIS and Willow
Financial Bank which provides that Willow Financial Bank will be entitled to 90%
of the revenue generated by the securities brokerage and investment advisory
activities conducted at the WIS office and will bear substantially all
operational and overhead expenses. Upon consummation of the sale of WIS stock to
Uvest, WIS is no longer a subsidiary of Willow Financial. However, under the
provisions of FIN 46R, Consolidation of Variable Interest Entities, the
results of WIS continue to be consolidated in Willow Financials financial
statements. The affiliation agreement with Uvest has the primary effect of
relieving WIS of direct responsibility for securities clearing and certain
back-office and oversight obligations.
Effective
December 21, 2007, Willow Financial completed its acquisition of Carnegie for a
purchase price of up to $4.8 million in cash plus approximately $1.1 million in
Willow Financials common stock. Carnegie is a direct subsidiary of Willow
Financial Bank. Carnegie provides professional investment consulting services to
retirement plan administrators, foundations, corporations and high net worth
investors. Carnegie is operated as a separate business segment of Willow
Financial Bank.
Employees
Willow
Financial had 381 full-time employees and 71 part-time employees at March 31,
2008. None of these employees are covered by a collective bargaining agreement
and Willow Financial believes it enjoys good relations with its
personnel.
Restatement of Financial
Statements
On May 5,
2008, Willow Financial filed an Amendment on Form 10-K/A for its Annual Report
on Form 10-K/A for the fiscal year ended June 30, 2007, filed with the
Securities and Exchange Commission (SEC) on October 16, 2007 (Amendment No. 1)
which amended its Annual Report on Form 10-K for the year ended June 30, 2007
filed with the SEC on September 28, 2007 (Amendment No. 2). Willow Financial
filed Amendment No. 2 to correct the consolidated financial statements of Willow
Financial as of June 30, 2007 and 2006 and for each of the periods in the years
ended June 30, 2007 and 2006, and these corrected financial statements are
included in this joint proxy statement/prospectus. In a Current Report on Form
8-K filed with the SEC on April 10, 2008, Willow Financial indicated that its
previously issued financial statements for these and prior periods should no
longer be relied upon.
Willow
Financials management along with its independent registered public accounting
firm, during the course of Willow Financials fiscal 2007 annual review of
financial results and application of financial controls, identified deficiencies
that represented material weaknesses in internal controls over financial
reporting. While a remediation
87
plan was initiated at that time to
correct these material weaknesses, in finalizing its Form 10-Q for the quarter
ended September 30, 2007, management and Willow Financials independent
registered public accounting firm subsequently recognized that these
deficiencies had not been fully remediated. At that time, the material
weaknesses resulted in an un-reconciled difference of approximately $6.2
million. Management, in conjunction with third-party advisors and an additional
accounting firm retained by Willow Financial and the Audit Committee of Willow
Financials board of directors to assist management in reconciling the Willow
Financials financial statements spent significant time reviewing and
researching the books and records of Willow Financial to determine the root
cause of the out of balance condition. Despite exhaustive efforts over more than
five months and the incurrence of approximately $3.0 million in additional
outside professional fees, Willow Financial was unable to fully correct the
prior accounting entries in a manner which completely reconciled the out of
balance condition. Based upon the time and expense that was incurred, management
and the Audit Committee of Willow Financials board of directors determined the
most appropriate action was to record the un-reconciled differences as a charge
to earnings in the 2006 fiscal quarters ended September 30, 2005 and December
31, 2005, the periods that it was determined that the out of balance condition
first arose. As a result, management and the Audit Committee determined that
Willow Financials financial statements for the fiscal years ended June 30, 2007
and 2006 required restatement. The adjustments included errors with an aggregate
pre-tax income statement impact of $8.3 million, a goodwill impact of $497
thousand and an aggregate net reduction in retained earnings of $5.9 million as
further described below:
-
Errors discovered as a result of improperly
performed reconciliations that included un-reconciled
differences, which resulted in an aggregate reduction to pre-tax income
of $8.3 million ($5.5 million after
tax) and a
charge to fiscal 2004 retained earnings of $365 thousand; and
-
Errors in the accounting for the acquisition of
Chester Valley and the related calculation of goodwill of
approximately $497 thousand.
For additional
discussion, see Note 2 to the Consolidated Financial Statements of Willow
Financial found elsewhere in this joint proxy statement/prospectus and
Managements Discussion and Analysis of Financial Condition and Results of
Operations found elsewhere in this joint proxy statement/prospectus.
Lending Activities
Loan Portfolio
Composition
The following table sets forth the composition of the loan portfolio as
of the dates indicated. This data does not include single family loans
classified as held for sale which amounted to $8.1 million, $2.6 million, $1.8
million, $1.1 million, and $5.3 million at June 30, 2007, 2006, 2005, 2004, and
2003, respectively.
|
|
June
3
0,
2007
|
|
June
3
0, 2
006
|
|
June
30,
2005
|
|
June
30,
2004
|
|
June
3
0
, 2003
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
of
|
|
|
|
of
|
|
|
|
of
|
|
|
|
of
|
|
|
|
of
|
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
A
mount
|
|
Total
|
(Dollars in thousands)
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$ 273,247
|
|
|
26.10
|
%
|
|
$ 298,509
|
|
|
27.60
|
%
|
|
$202,942
|
|
|
34.34
|
%
|
|
$181,049
|
|
|
34.15
|
%
|
|
$131,821
|
|
|
31.40
|
%
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
multi-family
|
|
316,099
|
|
|
30.19
|
|
|
325,987
|
|
|
30.14
|
|
|
174,920
|
|
|
29.60
|
|
|
180,881
|
|
|
34.12
|
|
|
155,892
|
|
|
37.14
|
|
Construction
|
|
93,180
|
|
|
8.90
|
|
|
112,774
|
|
|
10.43
|
|
|
86,658
|
|
|
14.66
|
|
|
57,014
|
|
|
10.75
|
|
|
36,191
|
|
|
8.62
|
|
Home
equity
|
|
272,295
|
|
|
26.01
|
|
|
259,119
|
|
|
23.96
|
|
|
100,805
|
|
|
17.06
|
|
|
91,848
|
|
|
17.32
|
|
|
72,990
|
|
|
17.39
|
|
Total mortgage loans
|
|
954,821
|
|
|
91.20
|
|
|
996,389
|
|
|
92.13
|
|
|
565,325
|
|
|
95.66
|
|
|
510,792
|
|
|
96.34
|
|
|
396,894
|
|
|
94.55
|
|
Consumer loans
|
|
3,917
|
|
|
0.37
|
|
|
4,304
|
|
|
0.40
|
|
|
2,106
|
|
|
0.36
|
|
|
1,678
|
|
|
0.32
|
|
|
2,324
|
|
|
0.55
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
business loans
|
|
88,274
|
|
|
8.43
|
|
|
80,815
|
|
|
7.47
|
|
|
23,492
|
|
|
3.98
|
|
|
17,686
|
|
|
3.34
|
|
|
20,549
|
|
|
4.90
|
|
Total loans receivable
|
|
1,047,012
|
|
|
100.00
|
%
|
|
1,081,508
|
|
|
100.00
|
%
|
|
590,923
|
|
|
100.00
|
%
|
|
530,156
|
|
|
100.00
|
%
|
|
419,767
|
|
|
100.00
|
%
|
Allowance for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loan losses
|
|
(12,210
|
)
|
|
|
|
|
(16,737
|
)
|
|
|
|
|
(6,113
|
)
|
|
|
|
|
(5,220
|
)
|
|
|
|
|
(5,312
|
)
|
|
|
|
Deferred loan cost(fees)
|
|
491
|
|
|
|
|
|
(1,170
|
)
|
|
|
|
|
(623
|
)
|
|
|
|
|
(747
|
)
|
|
|
|
|
(656
|
)
|
|
|
|
Loans receivable, net
|
|
1,035,293
|
|
|
|
|
|
$1,063,601
|
|
|
|
|
|
$584,187
|
|
|
|
|
|
$524,189
|
|
|
|
|
|
$413,799
|
|
|
|
|
88
Contractual Principal Repayments
and Interest Rates
The
following table sets forth scheduled contractual amortization of the loan
portfolio at June 30, 2007. Demand loans, loans having no schedule of repayments
and no stated maturity and overdraft loans are reported as due in one year or
less.
|
|
At June 30, 2007, the amount due
withi
n
|
|
|
|
|
more
than
|
|
more
than
|
|
more
than
|
|
more
than
|
|
|
|
|
|
|
1 year
or
|
|
1 year
to
|
|
3 years
to
|
|
5 years
to
|
|
10 years
to
|
|
more
than
|
|
|
|
|
less
|
|
3 years
|
|
5 years
|
|
10 years
|
|
20 years
|
|
20 years
|
|
Total
|
|
|
(Dollars in thousands)
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
home equity
|
|
$ 1,142
|
|
$
11,239
|
|
$
20,820
|
|
$
73,926
|
|
$234,193
|
|
$204,222
|
|
$
545,542
|
Commercial real
estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and multi-family
|
|
5,341
|
|
33,675
|
|
26,271
|
|
174,312
|
|
72,238
|
|
4,262
|
|
316,099
|
Construction
|
|
51,535
|
|
32,025
|
|
9,620
|
|
|
|
|
|
|
|
93,180
|
Total mortgage loans
|
|
58,018
|
|
76,939
|
|
56,711
|
|
248,238
|
|
306,431
|
|
208,484
|
|
954,821
|
Consumer
|
|
96
|
|
1,138
|
|
884
|
|
1,435
|
|
154
|
|
210
|
|
3,917
|
Commercial business
|
|
14,556
|
|
18,729
|
|
12,750
|
|
24,323
|
|
2,886
|
|
15,030
|
|
88,274
|
Total
|
|
$ 72,670
|
|
$ 96,806
|
|
$ 70,345
|
|
$273,996
|
|
$309,471
|
|
$223,724
|
|
$1,047,012
|
Of the
$974.3 million of loan principal repayments due after June 30, 2008, $450.3
million have fixed rates of interest and $524.0 million have adjustable rates of
interest.
Lending Activity and
Products
Willow
Financial Banks lending activities are subject to underwriting standards and
origination procedures, which have been approved by its board of
directors.
Single-Family Residential First
Mortgage Loans
Willow
Financial processes, underwrites and originates single-family residential
mortgage loans on both a retail and wholesale basis. Willow Financial has
developed an extensive network of active residential mortgage brokers and
mortgage bankers to support its wholesale production system. These brokers
identify, process and close loans on Willow Financials behalf based upon rates
and terms that it provides to them on a regular basis which correlate to its
assessment of its demand for various types of loans. The brokers forward
completed loan applications that are underwritten and approved by Willow
Financial Bank personnel in accordance with standards previously approved by its
board of directors. Retail residential lending activities are supplemented by
loan originations through Willow Financial Banks internal loan officers,
whereby loan applications are obtained through its branch network and referrals
from local builders, real estate brokers and financial consultants. In order to
facilitate sale in the secondary market, single-family residential mortgage
loans generally are underwritten in accordance with Federal Home Loan Mortgage
Corporation (FHLMC) and Federal National Mortgage Association (FNMA)
guidelines. To a lesser extent, Willow Financial originates single-family
residential loans for its portfolio, primarily with adjustable interest rates.
In general, these loans do not conform to their underwriting standards due to
the size of the loan. Upon the completion of the Chester Valley Merger, Willow
Financials strategy has changed in that loan portfolio growth is concentrated
in commercial business, construction, commercial real estate and multi-family
and consumer lending products. Willow Financial does not originate sub-prime
mortgage loans.
Willow
Financial Bank generally requires a current appraisal prepared by an independent
appraiser or an acceptable alternative property valuation on all new
single-family residential mortgage loans as well as private mortgage insurance
on all first mortgage loans with a loan to value in excess of 80%. Title
insurance is required on loans secured by real estate with the exception of
certain single-family residential loans originated under $150 thousand. Hazard
insurance is required on all real estate loans. Flood insurance is also required
for all loans secured by properties located in a designated flood
area.
89
During
the year ended June 30, 2007, Willow Financial sold an aggregate of $51.9
million in single-family residential mortgage loans into the secondary market.
Most of Willow Financials newly originated single-family residential mortgage
loans, together with servicing rights, are now originated for re-sale in the
secondary market.
At June
30, 2007, single-family residential mortgage loans aggregated $273.2 million as
compared to $298.5 million at June 30, 2006. The $25.3 million or an 8.5%
decrease resulted largely from portfolio repayments while most new loans were
sold in the secondary market during the year.
Home Equity
Loans
In recent
years, Willow Financial Bank has increased its emphasis on the origination of
home equity loans and lines of credit, due to their shorter maturities and
generally higher interest rates. The maximum term of Willow Financials home
equity loans is 20 years with the exception of purchase money second mortgage
loans whose maximum term may be up to 30 years. A home equity loan is a
fixed-rate loan where the borrower receives the total loan amount at a closing
and makes monthly payments to repay the loan within a specific time period. Home
equity lines of credit are revolving lines of credit with a variable rate and a
maximum term of 15 years. The borrower may draw on this account up to the
maximum credit amount and repay the line at any time. At June 30, 2007, home
equity loans and lines of credit aggregated $272.3 million or 26.0% of the total
loan portfolio. Of this amount, $164.8 million were lines of credit.
Home
equity loans and lines of credit are secured by the borrowers residence, on
which Willow Financial Bank generally obtains a second lien position on the
underlying real estate. Willow Financial Banks home equity programs provide
financing in amounts up to 95% of the value of the property securing the loan,
when combined with the first mortgage. In addition to originating home equity
loans through its branch offices, Willow Financial Bank relies considerably on
purchased loans from its network of correspondents.
Other Consumer Lending
Activities
Willow
Financial Bank offers various types of other consumer loans through its branch
network primarily consisting of loans secured by automobiles, to a much lesser
extent deposit account loans, and unsecured personal loans. Willow Financial
Bank facilitates the funding of student loans in conjunction with American
Education Services (AES/PHEAA). At June 30, 2007, $3.9 million, or 0.4% of
Willow Financial Banks total loan portfolio consisted of these types of loans.
This compares to $4.3 million of other consumer loans, or 0.4% of the total loan
portfolio, at June 30, 2006.
Commercial Business
Loans
At June
30, 2007, commercial business loans aggregated $88.3 million, or 8.4% of total
loans, compared to $80.8 million at June 30, 2006, or 7.5% of total loans. The
$7.5 million or a 9.2% increase resulted primarily from the continued focus to
increase this segment of the loan portfolio. These loans are generally
originated to small and medium sized businesses in Willow Financial Banks
market area. These types of loans assist in Willow Financial Banks
asset/liability management since they generally provide shorter maturities
and/or adjustable rates of interest in addition to generally having higher rates
of return that compensate for the additional credit risk associated with these
loans.
Generally, Willow Financial Bank provides these loans on a secured basis
and they are collateralized by accounts receivable, inventory, equipment, or
other general corporate assets of the borrower. Additionally, the principals of
the borrower guarantee most commercial business loans. In general, interest
rates are adjustable, indexed to a published rate of interest or
fixed.
Generally, commercial business loans have higher risks associated with
them than single-family mortgage loans due to the borrowers business operations
being more susceptible to local and national economic conditions as well as
collateral being less tangible than real estate. These risks are mitigated by
Willow Financial Bank employing individuals experienced in this type of lending
and by generally requiring the personal guarantees of the businesss principals.
Additionally, in some instances, personal assets of the principals are obtained
as additional security for these loans.
90
Commercial Real Estate and
Multi-Family Residential Real Estate Loans
At June
30, 2007, commercial real estate and multi-family residential loans amounted to
$316.1 million or 30.2% of the total loan portfolio. This compares to $326.0
million or 30.1% at June 30, 2006. Included in commercial real estate loans are
approximately $107.7 million of loans to businesses secured by real estate owned
by the business.
Willow
Financial Banks commercial real estate and multi-family residential loan
portfolio consists primarily of loans secured by office buildings, retail and
industrial buildings, strip shopping centers, residential properties with five
or more units, non-FNMA eligible single-family residential investment properties
and other properties used for commercial and multi-family purposes located
within Willow Financial Banks market area.
Willow
Financial Banks underwriting standards for the commercial real estate and
multi-family residential loan portfolio allow for terms up to 25 years with
monthly amortization over the life of the loan and loan to value ratios of not
more than 80%. Interest rates are generally adjustable with a maximum interest
rate reset period of five years. Prepayment fees are generally charged on most
commercial real estate and multi-family loans in order to partially protect
Willow Financial Bank in a falling interest rate environment. Personal
guarantees are generally required as additional security for this portfolio of
loans.
Commercial real estate and multi-family real estate lending generally
involves increased risks as compared to single-family residential lending
including, but not limited to, larger loans to individual borrowers and loan
payments that are dependent upon the successful operation of the project or the
borrowers business. Willow Financial Bank attempts to mitigate these risks by
limiting loans to proven businesses, properties with historical operating
performance sufficient to service the debt, utilizing conservative debt coverage
ratios in the underwriting, and periodically monitoring the operation of the
business or project and the physical condition of the property. Additionally,
independent appraisal reports are obtained on each loan to substantiate the
propertys market value, and are reviewed by qualified Willow Financial Bank
personnel or, if required by Willow Financial Banks policies, qualified third
party consultants, prior to the closing of the loan.
In
addition to originating loans, Willow Financial Bank periodically purchases
participation interests in larger balance loans, typically multi-family and
commercial real estate mortgage loans and construction loans, from other
financial institutions in its market area. Willow Financial Bank may purchase
these loans to supplement its own originations or sell participations to manage
borrower concentration risks. All purchased participations comply with Willow
Financial Banks approved underwriting standards. During fiscal 2007, Willow
Financial Bank purchased an aggregate of $40.5 million in participation
interests.
Construction and Land Acquisition
Loans
Construction loans for residential and commercial projects, which
generally are secured by properties in southeastern Pennsylvania, southern New
Jersey and northern Delaware are originated within Willow Financials market
area. Willow Financial Bank generally limits construction loans to builders and
developers with whom it has an established relationship, or who are otherwise
known to officers of Willow Financial Bank. Additionally, Willow Financial Bank
may acquire participation interests in certain construction loans originated by
other local financial institutions that have similar underwriting standards as
Willow Financial Bank. These participation loans undergo a full underwriting in
accordance with Willow Financial Banks established policy. Construction loans
outstanding at June 30, 2007 were $93.2 million, or 8.9% of total loans,
compared to $112.8 million or 10.4% of total loans at June 30, 2006. The $19.6
million or 17.4% decrease is due primarily to the diminishing demand for new
construction financing, resulting from a slowdown in the housing
market.
Construction loans generally have variable rates of interest, which is a
strong tool in managing the interest rate risk exposure of Willow Financial
Bank. Generally, they have a maximum term to maturity of three years and loan to
value ratios of 80% or less. Residential construction loans to developers are
made on either a pre-sold or speculative (unsold) basis. Limits are placed on
the number of units that can be built on a speculative basis based upon the
reputation, prior experience and financial position of the builder, the location
of the property, and prior sales in the development and the surrounding
area.
91
Independent
appraisals are obtained for all construction loans and are reviewed and analyzed
by qualified employees of Willow Financial Bank or, in some instances, qualified
third party consultants. Property inspections are done at inception as well as
prior to advancing additional proceeds committed under the loan documents.
Monthly payment of interest is required on all construction loans.
Construction loans can also be originated for the acquisition and
development of land for sale (i.e., roads or other improvements). These loans
generally require that the builder have a commitment for a construction loan for
the units to be built on the site. These loans are secured by a lien on the
property and are generally limited to a loan to value of 75% or less of the
appraised value. The loans have a variable rate of interest and require monthly
payments of interest. The principal of the loan is repaid as units are sold and
released. Generally, all of these loans are in Willow Financial Banks market
area and are to developers with whom Willow Financial Bank has a prior
relationship. Personal guarantees from the borrowers are generally required for
these loans.
Construction and land loans generally carry a higher degree of risk than
single-family residential lending, due to the concentration of principal in a
limited number of loans and borrowers and the effect of economic conditions on
developers, builders and projects. Additional risk is also associated with
construction lending because of the inherent difficulty in estimating both a
propertys value at completion and the estimated cost to complete a project. The
nature of these loans is such that they are more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder are not
pre-sold and thus pose a greater potential risk than construction loans to
individuals on their personal residences.
In order to mitigate some of the risks inherent to construction lending,
inspections are done both prior to origination and throughout construction prior
to advancing funds, limiting the advancement of funds for speculative homes,
limiting originations to builders who have established relationships or
significant experience, as well as obtaining personal guarantees from the
principals.
The following table shows the activity in Willow Financial Banks loan
portfolio during the periods indicated:
|
Ye
ar ended June
30,
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in thousands)
|
Loans held at the beginning of the period
|
$1,081,508
|
|
|
$ 590,923
|
|
|
$ 530,156
|
|
Originated and purchased for portfolio
(1)(2)
:
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
Single-family
|
30,049
|
|
|
142,305
|
|
|
52,933
|
|
Commercial real estate and multi-family
|
36,738
|
|
|
20,646
|
|
|
39,879
|
|
Construction
|
76,017
|
|
|
73,573
|
|
|
70,558
|
|
Home
equity
|
95,845
|
|
|
96,995
|
|
|
54,782
|
|
Consumer loans
|
1,218
|
|
|
1,088
|
|
|
267
|
|
Commercial
business loans
|
67,187
|
|
|
24,578
|
|
|
11,153
|
|
Total originations and purchases for portfolio
|
307,054
|
|
|
359,185
|
|
|
229,572
|
|
Loans acquired from the Chester Valley Merger
|
|
|
|
467,700
|
|
|
|
|
Amortization and curtailments
|
(336,370
|
)
|
|
(336,607
|
)
|
|
(168,466
|
)
|
Net (charge-offs) recoveries
|
(5,180
|
)
|
|
307
|
|
|
(339
|
)
|
Net (decrease) increase in loans
|
(34,496
|
)
|
|
490,585
|
|
|
60,767
|
|
Total loans held at the end of the period
|
$1,047,012
|
|
|
$1,081,508
|
|
|
$
590,923
|
|
____________________
(1)
|
Excludes loans classified as held for sale at the time of
origination.
|
|
(2)
|
Includes $22.8 million, and $21.7 million in purchased
single-family mortgage loans in fiscal 2006 and 2005,
respectively.
|
Loans to One
Borrower
Under the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
and pursuant to regulations for Federal Savings Banks, the aggregate loans that
Willow Financial Bank can make to any one borrower is equal to 15% of Willow
Financial Banks unimpaired capital and surplus. For Willow Financial Bank, this
amount
92
would be approximately $19.2 million at
June 30, 2007. There are provisions that would allow Willow Financial Bank to
lend an additional 10% of unimpaired capital and surplus if the loans are
secured by readily marketable securities. At June 30, 2007, Willow Financial
Banks three largest credit relationships with an individual borrower and
related entities amounted to $16.1 million, $16.0 million and $16.0 million;
each of which are in conformity with the current loans to one borrower
regulations described above.
Asset Quality
General
As a part of
the efforts to maintain asset quality, Willow Financial Bank has developed and
implemented an asset classification system in conjunction with federal
regulations. All of Willow Financial Banks assets are subject to this
classification system. Loans are periodically reviewed and the classifications
reviewed at least quarterly by the Loan Committee of the board of
directors.
When a borrower fails to make a scheduled payment, Willow Financial Bank
attempts to cure the delinquency by making personal contact with the borrower.
Initial contacts are generally made 16 days after the date the payment is due.
In most cases, delinquencies are promptly resolved. If the delinquency
continues, late charges are assessed and additional efforts are made to collect
the deficiency. Willow Financial Bank generally works with borrowers to resolve
such problems; however, when the account becomes 90 days delinquent, Willow
Financial Bank institutes foreclosure or other proceedings, as necessary, to
minimize any potential loss.
On loans for which Willow Financial Bank considers the collection of
principal or interest payments doubtful, it ceases the accrual of interest
income. On loans more than 90 days past due, as to principal and interest
payments, it is Willow Financial Banks policy to discontinue accruing
additional interest and reverse any interest currently accrued unless it is
determined that the loan principal and interest are fully secured and in the
process of collection. On occasion, a loan may be placed on non-accrual earlier
if the financial condition of the borrower raises significant concern with
regard to the borrowers ability to service the debt in accordance with the
terms of the loan. Interest income is not accrued on these loans until the
borrowers financial condition and payment record demonstrate an ability to
service the debt.
Real estate that Willow Financial Bank acquires as a result of
foreclosure or deed-in-lieu of foreclosure is classified as real estate owned
until sold. Real estate owned is recorded at the lower of cost or fair value
less estimated selling cost. Costs associated with acquiring and improving a
foreclosed property are usually capitalized to the extent that the carrying
value does not exceed fair value less estimated selling costs. Holding costs are
charged to expense. Gains and losses on the sale of real estate owned are
reflected in operations, as incurred.
Delinquent
Loans
The following table sets forth information concerning delinquent loans at
the dates indicated. The amounts presented represent the total outstanding
principal balances of the related loans rather than the actual payment amounts
that are past due.
|
At
|
|
At
|
|
June
30, 2
007
|
|
June
30, 2
006
|
|
30 to
|
|
60 to
|
|
30 to
|
|
60 to
|
|
59 days
|
|
89 days
|
|
59 days
|
|
89 days
|
Mortgage loans:
|
|
|
|
|
|
|
|
Single-family
|
$1,400
|
|
$ 147
|
|
$1,204
|
|
$ 71
|
Commercial
real estate and multi-family
|
427
|
|
268
|
|
519
|
|
5,466
|
Construction
|
317
|
|
406
|
|
239
|
|
264
|
Home
equity
|
541
|
|
349
|
|
587
|
|
152
|
Consumer loans
|
|
|
6
|
|
|
|
1
|
Commercial business loans
|
72
|
|
5
|
|
51
|
|
689
|
Total delinquent loans receivable
|
$2,757
|
|
$1,181
|
|
$2,600
|
|
$6,643
|
93
Loans
delinquent 30 to 89 days amounted to $3.9 million at June 30, 2007 compared to
$9.2 million at June 30, 2006. Management regularly monitors all delinquent loan
activity. Management believes that these loans are adequately collateralized or
the allowance is adequate to cover any potential collateral
shortfall.
Non-Performing
Assets
The
following table sets forth information with respect to non-performing assets
Willow Financial Bank has identified, including non-accrual loans and other real
estate owned at June 30, 2007. Total non-performing assets amounted to $3.9
million, or 0.25% of total assets, at June 30, 2007 compared to $15.8 million,
or 1.01% of total assets, at June 30, 2006. The $11.9 million decrease in Willow
Financial Banks non-performing assets during fiscal 2007 was due primarily to
the following factors: (1) net charge-offs during the year of $4.8 million
relating to two commercial business loan relationships categorized as
non-accrual at June 30, 2006; (2) the sale of an approximate $3.5 million
commercial real estate loan which was classified as non-accrual at June 30,
2006; (3) the sale of commercial real estate which was foreclosed upon during
the year and had secured a $2.0 million commercial real estate loan categorized
as non-accrual at June 30, 2006; and (4) payments of $2.1 million during the
year on loans in non-accrual status at June 30, 2006. These decreases were
partially offset by a commercial business loan relationship and a construction
loan relationship of $780 thousand and $463 thousand, respectively, which were
transferred to non-accrual status during fiscal 2007.
|
A
t June 3
0
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
(Dollars in thousands)
|
Accruing loans 90 or more days past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
|
|
$
|
|
|
$ 109
|
|
|
$
|
|
|
$ 367
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Other
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
Total accruing loans 90 or more days past
due
|
|
|
|
|
|
|
109
|
|
|
3
|
|
|
514
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
845
|
|
|
1,059
|
|
|
146
|
|
|
568
|
|
|
1,064
|
|
Construction
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate and
multi-family
|
697
|
|
|
7,753
|
|
|
315
|
|
|
48
|
|
|
48
|
|
Home
equity
|
601
|
|
|
479
|
|
|
99
|
|
|
39
|
|
|
236
|
|
Consumer
|
56
|
|
|
154
|
|
|
|
|
|
16
|
|
|
7
|
|
Commercial
business
|
1,188
|
|
|
6,036
|
|
|
106
|
|
|
698
|
|
|
360
|
|
Total non-accrual loans
|
3,850
|
|
|
15,481
|
|
|
666
|
|
|
1,369
|
|
|
1,715
|
|
Performing troubled debt restructurings
|
1
|
|
|
256
|
|
|
1,912
|
|
|
1,404
|
|
|
1,463
|
|
Total non-performing loans
|
3,851
|
|
|
15,737
|
|
|
2,687
|
|
|
2,776
|
|
|
3,692
|
|
Other real estate owned, net
|
|
|
|
51
|
|
|
439
|
|
|
403
|
|
|
391
|
|
Total non-performing assets
|
$3,851
|
|
|
$15,788
|
|
|
$3,126
|
|
|
$3,179
|
|
|
$4,083
|
|
Non-performing loans to total loans
|
0.37
|
%
|
|
1.46
|
%
|
|
0.46
|
%
|
|
0.52
|
%
|
|
0.88
|
%
|
Non-performing assets to total assets
|
0.25
|
%
|
|
1.01
|
%
|
|
0.33
|
%
|
|
0.34
|
%
|
|
0.48
|
%
|
Classified and Criticized
Assets
Federal
regulations require that each insured institution classify its assets on a
regular basis. Furthermore, in connection with examinations of insured
institutions, federal examiners have authority to identify problem assets and,
based upon their judgment, classify them. There are three classifications for
problem assets: substandard, doubtful, and loss. Substandard assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of current existing facts, conditions and values,
questionable, and there is a high probability of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Federal regulations also require
another unclassified category designated special mention to be established and
maintained for assets that do not currently expose an insured institution to a
sufficient degree of risk to warrant classification as substandard, doubtful, or
loss.
94
At June
30, 2007, Willow Financial had $8.2 million of assets classified as substandard,
consisting of $6.2 million of commercial real estate and business loans, $1.3
million of single-family mortgage loans, and $660 thousand of consumer loans,
and $1.4 million classified as doubtful, consisting of commercial real estate
and business loans. This compares to $6.6 million of assets classified as
substandard, consisting of $5.1 million of commercial real estate and business
loans, $974 thousand of single-family mortgage loans, $525 thousand of consumer
loans, and $12.4 million classified as doubtful, consisting of $12.3 million of
commercial real estate and business loans and $86 thousand of single-family
mortgage loans at June 30, 2006. There were no loans classified as loss at June
30, 2007 or 2006.
Allowance for Loan
Losses
The
allowance for loan losses is maintained at a level management believes is
adequate to cover known and inherent losses in the loan portfolio that are both
probable and reasonable to estimate at each reporting date. Willow Financial
Banks determination of the adequacy of the allowance is based upon an
evaluation of the portfolio, loss experience, current economic conditions,
volume, growth, composition of the portfolio, and other relevant factors. Willow
Financial Bank uses historical loss factors for each loan type and for loans
considered to have a higher degree of risk. Additional components that may be
used include, but are not limited to delinquency trends, asset classification
trends and current economic conditions. Management then assesses these
conditions and establishes the allowance for loan loss based upon the facts
known at that time. The methodology does not imply that any portion of the
allowance for loan loss is restricted, as the allowance for loan losses applies
to the entire loan portfolio.
The
allowance is increased by a provision for loan losses, which is charged against
income. As shown in the table below, at June 30, 2007, Willow Financial Banks
allowance for loan losses amounted to $12.2 million or 317.1% and 1.17% of its
non-performing loans and total loans receivable less deferred fees,
respectively.
|
Y
ear ended June 30,
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
(Dollars in thousands)
|
Balancebeginning of period
|
$16,737
|
|
|
$ 6,113
|
|
|
$ 5,220
|
|
|
$ 5,312
|
|
|
$ 4,626
|
|
Plus: provisions for loan losses
|
653
|
|
|
3,380
|
|
|
1,232
|
|
|
426
|
|
|
1,034
|
|
Less: charge-offs for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
(76
|
)
|
|
(24
|
)
|
|
(7
|
)
|
|
(58
|
)
|
|
(284
|
)
|
Consumer loans
|
(277
|
)
|
|
(237
|
)
|
|
(22
|
)
|
|
(11
|
)
|
|
(4
|
)
|
Commercial real estate loans
|
(1,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
(3,185
|
)
|
|
(47
|
)
|
|
(316
|
)
|
|
(658
|
)
|
|
(103
|
)
|
Total charge-offs
|
(5,386
|
)
|
|
(308
|
)
|
|
(345
|
)
|
|
(727
|
)
|
|
(391
|
)
|
Plus: recoveries for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
1
|
|
|
36
|
|
|
6
|
|
|
74
|
|
|
|
|
Consumer
loans
|
45
|
|
|
44
|
|
|
|
|
|
1
|
|
|
|
|
Commercial business
loans
|
160
|
|
|
535
|
|
|
|
|
|
134
|
|
|
43
|
|
Total recoveries
|
206
|
|
|
615
|
|
|
6
|
|
|
209
|
|
|
43
|
|
Allowance acquired from the Merger
|
|
|
|
6,937
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
$12,210
|
|
|
$16,737
|
|
|
$ 6,113
|
|
|
$ 5,220
|
|
|
$ 5,312
|
|
Allowance for loan loss to total end of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period non-performing
loans
|
317.06
|
%
|
|
106.35
|
%
|
|
227.50
|
%
|
|
188.04
|
%
|
|
143.88
|
%
|
Charge-offs to average loans
|
0.51
|
%
|
|
0.03
|
%
|
|
0.06
|
%
|
|
0.16
|
%
|
|
0.08
|
%
|
Allowance for loan loss to end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total loans less
deferred fees
|
1.17
|
%
|
|
1.55
|
%
|
|
1.05
|
%
|
|
1.27
|
%
|
|
1.27
|
%
|
The
provision for loan losses for the year ended June 30, 2007 was $653 thousand, a
decrease of $2.7 million from $3.4 million in the prior year. Net charge-offs in
fiscal 2007 were $5.2 million as compared to net recoveries of $307 thousand in
fiscal year 2006. The increase is due primarily to the charge-off of two loan
relationships which were categorized as non-accrual at June 30, 2006. The
decrease in the provision for loan losses in fiscal 2007 compared to fiscal 2006
was due primarily to the decrease in non-performing assets. The increase in the
provision for loan losses in fiscal 2006 compared to fiscal 2005 was due
primarily to a corresponding increase in non-performing loans and classified
loans. Management assesses the allowance for loan losses at least quarterly, and
makes any necessary
95
provision for losses needed to maintain
its allowance for losses at a level deemed adequate. Management believes that
the allowance for loan losses was adequate at June 30, 2007 to cover losses that
are both probable and reasonably estimable based upon the facts and
circumstances known to Willow Financial at that date.
Effective
December 21, 1993, the Office of Thrift Supervision in conjunction with the
Comptroller of the Currency, the FDIC and the Federal Reserve Board issued a
Policy Statement regarding a financial institutions allowance for loan and
lease losses. The Policy Statement, which reflects the position of the
regulatory agencies and does not necessarily constitute generally accepted
accounting principles, includes guidance (i) on Willow Financials
responsibilities for the assessment and establishment of an adequate allowance;
and (ii) for the agencies examiners to use in evaluating the adequacy of such
allowance and the policies used to determine such allowance. The Policy
Statement also sets forth quantitative measures for the allowance with respect
to assets classified substandard and doubtful and with respect to the remaining
portion of the institutions portfolio. Specifically, the Policy Statement sets
forth the following quantitative measures which examiners may use to determine
the reasonableness of an allowance: (i) 30% to 50% of the portfolio that is
classified doubtful; (ii) 10% to 20% of the portfolio classified substandard;
and (iii) for the portions of the portfolio that have not been classified
(including loans designated special mention), estimated credit losses over the
upcoming twelve months based on facts and circumstances available as of the
evaluation date. While the Policy Statement sets forth this quantitative
measure, such guidance is not intended as a floor or ceiling. Willow
Financials policy for establishing loan losses is consistent with the Policy
Statement. In July 2001, the SEC issued Staff Accounting Bulletin (SAB) No.
102, Selected Loan Loss Allowance Methodology And Documentation Issues. The
guidance in the SAB was effective immediately and focuses on the documentation
the SEC staff normally expects registrants to prepare and maintain in support of
the allowance for loan losses. Concurrent with the SECs issuance of SAB No.
102, the federal banking agencies, represented by the FFIEC issued an
interagency policy statement entitled Allowance For Loan and Lease Loss
Methodologies And Documentation For Banks and Savings Institutions (FFIEC
Policy Statement). The SAB and FFIEC Policy Statement were the result of an
agreement between the SEC and the federal banking agencies in March 1999 to
provide guidance on allowance for loan loss methodologies and supporting
documentation. Management believes that Willow Financial Banks documentation
relating to the allowance for loan loss is consistent with this
guidance.
The
allocation of the allowance for loan losses is shown in the table below. It is
broken down by loan type at June 30, 2007. Through such allocations, Willow
Financial Bank does not intend to imply that actual future charge-offs will
necessarily follow the same pattern or that any portion of the allowance is
restricted.
|
|
June
30
, 2007
|
|
June
30
, 2006
|
|
June
30
, 2005
|
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
|
|
|
|
loan type
|
|
|
|
|
loan type
|
|
|
|
|
loan type
|
|
|
|
|
|
to
total
|
|
|
|
|
to
total
|
|
|
|
|
to
total
|
|
|
Amount
|
|
loans
|
|
Amount
|
|
loans
|
|
A
mount
|
|
loans
|
|
|
(Dollars in thousands)
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
$
|
438
|
|
26.10
|
%
|
|
$
|
473
|
|
27.60
|
%
|
|
$
|
155
|
|
34.34
|
%
|
Commercial real estate and multi-family
|
|
|
6,121
|
|
30.19
|
|
|
|
7,412
|
|
30.14
|
|
|
|
2,280
|
|
29.60
|
|
Construction
|
|
|
1,768
|
|
8.90
|
|
|
|
1,979
|
|
10.43
|
|
|
|
2,169
|
|
14.66
|
|
Home
equity
|
|
|
1,435
|
|
26.01
|
|
|
|
1,351
|
|
23.96
|
|
|
|
537
|
|
17.06
|
|
Total mortgage
loans
|
|
|
9,762
|
|
91.20
|
|
|
|
11,215
|
|
92.13
|
|
|
|
5,141
|
|
95.66
|
|
Consumer loans
|
|
|
776
|
|
0.37
|
|
|
|
663
|
|
0.40
|
|
|
|
71
|
|
0.36
|
|
Commercial
business loans
|
|
|
1,672
|
|
8.43
|
|
|
|
4,859
|
|
7.47
|
|
|
|
901
|
|
3.98
|
|
Total
|
|
$
|
12,210
|
|
100.00
|
%
|
|
$
|
16,737
|
|
100.00
|
%
|
|
$
|
6,113
|
|
100.00
|
%
|
Securities Activities
General
Willow
Financial Banks investment policy is designed, among other things, to provide
management with an additional tool in implementing its asset/liability
strategies. It emphasizes principal preservation, favorable returns, maintaining
liquidity and flexibility, and minimizing credit risk. The policy permits
investments in US government and agency securities, investment grade corporate
bonds and commercial paper, municipal bonds, various types of
96
mortgage-backed securities and
collateralized mortgage obligations, certificates of deposit and federal funds
sold to financial institutions approved by Willow Financial Banks board of
directors, and certain equity investments and mutual funds.
Willow
Financial Bank will from time to time use hedging programs such as interest rate
swaps, caps, collars or other activities involving the use of off-balance sheet
financial derivatives to assist in its Asset/Liability management and the
mitigation of interest rate risk. Willow Financial Bank has not purchased
mortgage-backed derivative instruments that would be characterized high-risk
under Office of Thrift Supervision regulations at the time of purchase, nor has
it purchased corporate obligations, which are not rated investment
grade.
Statement
of Financial Accounting Standards (SFAS) No. 115 requires Willow Financial to
classify a security as available for sale (AFS), held-to-maturity (HTM), or
trading, at the time of acquisition. Securities classified as HTM must be
purchased with the intent and ability to hold that security until its final
maturity, and can be sold prior to maturity only under certain rare
circumstances. HTM securities are accounted for based upon the historical cost
of the security. AFS securities can be sold at any time based upon Willow
Financials needs or judgment as to market changes. AFS securities are accounted
for at fair value with unrealized gains and losses on these securities, net of
income tax effects, reflected in the stockholders equity section of Willow
Financials Statement of Financial Condition.
Additionally, securities are evaluated periodically to determine whether
a decline in their fair value is other than temporary. Management utilizes
criteria such as the magnitude and duration of the decline, in addition to the
reasons underlying the decline, to determine whether the loss in value is other
than temporary. The term other than temporary is not intended to indicate that
the decline is permanent, but indicates that the prospects for a near-term
recovery of value is not necessarily favorable, or that there is a lack of
evidence to support realizable value equal to or greater than carrying value of
the investment. Once a decline in fair value is determined to be other than
temporary, the fair value of the security is reduced through a charge to
earnings in the consolidated statements of income.
Management does not believe any individual unrealized loss on its
securities as of June 30, 2007 represents an other-than-temporary impairment.
The temporary impairment is directly related to changes in market interest
rates. In general, as interest rates rise, the fair value of fixed-rate
securities will decrease and, as interest rates fall, the fair value of
fixed-rate securities will increase. The severity of the impairment as a percent
of the total investment position is nominal and the duration of the impairment
to date is short. The impairments are deemed temporary based on the direct
relationship of the decline in fair value to movements in interest rates, as
well as the relatively short duration of the investments and their high credit
quality. Additionally, Willow Financial has the ability and intent to hold these
securities until such time as the value recovers or the securities
mature.
At June
30, 2007, investment securities amounted to $277.9 million, or 17.9% of total
assets. This includes a $3.2 million unrealized loss, net of income tax, on
those investment securities classified as AFS. The portfolio consists of US
government and agency securities, many with callable features and agency and
non-agency mortgage-backed pass-through securities, collateralized mortgage
obligations, municipal bonds, equity investments primarily in mutual
funds.
97
The
following table sets forth information on the carrying value and the amortized
cost of Willow Financial Banks securities classified as held to maturity and
available for sale at the dates indicated.
|
|
At June 30,
|
|
|
2
00
7
|
|
2
00
6
|
|
2
00
5
|
|
|
Amortized
|
|
|
|
Amortized
|
|
|
|
|
Amortized
|
|
|
|
|
|
Cost
|
|
F
air value
|
|
Cost
|
|
F
air value
|
|
Cost
|
|
F
air value
|
|
|
(Dollars in thousands)
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
19,801
|
|
$
|
20,230
|
US
Govt agency securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
14,818
|
CMOs
|
|
|
60,271
|
|
|
59,261
|
|
|
72,355
|
|
|
70,425
|
|
|
90,449
|
|
|
90,856
|
Mortgage-backed securities
|
|
|
28,092
|
|
|
27,227
|
|
|
33,206
|
|
|
31,662
|
|
|
39,201
|
|
|
39,005
|
Total held to
maturity
|
|
|
88,363
|
|
|
86,488
|
|
|
105,561
|
|
|
102,087
|
|
|
164,451
|
|
|
164,909
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
19,978
|
|
|
19,426
|
|
|
14,419
|
|
|
14,208
|
|
|
|
|
|
|
Municipal bonds
|
|
|
30,585
|
|
|
30,005
|
|
|
9,105
|
|
|
9,127
|
|
|
|
|
|
|
Equity securities
(1)
|
|
|
11,464
|
|
|
11,162
|
|
|
11,642
|
|
|
11,326
|
|
|
9,733
|
|
|
9,502
|
US
Govt agency securities
|
|
|
35,285
|
|
|
34,208
|
|
|
35,473
|
|
|
34,297
|
|
|
45,484
|
|
|
44,867
|
CMOs
|
|
|
22,080
|
|
|
21,769
|
|
|
29,059
|
|
|
28,498
|
|
|
3,786
|
|
|
3,795
|
Mortgage-backed securities
|
|
|
73,840
|
|
|
71,769
|
|
|
103,523
|
|
|
99,469
|
|
|
91,565
|
|
|
90,255
|
Total available
for sale
|
|
|
193,232
|
|
|
188,339
|
|
|
203,221
|
|
|
196,925
|
|
|
150,568
|
|
|
148,419
|
Total securities
|
|
$
|
281,595
|
|
$
|
274,827
|
|
$
|
308,782
|
|
$
|
299,012
|
|
$
|
315,019
|
|
$
|
313,328
|
____________________
(1)
|
|
Includes mutual funds with a fair value of approximately $10.1
million at June 30, 2007.
|
Prior to
the effective date of the Chester Valley Merger, Willow Financial Bank undertook
a strategy to de-leverage a portion of its balance sheet by, among other things,
selling certain of its AFS securities. This effort resulted in Willow Financial
Bank selling an aggregate of approximately $95.9 million in securities, which
resulted in an aggregate net loss of approximately $919 thousand, which was
recognized in fiscal 2006. Prior to the effective date of the Chester Valley
Merger, both Willow Financial Bank and FFB had taken advantage of market
conditions in selling certain securities which did not result in an aggregate
loss to either company, or in the case of FFB, would potentially reduce a
negative mark to market in purchase accounting. The net proceeds received from
this strategy were utilized to repay higher costing Federal Home Loan Bank
borrowings.
In
addition to HTM and AFS securities, at June 30, 2007 and 2006, Willow Financial
had $1.2 million and $902 thousand, respectively, of trading account securities
consisting of mutual funds related to Willow Financials deferred compensation
plan for certain executive level employees and members of the Willow Financial
board of directors. There is a corresponding liability in other liabilities on
the consolidated statements of financial condition at June 30, 2007 and
2006.
Mortgage-Backed Securities
(MBS) and Collateralized Mortgage Obligations (CMOs)
At June
30, 2007, the investment securities portfolio contained MBSs with a carrying
value of $28.1 million and $71.8 million in HTM and AFS, respectively, and CMOs
of $60.3 million and $21.8 million in HTM and AFS, respectively. This compared
to $33.2 million and $99.5 million in HTM and AFS MBSs, respectively, and $72.4
million and $28.5 million in HTM and AFS CMOs, respectively, at June 30, 2006.
The decline during the year resulted from principal repayments being utilized to
repay higher costing borrowings. MBSs represent a participation interest in a
pool of single-family or multi-family mortgages. Mortgages are sold by various
originators to intermediaries (generally agencies of the US Government and
government sponsored enterprises) that pool and repackage the mortgages and sell
participation interests in the pools to investors. The servicer of the mortgage
loan collects the principal and interest payments and passes those payments
through to the intermediary who then remits the payment to the investor. The US
Government agencies and government sponsored enterprises, primarily the
Government National Mortgage Association (GNMA), FNMA and FHLMC, guarantee the
timely payment of principal and interest on these securities. MBSs that are
pooled by US Government or government sponsored enterprises are
98
known as agency mortgage-backed
securities. Other private servicers may pool mortgages into similar pass-through
securities and are known as non-agency MBSs. These non-agency MBSs do not have
the guaranteed timely payment of principal and interest that an agency MBS has,
and may also include loans that may not qualify to be included in an agency MBS,
for reasons such as, but not limited to, the size of the loan. At June 30, 2007,
Willow Financials mortgage-backed securities portfolio does not include any
securities backed by sub-prime mortgage loans.
MBSs are
issued in stated principal amounts and are backed by mortgage loans within a
specific interest rate range, but may have varying maturity dates. The
underlying pool of mortgages may be comprised of either fixed-rate or
adjustable-rate mortgage loans. Each MBS pool will also differ based upon the
actual level of prepayment experienced by the underlying mortgage
loans.
At June
30, 2007, the weighted average life of Willow Financials fixed-rate and
adjustable-rate mortgage-backed securities was approximately 3.2 years and 3.0
years, respectively, based upon managements assumptions related to the future
prepayments of the underlying mortgages. Prepayments that are greater than those
projected will shorten the remaining term of the security, while a decrease in
the amount of prepayments will lengthen the amount of time until the security
matures. Prepayments depend on many factors, including the type of mortgage, the
coupon rate, the remaining period until the loan matures or the rate is
scheduled to reset, the geographic region, and the general level of market
interest rates. During periods of rising interest rates, if the coupon rates of
the underlying mortgages are less than prevailing market rates offered on
mortgages, refinancing will decrease and prepayments of the mortgages underlying
the security will decline. Conversely, when market interest rates are falling,
and the coupon rate on the underlying mortgage exceeds the prevailing market
interest rate for mortgages offered, refinancings tend to increase which will
increase the amount of prepayments of the underlying mortgages.
CMOs are
securities that are structured from a pool of MBSs or whole loans. The
structuring results in sectors known as tranches. Each tranche within a CMO will
have different cash flow requirements and interest rates. Although still subject
to prepayments, this structuring into tranches provides a more predictable cash
flow to the bondholder.
US Government and Government
Agency Securities and Municipal Bonds
At June
30, 2007, the carrying value of US Government and US Government agency
securities within the investment securities portfolio was $34.2 million, which
includes approximately $1.1 million in unrealized losses, compared to $34.3
million, which included approximately $1.2 million in unrealized losses, at June
30, 2006. This portfolio is comprised primarily of securities issued by the
Federal Home Loan Bank. Many of these securities have call features that allow
the issuer to redeem these securities at par value prior to their stated
maturity. Generally, if the prevailing market interest rate on new issue
callable agency securities with similar maturities exceeds the coupon rate of
the security with the call feature, the call will not be exercised. Conversely,
if the prevailing market interest rate for new issue agency callable securities
with similar maturities is below the coupon rate of the security with the call
feature, the call will be exercised and the bond will be redeemed. When calls
are exercised and bonds redeemed prior to their maturity, Willow Financial Bank
faces the risk of re-investing those proceeds into other investments with lower
yields or longer terms.
Municipal
bonds classified as held to maturity at June 30, 2005, were sold in fiscal 2006
as part of Willow Financials de-leveraging strategy referenced above in
accordance with the provisions of Financial Accounting Standards Board (FASB)
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
Municipal bonds classified as AFS at
June 30, 2007 are comprised primarily of bonds issued by local school districts
as well as three non-rated Pennsylvania Municipal Authority bonds that are
classified as substandard. At June 30, 2007, the aggregate book value of these
substandard bonds was $3.6 million. Two of the three bonds, with an aggregate
book value of $3.2 million at June 30, 2007, are zero coupon bonds with
maturities extending up to 2034. Both bonds are secured by the revenue streams
of commercial office buildings, which are leased to various agencies of the
Commonwealth of Pennsylvania under long-term lease arrangements with renewal
options. A third bond was issued by the Housing Authority of Chester County and
has a book balance of $294 thousand at June 30, 2007, and bears interest at
rates between 5.60% and 6.00% and matures in June 2019. This bond involves
low-income scattered housing in Chester County under a program of the Office of
Housing and Urban Development (HUD). HUD has provided additional funds to
build additional houses, which have been donated to this bond issue. The
construction
99
of the homes has been completed and the
proceeds from the sale of the homes have been utilized to liquidate the bond
issue. During fiscal 2007, principal repayments were received on the bond issue.
Willow Financial Banks remaining par value is $505 thousand.
Other
Investments
Other
than MBSs, US government and government agency securities and municipal bonds,
Willow Financial has investments in various equity securities and mutual funds.
At June 30, 2007, Willow Financial was invested in equity securities with a fair
value of $1.1 million and mutual funds with a fair value of $10.1 million. The
equity securities include stock of several publicly traded companies, primarily
local financial institutions. The mutual fund investment of $10.1 million is
backed primarily by investments in adjustable-rate mortgage-backed securities
and other investments authorized by Willow Financials investment
policy.
Sources of Funds
General
Deposits
are the primary source of funds for Willow Financial Banks lending and
investment activities. In addition to deposits, funds are provided from the
amortization and prepayments within the loan and mortgage-backed securities
portfolios, maturities of investments, and borrowings. Scheduled loan
amortization is a relatively stable source of funds. However, competition, the
general level of interest rates and market conditions significantly influences
deposit inflows and outflows. Borrowings may be used on a short-term basis to
compensate for reductions in other funding sources. On a longer-term basis,
borrowings may be used for general business purposes.
Deposits
As shown
in the table below, Willow Financial Banks core deposit accounts at June 30,
2007 (which it considers to be all deposits other than certificate accounts)
represent 69.3% of total deposits as compared to 70.3% at June 30,
2006.
|
|
A
t June
30,
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Percent
|
|
|
|
|
Percent
|
|
|
Amount
|
|
of total
|
|
Amount
|
|
of total
|
|
|
(Dollars in thousands)
|
Savings accounts (passbooks statements and clubs)
|
|
$
|
87,565
|
|
8.0
|
%
|
|
$
|
101,119
|
|
9.9
|
%
|
Money market
accounts
|
|
|
403,487
|
|
36.9
|
%
|
|
|
338,451
|
|
33.3
|
%
|
Certificates of deposit
|
|
|
334,672
|
|
30.7
|
%
|
|
|
301,627
|
|
29.7
|
%
|
Checking
accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
|
125,905
|
|
11.5
|
%
|
|
|
152,056
|
|
15.0
|
%
|
Non-interest-bearing
|
|
|
141,101
|
|
12.9
|
%
|
|
|
123,247
|
|
12.1
|
%
|
Total
|
|
$
|
1,092,730
|
|
100.0
|
%
|
|
$
|
1,016,500
|
|
100.0
|
%
|
During
the year ended June 30, 2007, total deposits increased by $76.2 million, or 7.5%
compared to the year ended June 30, 2006. The increase occurred primarily from
an increase in money market demand deposit accounts as Willow Financial has been
successful in migrating money market balances from customers of its business
segment, WIS, as well as an increase in certificates of deposit resulting from
customer preference for higher rate deposit accounts. Core deposits, as
previously defined, increased by $43.2 million.
|
|
Year ended June 3
0,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(Dollars in thousands)
|
Beginning balance
|
|
$
|
1,016,500
|
|
$
|
602,678
|
|
|
$
|
603,115
|
|
Net increase
(decrease) in deposits
|
|
|
49,510
|
|
|
(36,332
|
)
|
|
|
(9,569
|
)
|
Deposits assumed in acquisition
|
|
|
|
|
|
437,065
|
|
|
|
|
|
Interest
credited
|
|
|
26,720
|
|
|
13,089
|
|
|
|
9,132
|
|
Ending balance
|
|
$
|
1,092,730
|
|
$
|
1,016,500
|
|
|
$
|
602,678
|
|
100
The
following table sets forth by various interest rate ranges, the amount of Willow
Financial Banks certificates of deposit at the dates indicated.
|
|
At J
une 3
0,
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
Interest rates:
|
|
|
|
|
|
|
from 0.00% to 2.99%
|
|
$
|
18,547
|
|
$
|
76,344
|
from
3.00% to 3.99%
|
|
|
16,796
|
|
|
115,702
|
from 4.00% to 4.99%
|
|
|
196,705
|
|
|
96,206
|
from
5.00% to 5.99%
|
|
|
101,799
|
|
|
11,211
|
6.00% and over
|
|
|
825
|
|
|
2,164
|
Total
|
|
$
|
334,672
|
|
$
|
301,627
|
Shown below are the amount and
remaining term to maturity for certificates of deposit as of June 30,
2007.
|
|
Amo
unts maturing in
|
|
|
|
|
|
Over six
|
|
Over
|
|
Over two
|
|
|
|
|
|
|
|
|
months
|
|
one year
|
|
years
|
|
Over
|
|
|
Six months
|
|
through
|
|
through
|
|
through
|
|
three
|
|
|
or less
|
|
one year
|
|
two years
|
|
three years
|
|
years
|
|
|
(Dollars in thousands)
|
Interest
rates:
|
|
|
0.00% to 2.99%
|
|
$
|
10,405
|
|
$
|
3,920
|
|
$
|
2,592
|
|
$
|
567
|
|
$
|
1,063
|
3.00% to 3.99%
|
|
|
8,711
|
|
|
3,805
|
|
|
2,020
|
|
|
1,275
|
|
|
985
|
4.00% to 4.99%
|
|
|
97,353
|
|
|
55,253
|
|
|
23,587
|
|
|
16,026
|
|
|
4,486
|
5.00% to 5.99%
|
|
|
51,140
|
|
|
41,575
|
|
|
4,976
|
|
|
2,932
|
|
|
1,176
|
6.00% and over
|
|
|
204
|
|
|
15
|
|
|
41
|
|
|
303
|
|
|
262
|
Total
|
|
$
|
167,813
|
|
$
|
104,568
|
|
$
|
33,216
|
|
$
|
21,103
|
|
$
|
7,972
|
At June
30, 2007 the total amount of outstanding certificates of deposit in amounts
greater than or equal to $100 thousand was $94.7 million. The following table
provides information regarding the maturity of these certificates of
deposit.
A
mounts maturing
in
|
|
|
Over
three
|
|
Over
six
|
|
|
|
|
Three
|
|
months
|
|
months
|
|
|
|
|
months
or
|
|
through
|
|
through
|
|
Over
one
|
|
|
less
|
|
six months
|
|
one year
|
|
year
|
|
Total
|
(Dollars
in thousands)
|
$36,257
|
|
$11,405
|
|
$19,159
|
|
$27,884
|
|
$94,705
|
Borrowings
Willow
Financial Bank utilizes borrowings to supplement its funding needs and in the
past, under certain instances, as revenue enhancement programs to take advantage
of arbitrage opportunities when investment returns exceeded the cost of
borrowings. At June 30, 2007, Willow Financial Bank had $235.5 million in
outstanding borrowings, which were comprised of $189.8 million of Federal Home
Loan Bank borrowings, $25.8 million of trust preferred securities, and $20.0
million of repurchase agreements. The investment in Federal Home Loan Bank
stock, as well as a portion of Willow Financial Banks residential mortgage loan
portfolio and investment securities portfolio, secure advances from the Federal
Home Loan Bank. The Federal Home Loan Bank of Pittsburgh provides an array of
borrowing programs which include: fixed or variable rate programs; various fixed
terms ranging from overnight to 20 years; and other programs that have callable
or putable features attached to them. Willow Financial Bank intends to continue
to utilize borrowings in the future as an alternative source of funds. The
repurchase agreements are secured by various securities within Willow Financial
Banks investment securities portfolio. During the fiscal year ending June 30,
2007, approximately $103.2 million of these borrowings were paid down with
proceeds from repayments within the investment and loan portfolios as well as
the funds generated from the growth in Willow Financial Banks
deposits.
101
The
following table sets forth certain information regarding Willow Financial Banks
borrowings for the periods indicated.
|
|
At or fo
r the ye
ar
ended
|
|
|
June 30, 2007
|
|
June 30, 2006
|
|
|
(Dollars in thousands)
|
Federal Home Loan Bank advances:
|
|
|
|
|
|
|
|
|
Average balance outstanding for the period
|
|
$
|
225,722
|
|
|
$
|
312,420
|
|
Maximum outstanding at any month end
|
|
|
258,035
|
|
|
|
364,572
|
|
Balance outstanding at end of the period
|
|
|
189,764
|
|
|
|
282,555
|
|
Average interest rate for the period
|
|
|
3.93
|
%
|
|
|
4.04
|
%
|
Interest rate at the end of the period
|
|
|
4.19
|
%
|
|
|
4.24
|
%
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
Average balance outstanding for the period
|
|
$
|
22,767
|
|
|
$
|
4,959
|
|
Maximum outstanding at any month end
|
|
|
30,000
|
|
|
|
20,000
|
|
Balance outstanding at end of the period
|
|
|
20,000
|
|
|
|
20,000
|
|
Average interest rate for the period
|
|
|
4.99
|
%
|
|
|
4.60
|
|
Interest rate at the end of the period
|
|
|
4.52
|
%
|
|
|
4.56
|
|
At June
30, 2007 the maturity dates of Willow Financial Banks Federal Home Loan Bank
advances ranged from July 2, 2007 to October 1, 2018. Certain advances also
require monthly payments of principal. At June 30, 2007, $152.5 million of
Federal Home Loan Bank advances were callable at the option of the Federal Home
Loan Bank within certain parameters, of which $107.5 million could be called
within one year. Of the Federal Home Loan Bank advances that are callable at the
discretion of the Federal Home Loan Bank, $47.5 million of such advances could
be called only if an index exceeded a specific pre-determined rate.
Trust Preferred
Securities
Effective
with the acquisition of Chester Valley, Willow Financial assumed the liability
for $10.5 million of Junior Subordinated Debentures to the Chester Valley
Statutory Trust (the Chester Valley Trust), a Pennsylvania Business Trust, in
which Willow Financial owns all of the common equity as a result of the
acquisition of Chester Valley. The Chester Valley Trust issued $10.0 million of
Trust Preferred Securities to investors, which are secured by the Junior
Subordinated Debentures and the guarantee of Willow Financial. These Trust
Preferred Securities were redeemed by Willow Financial on March 26, 2007 in
accordance with the Chester Valley Trust Agreement.
On March
31, 2006, Willow Financial issued $25.8 million of Junior Subordinated
Debentures to Willow Grove Statutory Trust I (the Willow Grove Trust), a
Connecticut Statutory Trust, in which Willow Financial owns all of the common
equity. The Willow Grove Trust then issued $25.0 million of Trust Preferred
Securities, which pay interest quarterly at three-month LIBOR plus 1.31% to
investors, which are secured by the Junior Subordinated Debentures and the
guarantee of Willow Financial. The Junior Subordinated Debentures are treated as
debt of Willow Financial but qualify as Tier I capital of Willow Financial Bank
to the extent of the amount of the proceeds, which are invested in Willow
Financial Bank. The Trust Preferred Securities are callable by Willow Financial
on or after September 30, 2011. The Trust Preferred Securities must be redeemed
by Willow Financial upon their maturity in the year 2036.
Accounting for Derivative
Instruments and Hedging
Willow
Financial may from time to time utilize derivative instruments such as interest
rate swaps, interest rate collars, interest rate floors, interest rate swap
options or combinations thereof to assist in its asset/liability management. In
accordance with SFAS No. 133, Accounting for Derivative Instruments, Willow
Financial documents its hedge relationships, including identification of the
hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge. Willow Financial also
assesses, both at inception and at least quarterly thereafter, whether the
derivative instruments that are used in hedging transactions are highly
effective in offsetting the changes in either the fair value or cash flows of
the hedged item. For fair value hedges, both the effective and ineffective
portions of the changes in the fair value of the derivative, along with the gain
or loss on the hedged item that is attributable to the hedged risk, are recorded
in the statement of operations
102
within interest income or interest
expense. For cash flow hedges, the effective portion of the change in the fair
value of the derivative is recorded in accumulated other comprehensive income.
When the hedged item impacts the statement of operations, the gain or loss
included in accumulated other comprehensive income is reported on the same line
in the statement of operations as the hedged item. In addition, the ineffective
portion of the changes in the fair value of derivatives used as cash flow hedges
is reported in the statement of operations.
As part
of the Chester Valley Merger, Willow Financial assumed the responsibility for a
$20 million notional interest rate swap whereby Willow Financial paid a variable
rate and received a fixed rate. The interest rate swap had been used to hedge
certain Federal Home Loan Bank borrowings of the former Chester Valley. On the
date of the Chester Valley Merger, the interest rate swap and the hedged
borrowings were marked to fair value in purchase accounting. In September 2005,
the hedged borrowings were repaid and $10 million notional amount of the
interest rate swap was unwound with the counter-party. After performing the
appropriate documentation of the derivative instrument, Willow Financial
designated the remaining $10 million notional amount interest rate swap as a
fair value hedge of certain existing borrowings of Willow Financial Bank. The
swap had the effect of converting a fixed rate borrowing to an adjustable rate
borrowing. During the quarter ended December 31, 2005, the derivative instrument
ceased to be a highly effective hedge; therefore, Willow Financial discontinued
hedge accounting resulting in a pre-tax charge to the statement of operations of
$47 thousand. The interest rate swap was unwound in February 2006 without
resulting in any additional impact to the statement of operations. The basis
adjustment that was previously recorded on the hedged borrowing that is recorded
in the statement of financial condition is amortized as an increase in interest
expense over the remaining life of the borrowing using the interest
method.
Additionally, in August 2003, Chester Valley purchased a $30.0 million
notional amount 3.50% six-month LIBOR interest rate cap while simultaneously
selling a $30.0 million notional amount 6.00% six-month LIBOR interest rate cap
(Interest Rate Corridor) which expires in August 2008. Chester Valley paid a
net premium, which entitled it to receive the difference between six-month LIBOR
from 3.50% up to 6.00% applied to the $30.0 million notional amount. Upon
consummation of the Chester Valley Merger, Willow Financial assumed the Interest
Rate Corridor and designated it to hedge certain borrowings of Willow Financial
Bank, which were variable in nature and indexed to six-month LIBOR. The Interest
Rate Corridor was being used to hedge the cash flows of this borrowing. Prior to
October 23, 2006, the Interest Rate Corridor reduced the negative impact on
earnings of the borrowings in a rising interest rate environment. The fair
market value of the Interest Rate Corridor had two components: the intrinsic
value and the time value of the option. The Interest Rate Corridor was
marked-to-market quarterly, with changes in the intrinsic value of the Interest
Rate Corridor, net of tax, included as a separate component of other
comprehensive income, and the change in the time value of the option included
directly as interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, would have been expensed in the period in which
ineffectiveness was determined.
On
October 23, 2006, Willow Financial unwound the Interest Rate Corridor and
recognized a gain of $804 thousand in the statement of operations upon repayment
of the $30 million Federal Home Loan Bank advance.
At June
30, 2007 and 2006, Willow Financial Bank had five interest rate swap
arrangements used to hedge specific loans originated by Willow Financial Bank
for which the transactions were economically beneficial to Willow Financial Bank
in passing along the interest rate risk to the borrower. The swaps effectively
convert the rates from a floating rate based on LIBOR to a fixed rate throughout
the life of the underlying loans. At June 30, 2007, the total outstanding
notional amount on these swaps was $9.3 million. The weighted average floating
and fixed rates on these transactions were 4.6% and 5.3%, respectively at June
30, 2007. Willow Financial Bank lacked sufficient documentation for these
transactions to receive hedge accounting treatment. As such, Willow Financial
Bank has recorded a net receivable of $196 thousand and $480 thousand,
respectively, at June 30, 2007 and 2006. The change in the fair value of the
interest rate swaps is included as a component of other income on the
consolidated statements of income.
Regulation
Set forth
below is a brief description of certain laws and regulations, which are
applicable to Willow Financial and Willow Financial Bank, including its business
segment, PCIS. The description of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, does not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
103
General
Willow
Financial Bank, as a federally chartered savings institution, is subject to
federal regulation and oversight by the Office of Thrift Supervision extending
to all aspects of its operations. Willow Financial Bank also is subject to
regulation and examination by the FDIC, which insures the deposits of Willow
Financial Bank to the maximum extent permitted by law, and requirements
established by the Federal Reserve Board. Federally chartered savings
institutions are required to file periodic reports with the Office of Thrift
Supervision and are subject to periodic examinations by the Office of Thrift
Supervision and the FDIC. Federal laws and regulations determine the investment
and lending authority of savings institutions, and such institutions are
prohibited from engaging in any activities not permitted by such laws and
regulations. Such regulation and supervision primarily is intended for the
protection of depositors and not for the purpose of protecting
stockholders.
The
Office of Thrift Supervision regularly examines Willow Financial Bank and
prepares reports for consideration by its board of directors on any deficiencies
that it may find in Willow Financial Banks operations. The FDIC also has the
authority to examine Willow Financial Bank in its role as the administrator of
the Deposit Insurance Fund. Willow Financial Banks relationship with its
depositors and borrowers also is regulated to a great extent by both federal
and, to a lesser extent, state laws, especially in such matters as the ownership
of savings accounts and the form and content of Willow Financial Banks mortgage
requirements. The Office of Thrift Supervisions enforcement authority over all
savings institutions and their holding companies includes, among other things,
the ability to assess civil money penalties, to issue cease and desist or
removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
Office of Thrift Supervision. Any change in such laws or regulations, whether by
the FDIC, Office of Thrift Supervision or Congress, could have a material
adverse impact on Willow Financial and Willow Financial Bank and Willow
Financial Banks operations.
Willow Financial Bancorp,
Inc.
Willow
Financial is a registered savings and loan holding company under Section 10 of
the Home Owners Loan Act, as amended, and subject to Office of Thrift
Supervision examination and supervision as well as certain reporting
requirements. In addition, Willow Financial Bank is subject to certain
restrictions in dealing with Willow Financial and with other persons affiliated
with Willow Financial Bank.
Generally, the Home Owners Loan Act prohibits a savings and loan holding
company, such as Willow Financial, directly or indirectly, from (1) acquiring
control (as defined) of a savings institution (or holding company thereof)
without prior Office of Thrift Supervision approval, (2) acquiring more than 5%
of the voting shares of a savings institution (or holding company thereof) which
is not a subsidiary, subject to certain exceptions, without prior Office of
Thrift Supervision approval, or (3) acquiring through a merger, consolidation or
purchase of assets of another savings institution (or holding company thereof)
or acquiring all or substantially all of the assets of another savings
institution (or holding company thereof) without prior Office of Thrift
Supervision approval or (4) acquiring control of an uninsured institution. A
savings and loan holding company may not acquire as a separate subsidiary a
savings institution which has its principal offices outside of the state where
the principal offices of its subsidiary institution is located, except (a) in
the case of certain emergency acquisitions approved by the FDIC, (b) if the
holding company controlled (as defined) such savings institution as of March 5,
1987 or (c) when the laws of the state in which the savings institution to be
acquired is located specifically authorize such an acquisition. No director or
officer of a savings and loan holding company or person owning or controlling
more than 25% of such holding companys voting shares may, except with the prior
approval of the Office of Thrift Supervision, acquire control of any savings
institution which is not a subsidiary of such holding company.
Willow Financial
Bank
Insurance of Accounts
The
deposits of Willow Financial Bank are insured to the maximum extent permitted by
the Deposit Insurance Fund, which is administered by the FDIC, and are backed by
the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, insured
institutions. It also
104
may prohibit any insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the Office of
Thrift Supervision an opportunity to take such action.
Under
current FDIC regulations, insured institutions are assigned to one of three
capital groups which are based solely on the level of an institutions
capitalwell capitalized, adequately capitalized, and
undercapitalizedwhich are defined in the same manner as the regulations
establishing the prompt corrective action system discussed below. Effective
January 1, 2007, the previous nine risk classifications have been consolidated
into four risk categories, which reflect varying levels of supervisory concern,
from those, which are considered to be healthy to those, which are considered to
be of substantial supervisory concern. The risk categories were created with
rates during the last six months of fiscal 2007 ranging from five basis points
for well capitalized, healthy institutions, such as Willow Financial Bank, to 43
basis points for undercapitalized institutions with substantial supervisory
concerns.
In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation, a mixed-ownership government corporation established to
recapitalize the predecessor to the Savings Association Insurance Fund. The
assessment rate for the third calendar quarter of 2007 was .00139% of insured
deposits and is adjusted quarterly. These assessments will continue until the
Financing Corporation bonds mature in 2019. The FDIC approved a one-time
assessment credit to banks and savings associations in existence on December 31,
1996. The credit is applied on a quarterly basis up to the amount of the
respective quarters assessment. The remaining balance of Willow Financial
Banks credit is $607 thousand at June 30, 2007. It is anticipated that the
assessment credit will be fully utilized by December 31, 2008.
The FDIC
may terminate the deposit insurance of any insured depository institution,
including Willow Financial Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances, which would result
in termination of Willow Financial Banks deposit insurance.
Deposit Insurance
Reform
On
February 8, 2006, President George W. Bush signed into law legislation that
merged the Bank Insurance Fund and the Savings Association Insurance Fund to
form the Deposit Insurance Fund, eliminated any disparities in bank and thrift
risk-based premium assessments, reduced the administrative burden of maintaining
and operating two separate funds and established certain new insurance coverage
limits and a mechanism for possible periodic increases. The legislation also
gave the FDIC greater discretion to identify the relative risks all institutions
present to the Deposit Insurance Fund and set risk-based premiums.
Major provisions in the legislation
include:
-
Merging the Savings Association Insurance Fund and
Bank Insurance Fund, which became effective
March 31, 2006;
-
Maintaining basic deposit and municipal account
insurance coverage at $100,000 but providing for a new
basic insurance coverage for retirement accounts of $250,000. Insurance
coverage for basic deposit and
retirement
accounts could be increased for inflation every five years in $10,000
increments beginning in
2011;
-
Providing the FDIC with the ability to set the
designated reserve ratio within a range of between 1.15%
and 1.50%, rather than maintaining 1.25% at all times
regardless of prevailing economic conditions;
-
Providing a one-time assessment credit of $4.7
billion to banks and savings associations in existence on
December 31, 1996, which may be used to offset future
premiums with certain limitations; and
-
Requiring the payment of dividends of 100% of the
amount that the insurance fund exceeds 1.5% of the
estimated insured deposits and the payment of 50% of the amount that
the insurance fund exceeds 1.35%
of the
estimated insured deposits (when the reserve is greater than 1.35% but no more
than 1.5%).
105
Regulatory Capital
Requirements
The
Office of Thrift Supervision capital requirements consist of a tangible capital
requirement, a leverage capital requirement and a risk-based capital
requirement. The Office of Thrift Supervision is authorized to impose capital
requirements in excess of those standards on individual institutions on a
case-by-case basis.
Under the
tangible capital requirement, a savings bank must maintain tangible capital in
an amount equal to at least 1.5% of adjusted total assets. Tangible capital is
defined as core capital less all intangible assets (including supervisory
goodwill), plus a specified amount of purchased mortgage-servicing
rights.
Under the
leverage capital requirement adopted by the Office of Thrift Supervision,
savings banks must maintain core capital in an amount equal to at least 3.0%
of adjusted total assets. Core capital is defined as common stockholders equity
(including retained earnings), non-cumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated subsidiaries, plus
purchased mortgage servicing rights valued at the lower of 90% of fair market
value, 90% of original cost or the current amortized book value as determined
under generally accepted accounting principles, and qualifying supervisory
goodwill, less non-qualifying intangible assets.
Under the
risk-based capital requirement, a savings bank must maintain total capital
(which is defined as core capital plus supplementary capital) equal to at least
8.0% of risk-weighted assets. A savings bank must calculate its risk-weighted
assets by multiplying each asset and off-balance sheet item by various risk
factors, which range from 0% for cash and securities issued by the United States
Government or its agencies to 100% for repossessed assets or loans more than 90
days past due. Qualifying one- to-four family residential real estate loans and
qualifying multi-family residential real estate loans (not more than 90 days
delinquent and having an 80% or lower loan-to-value ratio) are weighted at a 50%
risk factor. Supplementary capital may include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and general allowances for
loan losses. The allowance for loan losses includable in supplementary capital
is limited to 1.25% of risk-weighted assets. The amount of supplementary capital
that can be included is limited to 100% of core capital.
Certain
exclusions from capital and assets are required for the purpose of calculating
total capital, in addition to the adjustments required for calculating core
capital. Such exclusions consist of equity investments (as defined by
regulation) and that portion of land loans and non-residential construction
loans in excess of an 80% loan-to-value ratio and reciprocal holdings of
qualifying capital instruments. However, in calculating regulatory capital,
institutions must exclude unrealized losses and gains on securities available
for sale, net of taxes, reported as a separate component of capital calculated
according to U.S. generally accepted accounting principles.
In its
letter approving the merger of Willow Financial Bank and Chester Valley, the
Office of Thrift Supervision, as one of its conditions for approval, indicated
that, for the periods ending December 31, 2005, 2006 and 2007, Willow Financial
Bank must have tier one core capital ratios at least equal to 6.50%, 6.75%, and
7.25%, respectively, and total risk-based capital ratios at least equal to
11.97%, 12.02% and 12.40%, respectively. Willow Financial Bank also had to
submit to the Office of Thrift Supervision, quarterly status reports detailing
its compliance with the conditions on regulatory capital outlined in its
approval letter. The Office of Thrift Supervisions conditions for approval of
the FFB Bank Chester Valley Merger also indicated that, for the periods ending
December 31, 2005, 2006 and 2007, Willow Financial Bancorp must have
consolidated tangible capital ratios at least equal to 5.14%, 5.59% and 6.12%,
respectively. Willow Financial also must submit to the Office of Thrift
Supervision quarterly status reports. Willow Financial and Willow Financial Bank
were in compliance with these regulatory capital ratios at the applicable
times.
Office of
Thrift Supervision regulations establish special capitalization requirements for
savings banks that own service corporations and other subsidiaries, including
subsidiary savings banks. According to these regulations, certain subsidiaries
are consolidated for capital purposes and others are excluded from assets and
capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks,
engaged solely in mortgage-banking activities, or engaged in certain other
activities solely as agent for its customers are includable subsidiaries that
are consolidated for capital purposes in proportion to Willow Financial Banks
level of ownership, including the assets of includable subsidiaries in which
Willow Financial Bank
106
has a minority interest that is not
consolidated for generally accepted accounting principles purposes. For
excludable subsidiaries, the debt and equity investments in such subsidiaries
are deducted from assets and capital. At June 30, 2007, Willow Financial Bank
had no investments subject to a deduction from tangible capital.
Under
currently applicable Office of Thrift Supervision policy, savings institutions
must value securities available for sale at amortized cost for regulatory
capital purposes. This means that in computing regulatory capital, savings
institutions should add back any unrealized losses and deduct any unrealized
gains, net of income taxes, on debt securities reported as a separate component
of capital calculated according to U.S. generally accepted accounting
principles.
At June
30, 2007, Willow Financial Bank exceeded all of its regulatory capital
requirements, including capital requirements provided for with the approval of
Chester Valley Merger, with tangible, core and risk-based capital ratios of
8.0%, 8.0% and 13.3%, respectively.
The
Office of Thrift Supervision and the FDIC generally are authorized to take
enforcement action against a savings bank that fails to meet its capital
requirements, which action may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease-and-desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution. In addition, under
current regulatory policy, a savings bank that fails to meet its capital
requirements is prohibited from paying any dividends.
Prompt Corrective
Action
Under the
Federal Deposit Insurance Corporation Improvement Act of 1991, the federal
banking regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure of capital deemed appropriate by the federal banking regulator for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements.
Under the
Federal Deposit Insurance Corporation Improvement Act an institution is deemed
to be (a) well capitalized if it has total risk-based capital of 10.0% or
more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1
leverage capital ratio of 5.0% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (b) adequately capitalized if it has a total risk-based capital ratio
of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1
leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of well capitalized, (c) undercapitalized if it
has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based
capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances), (d) significantly
undercapitalized if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1
leverage capital ratio that is less than 3.0%, and (e) critically
undercapitalized if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Under specified circumstances, a federal banking
agency may reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
An
institution generally must file a written capital restoration plan which meets
specified requirements with its appropriate federal banking agency within 45
days of the date that the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the agency. An institution
that is required to submit a capital restoration plan must concurrently submit a
performance guaranty by each company that controls the institution. In addition,
undercapitalized institutions are subject to various regulatory restrictions,
and the appropriate federal banking agency also may take any number of
discretionary supervisory actions.
At June
30, 2007, Willow Financial Bank was in the well capitalized category for
purposes of the above regulations.
107
Safety and Soundness
Guidelines
The
Office of Thrift Supervision and the other federal bank regulatory agencies have
established guidelines for safety and soundness, addressing operational and
managerial standards, as well as compensation matters for insured financial
institutions. Institutions failing to meet these standards may be required to
submit compliance plans to their appropriate federal regulators. The Office of
Thrift Supervision and the other agencies have also established guidelines
regarding asset quality and earnings standards for insured institutions. Willow
Financial Bank believes that it is in compliance with these guidelines and
standards.
Capital Distributions
Office of
Thrift Supervision regulations govern capital distributions by savings
institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution to make
capital distributions. A savings institution must file an application for Office
of Thrift Supervision approval of the capital distribution if any of the
following occur or would occur as a result of the capital distribution (1) the
total capital distributions for the applicable calendar year exceed the sum of
the institutions net income for that year to date plus the institutions
retained net income for the preceding two years, (2) the institution would not
be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
Office of Thrift Supervision-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If the filing of an application
is not required, savings institutions that are a subsidiary of a holding company
(as well as certain other institutions) must still file a notice with the Office
of Thrift Supervision at least 30 days before the board of directors declares a
dividend or approves a capital distribution. Commencing with the dividend that
was paid in the first calendar quarter in 2008, Willow Financial was required to
file applications with the Office of Thrift Supervision for capital
distributions and anticipates requiring Office of Thrift Supervision approval
for any capital distributions through at least the remainder of calendar year
2008.
Branching by Federal Savings
Institutions
Office of
Thrift Supervision policy permits interstate branching to the full extent
permitted by statute (which is essentially unlimited). Generally, federal law
prohibits federal savings institutions from establishing, retaining or operating
a branch outside the state in which the federal institution has its home office
unless the institution meets the IRS domestic building and loan test
(generally, 60% of a thrifts assets must be housing-related) (IRS Test). The
IRS Test requirement does not apply if: (a) the branch(es) result(s) from an
emergency acquisition of a troubled savings institution (however, if the
troubled savings institution is acquired by a bank holding company, does not
have its home office in the state of the bank holding company bank subsidiary
and does not qualify under the IRS Test, its branching is limited to the
branching laws for state-chartered banks in the state where the savings
institution is located); (b) the law of the state where the branch would be
located would permit the branch to be established if the federal savings
institution were chartered by the state in which its home office is located; or
(c) the branch was operated lawfully as a branch under state law prior to the
savings institutions reorganization to a federal charter.
Furthermore, the Office of Thrift Supervision will evaluate a branching
applicants record of compliance with the Community Reinvestment Act of 1977. An
unsatisfactory Community Reinvestment Act record may be the basis for denial of
a branching application.
Community Reinvestment Act and the
Fair Lending Laws
Savings
institutions have a responsibility under the Community Reinvestment Act and
related regulations of the Office of Thrift Supervision to help meet the credit
needs of their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institutions failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities, and failure to comply with
the fair lending laws could result in enforcement actions by the Office of
Thrift Supervision, as well as other federal regulatory agencies and the
Department of Justice.
108
Qualified Thrift Lender
Test
All
savings institutions are required to meet a qualified thrift lender test to
avoid certain restrictions on their operations. Under Section 2303 of the
Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings
institution can comply with the qualified thrift lender test by either
qualifying as a domestic building and loan bank as defined in Section
7701(a)(19) of the Internal Revenue Code or by meeting the second prong of the
qualified thrift lender test set forth in Section 10(m) of the Home Owners Loan
Act. A savings institution that does not meet the qualified thrift lender test
must either convert to a bank charter or comply with the following restrictions
on its operations: (a) the institution may not engage in any new activity or
make any new investment, directly or indirectly, unless such activity or
investment is permissible for a national bank; (b) the branching powers of the
institution shall be restricted to those of a national bank; and (c) payment of
dividends by the institution shall be subject to the rules regarding payment of
dividends by a national bank. Upon the expiration of three years from the date
the savings institution ceases to be a qualified thrift lender, it must cease
any activity and not retain any investment not permissible for a national bank
(subject to safety and soundness considerations).
Currently, the portion of the qualified thrift lender test that is based
on Section 10(m) of the Home Owners Loan Act rather than the Internal Revenue
Code requires that 65% of an institutions portfolio assets (as defined)
consist of certain housing and consumer-related assets on a monthly average
basis in nine out of every 12 months. Assets that qualify without limit for
inclusion as part of the 65% requirement are loans made to purchase, refinance,
construct, improve or repair domestic residential housing and manufactured
housing; home equity loans; mortgage-backed securities (where the mortgages are
secured by domestic residential housing or manufactured housing); stock issued
by the Federal Home Loan Bank of Pittsburgh; and direct or indirect obligations
of the FDIC. Small business loans, credit card loans and student loans are also
included without limitation as qualified investments. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institutions portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of loans
for personal, family and household purposes (other than credit card loans and
educational loans); and stock issued by Fannie Mae or Freddie Mac. Portfolio
assets consist of total assets minus the sum of (a) goodwill and other
intangible assets, (b) property used by the savings institution to conduct its
business, and (c) liquid assets up to 20% of the institutions total assets. At
June 30, 2007, approximately 69.5% of the portfolio assets of Willow Financial
Bank were qualified thrift investments.
Federal Home Loan Bank
System
Willow
Financial Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is
one of 12 regional Federal Home Loan Banks that administer the home financing
credit function of savings institutions. Each Federal Home Loan Bank serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
Federal Home Loan Bank System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by its board of directors.
At June 30, 2007, Willow Financial Bank had $189.8 million of Federal Home Loan
Bank advances.
As a
member, Willow Financial Bank is required to purchase and maintain stock in the
Federal Home Loan Bank of Pittsburgh in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of the members aggregate amount
of outstanding advances and 0.7% of the members unused borrowing capacity. At
June 30, 2007, Willow Financial Bank had $11.4 million in stock of the Federal
Home Loan Bank of Pittsburgh, which was in compliance with this
requirement.
The
Federal Home Loan Banks are required to provide funds for the resolution of
troubled savings institutions and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of Federal Home Loan Bank dividends paid and
could continue to do so in the future and could also result in the Federal Home
Loan Banks imposing higher interest rates on advances to members. These
contributions also could have an adverse effect on the value of Federal Home
Loan Bank stock in the future.
109
Federal Reserve
System
Federal
Reserve Board regulations require all depository institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and Super NOW checking accounts) and non-personal time deposits. At June 30,
2007, Willow Financial Bank was in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the Office of Thrift Supervision.
Savings
banks are authorized to borrow from a Federal Reserve Bank discount window,
but Federal Reserve Board regulations require savings banks to exhaust other
reasonable alternative sources of funds, including Federal Home Loan Bank
advances, before borrowing from a Federal Reserve Bank.
Affiliate
Restrictions
Section
11 of the Home Owners Loan Act provides that transactions between an insured
subsidiary of a holding company and an affiliate thereof will be subject to the
restrictions that apply to transactions between banks that are members of the
Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of
the Federal Reserve Act.
Generally, Section 23A and Office of Thrift Supervision regulations
issued in connection therewith limit the extent to which a savings institution
or its subsidiaries may engage in certain covered transactions with affiliates
to an amount equal to 10% of the institutions capital and surplus, in the case
of covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. Section 23B applies to covered transactions and certain other
transactions and requires that all such transactions be on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A covered transaction is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. Section 23B transactions also apply to the provision of services and
the sale of assets by a savings association to an affiliate.
In
addition, under Office of Thrift Supervision regulations, a savings institution
may not make a loan or extension of credit to an affiliate unless the affiliate
is engaged only in activities permissible for bank holding companies; a savings
institution may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings institution and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings institution or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings institution to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The
Office of Thrift Supervision regulation generally excludes all non-bank and
non-savings institution subsidiaries of savings institutions from treatment as
affiliates, except to the extent that the Office of Thrift Supervision or the
Federal Reserve Board decides to treat such subsidiaries as affiliates. The
regulation also requires savings institutions to make and retain records that
reflect affiliate transactions in reasonable detail, and provides that certain
classes of savings institutions may be required to give the Office of Thrift
Supervision prior notice of affiliate transactions.
Federal Securities
Law
Willow
Financials common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended. It is therefore subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
Securities Exchange Act of 1934, as amended. Due to the need to correct it
financials statements relating to the out of balance condition, Willow Financial
was unable to timely file its Quarterly Reports for the periods ending September
30, 2007, December 31, 2008 and March 31, 2008 in compliance with federal
securities laws and regulations. Each of these reports has been subsequently
filed with the SEC and Willow Financial is as of the date of this joint proxy
statement/prospectus current in all periodic information reports required by the
SEC.
110
Sarbanes-Oxley Act of
2002
On July
30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
implementing legislative reforms intended to address corporate and accounting
fraud. In addition to the establishment of a new accounting oversight board
which enforces auditing, quality control and independence standards and is
funded by fees from all publicly traded companies, the Sarbanes-Oxley Act
restricts provision of both auditing and consulting services by accounting
firms. To ensure auditor independence, any non-audit services being provided
require pre-approval by Willow Financials audit committee. In addition, the
audit partners must be rotated. The Sarbanes-Oxley Act requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the SEC, subject to civil and criminal
penalties if they knowingly or willfully violate this certification requirement.
In addition, under the Sarbanes-Oxley Act, counsel will be required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the board of directors or the
board itself.
Longer
prison terms will also be applied to corporate executives who violate federal
securities laws, the period during which certain types of suits can be brought
against a company or its officers has been extended, and bonuses issued to top
executives prior to restatement of a companys financial statements are subject
to disgorgement if such restatement was due to corporate misconduct. Executives
are also prohibited from insider trading during retirement plan blackout
periods, and loans to company executives are restricted. In addition, a
provision directs that civil penalties levied by the SEC as a result of any
judicial or administrative action under the Act be deposited to a fund for the
benefit of harmed investors. The Federal Accounts for Investor Restitution
(FAIR) provision also requires the SEC to develop methods of improving
collection rates. The legislation accelerated the time frame for disclosures by
public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in ownership in a companys securities
within two business days of the change.
The
Sarbanes-Oxley Act increased the oversight of, and codified certain requirements
relating to audit committees of public companies and how they interact with
Willow Financials registered public accounting firm (RPAF). Audit committee
members must be independent and are barred from accepting consulting, advisory
or other compensatory fees from the issuer. In addition, companies must disclose
whether at least one member of the committee is a financial expert (as such
term is defined by the SEC) and if not, why not. Under the Sarbanes-Oxley Act, a
RPAF is prohibited from performing statutorily mandated audit services for a
company if such companys chief executive officer, chief financial officer,
comptroller, chief accounting officer or any person serving in equivalent
positions has been employed by such firm and participated in the audit of such
company during the one-year period preceding the audit initiation date. The
Sarbanes-Oxley Act also prohibits any officer or director of a company or any
other person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent public or certified
accountant engaged in the audit of a companys financial statements for the
purpose of rendering the financial statements materially misleading. The
Sarbanes-Oxley Act also required the SEC to prescribe rules requiring inclusion
of an internal control report and assessment by management in the annual report
to shareholders, which became effective for Willow Financial for the fiscal year
ended June 30, 2005. The Sarbanes-Oxley Act requires the RPAF that issues the
audit report to attest to and report on managements assessment of Willow
Financials internal controls. In addition, the Sarbanes-Oxley Act requires that
each financial report required to be prepared in accordance with (or reconciled
to) U.S. generally accepted accounting principles and filed with the SEC reflect
all material correcting adjustments that are identified by a RPAF in accordance
with U.S. generally accepted accounting principles and the rules and regulations
of the SEC.
Regulation of
WIS
As noted
above, while WIS is no longer a subsidiary of Willow Financial, it operates as a
business segment of Willow Financial, and its results continue to be included in
Willow Financials consolidated financial statements. WIS is subject to
regulation by a number of federal regulatory agencies that are charged with
safeguarding the integrity of the securities and other financial markets and
with protecting the interests of customers participating in those markets. The
SEC is the federal agency that is primarily responsible for the regulation of
broker-dealers and investment advisers doing business in the United States. The
Federal Reserve Board promulgates regulations applicable to securities credit
transactions involving broker-dealers and certain other institutions. Much of
the
111
regulation of broker-dealers, however,
has been delegated to self-regulatory organizations (SROs), principally FINRA
(and its subsidiaries), and the other national securities exchanges. These SROs,
which are subject to oversight by the SEC, adopt rules (which are subject to
approval by the SEC) that govern the industry, monitor daily activity and
conduct periodic examinations of member broker-dealers.
WIS is
also subject to the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot
Act), signed into law on October 26, 2001. The USA Patriot Act requires
financial institutions to adopt and implement policies and procedures designed
to prevent and defeat money laundering. WIS believes it is in compliance with
the USA Patriot Act.
Securities firms are also subject to regulation by state securities
commissions in the states in which they are required to be registered. WIS is
registered as a broker-dealer with the SEC and in all 50 states and in the
District of Columbia, and is a member of, and subject to regulation by, a number
of SROs, including FINRA.
As a
result of federal and state registration and SRO memberships, WIS is subject to
overlapping schemes of regulation that cover all aspects of its securities
business. Such regulations cover matters including capital requirements, uses
and safe-keeping of clients funds, conduct of directors, officers and
employees, record-keeping and reporting requirements, supervisory and
organizational procedures intended to assure compliance with securities laws and
to prevent improper trading on material nonpublic information, employee-related
matters, including qualification and licensing of supervisory and sales
personnel, limitations on extensions of credit in securities transactions,
clearance and settlement procedures, requirements for the registration,
underwriting, sale and distribution of securities, and rules of the SROs
designed to promote high standards of commercial honor and just and equitable
principles of trade. A particular focus of the applicable regulations concerns
the relationship between broker-dealers and their customers. As a result, the
many aspects of the broker-dealer customer relationship are subject to
regulation including, in some instances, suitability determinations as to
certain customer transactions, limitations on the amounts that may be charged to
customers, timing of proprietary trading in relation to customers trades and
disclosures to customers.
WIS also
is subject to Risk Assessment Rules imposed by the SEC which require, among
other things, that certain broker-dealers maintain and preserve certain
information, describe risk management policies and procedures and report on the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial and
operational condition of the broker-dealers. Certain Material Associated
Persons (as defined in the Risk Assessment Rules) of the broker-dealers and the
activities conducted by such Material Associated Persons may also be subject to
regulation by the SEC.
WIS is
registered as an investment adviser with the SEC. As an investment adviser
registered with the SEC, it is subject to the requirements of the Investment
Advisers Act of 1940 and the SECs regulations thereunder, as well as certain
state securities laws and regulations. Such requirements relate to, among other
things, limitations on the ability of an investment adviser to charge
performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients, as well
as general anti-fraud prohibitions. The state securities law requirements
applicable to registered investment advisers are in certain cases more
comprehensive than those imposed under the federal securities laws.
In the
event of non-compliance with an applicable regulation, governmental regulators
and FINRA may institute administrative or judicial proceedings that may result
in censure, fine, civil penalties (including treble damages in the case of
insider trading violations), the issuance of cease-and-desist orders, the
deregistration or suspension of the non-compliant broker-dealer or investment
adviser, the suspension or disqualification of the broker-dealers officers or
employees or other adverse consequences. With the sale of PCIS to Uvest, Uvest
is now responsible for any such penalties or orders imposed on WIS subsequent to
effective date of the sale, which was February 28, 2006.
112
TAXATION
Federal Taxation
General
Willow
Financial is subject to federal income taxation in the same general manner as
other corporations with some exceptions listed below. The following discussion
of federal taxation is only intended to summarize certain pertinent federal
income tax matters and is not a comprehensive description of the applicable tax
rules. Tax years 2004, 2005 and 2006 are open under the statute of limitations
and subject to review by the Internal Revenue Service.
Willow
Financial files a consolidated federal income tax return, which includes Willow
Financial Bank. Accordingly, it is anticipated that any cash distributions made
by it would be treated as cash dividends, and not as a non-taxable return of
capital to stockholders for federal and state tax purposes.
Method of
Accounting
For
federal income tax purposes, income and expenses are reported on the accrual
method of accounting and Willow Financial files its federal income tax return
using a June 30 fiscal year end.
Bad Debt
Reserves
The Small
Business Job Protection Act of 1996 (the 1996 Act) eliminated the use of the
reserve method of accounting for bad debt reserves by savings institutions,
effective for taxable years beginning after 1995. Prior to the 1996 Act, Willow
Financial Bank was permitted to establish a reserve for bad debts and to make
additions to the reserve. These additions could, within specified formula
limits, be deducted in arriving at taxable income. As a result of the 1996 Act,
savings associations must use the specific charge-off method in computing their
bad debt deduction beginning with their 1996 federal tax return. In addition,
federal legislation requires the recapture (over a six year period) of the
excess of tax bad debt reserves at December 31, 1995 over those established as
of December 31, 1987. Willow Financial Bank has no excess reserves subject to
recapture as of June 30, 2007.
Taxable Distributions and
Recapture
Prior to
the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to
recapture into taxable income if Willow Financial Bank failed to meet certain
thrift asset and definitional tests. New federal legislation eliminated these
thrift related recapture rules. However, under current law, pre-1988 reserves
remain subject to recapture should Willow Financial Bank make certain
non-dividend distributions or ceases to maintain a bank charter.
At June
30, 2007, Willow Financial Banks total federal pre-1988 reserve was
approximately $8.9 million. The reserve reflects the cumulative effects of
federal tax deductions for which no federal income tax provisions have been
made.
Minimum Tax
The Code
imposes an alternative minimum tax (AMT) at a rate of 20% on a base of regular
taxable income plus certain tax preferences (alternative minimum taxable
income or AMTI). The AMT is payable to the extent such AMTI is in excess of
regular income tax. Net operating losses can offset no more than 90% of AMTI.
Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.
Net Operating Loss
Carryovers
Net
operating losses may be carried back to the three preceding taxable years and
forward to the succeeding 15 taxable years. This provision applies to losses
incurred in taxable years beginning before August 6, 1997. For net operating
losses in years beginning after August 5, 1997, net operating losses can be
carried back to the two preceding taxable years and forward to the succeeding 20
taxable years with some exceptions. At June 30, 2007, Willow Financial had no
operating loss carry-forwards for federal income tax purposes.
113
Corporate DividendsReceived
Deduction
Willow
Financial may exclude from income 100% of dividends received from a member of
the same affiliated group of corporations. The corporate dividends received
deduction is 80% in the case of dividends received from corporations, which a
corporate recipient owns less than 80%, but at least 20% of the distribution
corporation. Corporations, which own less than 20% of the stock of a corporation
distributing a dividend, may deduct only 70% of dividends received.
State and Local
Taxation
Pennsylvania
Taxation
Willow
Financial is subject to the Pennsylvania Corporate Net Income Tax and Capital
Stock and Franchise Tax. The Corporation Net Income Tax rate for fiscal 2007 is
9.99% and is imposed on Willow Financials unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of approximately 0.489% of a corporations
capital stock value, which is determined in accordance with a fixed formula
based upon average net income and net worth.
Willow
Financial Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act (the MTIT), as amended to include thrift institutions
having capital stock. Pursuant to the MTIT, the tax rate is 11.5%. The MTIT
exempts Willow Financial Bank from other taxes imposed by the Commonwealth of
Pennsylvania for state income tax purposes and from all local taxation imposed
by political subdivisions, except taxes on real estate and real estate
transfers. The MTIT is a tax upon net earnings, determined in accordance with
U.S. generally accepted accounting principles (GAAP) with certain adjustments.
The MTIT, in computing GAAP income, allows for the deduction of interest earned
on state and federal obligations, while disallowing a percentage of a thrifts
interest expense deduction in the proportion of interest income on those
securities to the overall interest income of Willow Financial Bank. Net
operating losses, if any, thereafter can be carried forward three years for MTIT
purposes.
PROPERTIES
Office
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Office Location
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Owned/Leased
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Downingtown
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100 East Lancaster Ave, Downingtown PA
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Leased
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Exton
|
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601 N. Pottstown
Pike, Exton, PA
|
|
Leased
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Frazer
(1)
|
|
200 West Lancaster Ave, Frazer, PA
|
|
Leased
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Thorndale
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3909 Lincoln
Highway, Downingtown, PA
|
|
Leased
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Westtown
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1197 Wilmington Pike, West Chester, PA
|
|
Leased
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Airport
(Land)
|
|
102 Airport
Road, Coatesville, PA
|
|
Owned
|
Brandywine Square
|
|
82 Quarry Road, Downingtown, PA
|
|
Leased
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Devon
|
|
414 Lancaster
Ave, Devon, PA
|
|
Leased
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Kennett Square (Land)
|
|
838 East Baltimore Pike, Kennett Square, PA
|
|
Leased
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Eagle
|
|
300 Simpson
Drive, Chester Springs, PA
|
|
Leased
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Coatesville
|
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112-114 East Lincoln Hwy, Coatesville, PA
|
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Leased
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Avondale
|
|
119 Pennsylvania
Ave, Avondale, PA
|
|
Owned
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Oxford
|
|
321 N. Third St., Oxford, PA
|
|
Leased
|
Willow
Grove
(2)
|
|
9 Easton Rd,
Willow Grove, PA
|
|
Owned
|
Maple Glen
|
|
Welsh & Norristown Rds, Maple Glen, PA
|
|
Leased
|
Warminster
I
|
|
1555 West Street
Road, Warminster, PA
|
|
Leased
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Dresher
|
|
701 Twining Road, Dresher, PA
|
|
Leased
|
Huntingdon
Valley
|
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761 Huntingdon
Pike, Huntingdon Valley, PA
|
|
Leased
|
Warminster II
|
|
1141 Ivyland Rd, Warminster PA
|
|
Leased
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Hatboro
|
|
2 North York
Road, Hatboro, PA
|
|
Leased
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Roslyn
|
|
1331 Easton Rd, Roslyn, PA
|
|
Leased
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Somerton
|
|
11730 Bustleton
Avenue, Philadelphia, PA
|
|
Leased
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Rhawnhurst
|
|
8200 Castor Avenue, Philadelphia, PA
|
|
Leased
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North
Wales
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122 North Main
Street, North Wales, PA
|
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Leased
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114
Office
|
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Office Location
|
|
Owned/Leased
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Southampton
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|
735 Davisville Road, Southampton, PA
|
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Leased
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Bustleton
|
|
9869 Bustleton
Avenue, Philadelphia, PA
|
|
Leased
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King of Prussia
|
|
170 South Warner Road, Wayne, PA
|
|
Leased
|
West
Chester
|
|
16 East Market
Street, West Chester, PA
|
|
Leased
|
Cutler Building
|
|
23 Easton Rd, Willow Grove, PA
|
|
Owned
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Philadelphia
|
|
1650 Market
Street, Philadelphia, PA
|
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Leased
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Horsham
|
|
101 Witmer Road, Horsham, PA
|
|
Leased
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Springfield
(3)
|
|
435 Baltimore
Pike, Springfield, PA
|
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Leased
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Feasterville
|
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220 E. Street Rd., Feasterville, PA
|
|
Leased
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Gilbertsville
|
|
1012 E.
Philadelphia Ave, Gilbertsville, PA
|
|
Leased
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Exton
(4)
|
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667 Exton Commons, Exton, PA
|
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Leased
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____________________
(1)
|
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Includes the lease of an easement
at this location.
|
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(2)
|
|
The branch facility at this
location is owned. There is also a drive-up facility at this location that
is leased.
|
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(3)
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BeneServ
location.
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(4)
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Carnegie Wealth Management
location.
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LEGAL PROCEEDINGS
As
previously described in Willow Financials joint proxy statement/prospectus
dated April 27, 2005 and included in its registration statement on Form S-4
(file No. 333-123622) filed in connection with the Chester Valley Merger, First
Financial Bank (FFB) previously received a subpoena from the Regional
Municipal Securities Counsel in the Philadelphia Office of the Securities and
Exchange Commission (the SEC). The subpoena arose out of a non-public SEC
investigation titled Hummelstown General Authority, which Authority issued
non-rated revenue bonds now in default, underwritten by the firm of a former
director of Chester Valley and FFB. The SEC subpoena requested the production of
certain documents concerning FFBs involvement with non-rated municipal
securities, including those issued to finance the Whitetail Golf Course by the
Dauphin County General Authority and the Hummelstown General Authority, through
the former directors firm, and related matters. FFB previously produced
documents to the SEC and certain officers of FFB provided testimony to the SEC
in response to the SECs voluntary request for assistance in this matter. On
August 3, 2006, the SEC filed a complaint in federal court against the former
director, his wife, and the former directors firm. Willow Financial Bank is not
named as a defendant in the complaint filed by the SEC.
FFB is a
party to three civil actions relating to some of the revenue bonds which are the
subject of the SEC investigation described above. On August 30, 2005, a writ of
summons was filed by the Boyertown Area School District (Boyertown) in the
Court of Common Pleas, Montgomery County, Pennsylvania commencing a civil action
against,
inter alia
, FFB.
Boyertown Area School District
v. First Financial Bank et. al
. , No.
05-21799. A complaint was filed on November 9, 2005, asserting the following
claims against FFB: Breach of Trust Indenture and Fiduciary Duties (Count 1),
Breach of Fiduciary Duties (Count 2), Civil Conspiracy (Count 3), and Concerted
Action (Count 4). On September 19, 2005, Red Lion Area School District (Red
Lion) filed a complaint in the Court of Common Pleas, York County,
Pennsylvania, against
inter
alia
, FFB.
Red Lion Area School District v. Bradbury et. al
. , No. 2005-SU-1656-Y01; No. 2005-SU-2544-Y01. This case has
been transferred to the Court of Common Pleas of Montgomery County,
Pennsylvania, and an amended complaint was filed on October 18, 2006. The
amended complaint asserts the following claims against FFB: Declaratory Judgment
(Count 15), Breach of Trust Indenture (Count 16), Civil Conspiracy (Count 17),
Civil ConspiracyAlternative Legal Basis (Count 18), Breach of Common Law Duties
as Trustee (Count 19), Tortious Action in Concert/Aiding and Abetting Fraud
(Count 20), Breach of Trust Indenture (Count 21), Breach of Fiduciary Duties
(Count 22), Vicarious Liability and Respondeat Superior (Count 23), Unjust
Enrichment (Count 24), and Unjust Enrichment (Count 25). On March 16, 2006,
Perkiomen Valley School District (Perkiomen) filed a complaint in the Court of
Common Pleas, Montgomery County, Pennsylvania, against,
inter alia
, FFB
Perkiomen Valley School District v. First
Financial Bank et.al
. , No. 06-06533. The
complaint asserts the following claims against FFB: Breach of Trust Indenture
(Count 1), Breach of Fiduciary Duties (Count 2), Vicarious Liability and
Respondeat Superior (Count 3), Civil Conspiracy (Count 4), and Concert of Action
(Count 5). The actions have been consolidated for discovery and case management
purposes, but not for trial. Willow Financial
115
Banks answers were provided on
September 6, 2007, with respect to the Red Lion matter, and September 10, 2007,
with respect to the Boyertown and Perkiomen matters. Discovery is in its initial
stages. Willow Financial believes the above noted lawsuits are without merit and
intends to vigorously defend itself in the suits.
On June
16, 2007, Cincinnati Insurance Company (Cincinnati) commenced a declaratory
judgment action in federal court against Willow Financial Bank, Red Lion,
Boyertown, and Perkiomen seeking a declaration that Cincinnati is not obligated
to provide insurance coverage to Willow Financial Bank in connection with the
SEC subpoena and the litigation brought by Red Lion, Boyertown, and Perkiomen
(the School District Litigation):
Cincinnati
Insurance Company v. First Financial Bank et al
., 07-02389 (E.D. Pa.).
Willow
Financial Bank filed an answer and counterclaim on September 20, 2007 seeking
damages for Cincinnatis breach of contract for failure to defend and for bad
faith. Cincinnati answered the Counterclaim and denied all of Willow Financial
Banks allegations. Willow Financial Bank has served discovery and received
documents from Cincinnati and its counsel. Cincinnati has not served any
discovery. Willow Financial Bank filed a Motion for Judgment on the Pleadings as
to Cincinnatis duty to defend Willow Financial Bank in the School District
Litigation. Cincinnati filed its own Motion for Judgment on the Pleadings.
Willow Financial Bank filed an opposition to Cincinnatis Motion, and Boyertown
also filed an opposition to Cincinnatis Motion. The trial judge heard argument
on Willow Financial Banks Motion and Cincinnatis Motion on May 30,
2008.
In the
normal course of business, Willow Financial is involved in various legal
proceedings. Management of Willow Financial, based on discussions with legal
counsel, believes that such proceedings will not have a material adverse effect
on the financial condition or operations of Willow Financial. There can be no
assurance that any of the outstanding legal proceedings to which Willow
Financial is a party will not be decided adversely to Willow Financials
interests and have a material adverse effect on the financial condition and
operations of Willow Financial.
INFORMATION FOR THE ANNUAL PERIOD
ENDING JUNE 30, 2007
Managements Discussion and Analysis
of Financial Condition and Results of Operations of Willow Financial Bancorp,
Inc. for the Years Ended June 30, 2007, 2006, and 2005
The
following discussion is intended to assist in understanding the financial
condition and the results of operations for Willow Financial and its subsidiary
Willow Financial Bank, for the fiscal years ended June 30, 2007, 2006 and 2005.
The information in this section should be read in conjunction with the financial
statements and the accompanying notes included elsewhere herein.
GENERAL
Net
income is largely driven by net interest income, which is the difference between
the income earned on interest-earning assets and the interest paid on
interest-bearing liabilities and the relative amount of Willow Financials
interest-earning assets to interest-earning liabilities. Non-interest income and
expenses, the provision for loan losses and income tax expense also affect
Willow Financials results of operations.
CRITICAL ACCOUNTING
POLICIES
The
following discussion and analysis of Willow Financials financial condition and
results of operations is based upon consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities at the date of the financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.
In Willow
Financials opinion, the most critical accounting policies affecting the
consolidated financial statements are:
|
1.
|
|
Evaluation of the allowance
for loan losses.
The determination of
the allowance for loan losses involves significant judgments and
assumptions by Willow Financial which may have a material impact on the
carrying value of net loans and, potentially, on the amount of net income
it recognizes from period to period. For a description of the methods
Willow Financial uses to determine the adequacy of the allowance for loan
losses, see Results of OperationsProvision for Loan
Losses.
|
116
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2.
|
|
Realization of deferred income
tax items.
Included in other assets is
a net deferred tax asset, which is an estimate of net deferred tax
assets and deferred tax liabilities. These estimates involve significant
judgments and assumptions by Willow Financial, which may have a material
effect on the carrying value of this asset for financial reporting
purposes. For a more detailed description of these items and estimates,
see Note 15 (Income Taxes) to the audited consolidated financial
statements at and for the fiscal year ended June 30,
2007.
|
|
|
|
3.
|
|
Goodwill and core deposit
intangibles.
Goodwill represents the
excess cost over fair value of assets acquired over liabilities as a
result of the Chester Valley Merger and earlier branch acquisitions. Core
deposit intangibles are a measure of the value of the checking, savings
and money market deposits acquired in the Chester Valley Merger accounted
for under the purchase method. The core deposit intangible is being
amortized to expense over a twelve-year life using a method that
approximates a level yield method. Willow Financial follows the provisions
of SFAS No. 142, Goodwill and Other Intangible Assets, and performs
impairment tests of the intangible assets as well as the review of the
estimated life at least annually and impairment losses are recognized if
the carrying value of the intangible exceeds its fair value. Willow
Financial has incurred an impairment loss in the amount of $40.0 million
in the consolidated statement of operations for the three-month period
ended December 31, 2007 as a result of the Chester Valley Merger as
discussed in Note 26 of the Notes to the Consolidated Financial Statements
found elsewhere in this joint proxy
statement/prospectus.
|
The Notes
to Consolidated Financial Statements identify other significant accounting
policies used in the development and presentation of the financial statements.
This discussion and analysis, the significant accounting policies and other
financial statement disclosures identify and address key variables and other
qualitative and quantitative factors that are necessary for an understanding and
evaluation of Willow Financial and its results of operations.
As
discussed in Note 2 to the Notes to Consolidated Financial Statements, Willow
Financial has restated its financial statements for the fiscal years ended June
30, 2007 and June 30, 2006. The discussion in this Managements Discussion and
Analysis of Financial Condition and Results of Operations of Willow Financial,
Inc. for the Years Ended June 30, 2007, 2006, and 2005, gives effect to the
restatement of Willow Financials financial statements.
CHANGES IN FINANCIAL
CONDITION
General
Total
assets decreased by $19.4 million, or 1.2% to $1.55 billion at June 30, 2007
from $1.57 billion at June 30, 2006. The net loan portfolio decreased $28.3
million or 2.7% while total deposits increased by $76.2 million or
7.5%.
Cash and Cash
Equivalents
Cash and
cash equivalents, which consist of cash on hand and in other banks in
interest-earning and non-interest earning accounts, amounted to $60.3 million
and $31.0 million at June 30, 2007 and 2006, respectively. The increase in cash
and cash equivalents of $29.3 million or 94.7% was primarily the result of the
growth in interest-bearing deposits, repayment of loan balances and sales and
repayments of investment securities.
Securities Available for
Sale
At June
30, 2007, investment securities that were classified as available for sale
(AFS) totaled $188.3 million, compared to $196.9 million in AFS securities at
June 30, 2006. The decrease in available for sale securities was due to sales
and repayments in the investment portfolio with the proceeds primarily being
utilized to repay higher costing borrowings. The unrealized loss, net of income
taxes, on AFS securities amounted to approximately $3.2 million at June 30, 2007
compared to $4.1 million at June 30, 2006. The decrease in the unrealized loss
was the result of a decline in long-term interest rates during the
year.
Securities Held to
Maturity
At June
30, 2007, investment securities classified as held to maturity totaled $88.4
million, compared to $105.6 million in held to maturity securities at June 30,
2006. Held to maturity securities were comprised primarily of CMOs and
mortgage-backed securities. The decrease in held to maturity securities was the
result of principal
117
repayments experienced in the portfolio
with the proceeds primarily being utilized to repay higher costing borrowings.
Held to maturity investment securities are carried at amortized cost. In order
to more effectively manage its interest rate risk, Willow Financial plans
limited additions to its HTM portfolio.
Loans
The net
loan portfolio, which does not include loans held for sale, decreased $28.3
million or 2.7% from $1.06 billion at June 30, 2006. The decrease was primarily
the result of increased repayment levels within the construction and commercial
real estate loan portfolios, which decreased $19.6 million and $9.9 million,
respectively, at June 30, 2007 compared to June 30, 2006. The commercial real
estate loan decrease includes the sale of a non-performing commercial real
estate loan of $3.5 million and the liquidation of $2.0 million in real estate
of a previous non-performing loan. In addition, single family residential loans
decreased $25.3 million at June 30, 2007 compared to June 30, 2006 as a part of
managements strategy to reduce reliance on long-term single family residential
mortgage loans. Commercial business loans increased by $7.5 million from June
30, 2006 to June 30, 2007. This increase occurred despite the charge-off of a
$2.9 million commercial business borrowing relationship. At June 30, 2007, home
equity loans and lines of credit increased $13.2 million compared to June 30,
2006.
With the
inverted (long term rates are lower than short term rates) and/or flat yield
curve experienced during the year, a number of loans within the commercial real
estate portfolio were refinanced through other lenders who offered extended
terms without recourse. Additionally, the construction loan portfolio included
larger residential projects, which sold at a more rapid pace than anticipated
and the demand for new construction was not as robust as a result of a slowing
in the housing market.
The
allowance for loan losses decreased to $12.2 million at June 30, 2007 compared
to $16.7 million at June 30, 2006, due primarily to charge-offs recorded during
the year. The current fiscal year provision for loan losses decreased from
fiscal 2006 by approximately $2.7 million due largely to an $11.9 million
decrease in non-performing loans. During the current fiscal year, Willow
Financial recorded net charge-offs of $5.2 million due largely to the charge-off
of two loan relationships, which were categorized as non-accrual at June 30,
2006.
Loans Held for Sale
Mortgage
loans originated or purchased with the intention of being sold into the
secondary market are classified as held for sale and are carried at the lower of
aggregate cost or fair value with any unrealized loss reflected in the
consolidated statements of income. At June 30, 2007, $8.1 million of fixed-rate,
single-family residential mortgages were classified as held for sale compared to
$2.6 million in loans classified as held for sale at June 30, 2006. The increase
of $5.5 million resulted primarily from an increase in Willow Financial Banks
expansion of this business line as well as the timing of the origination of the
loans and the ultimate delivery to the purchaser of the loans. In order to
mitigate the risk of loss on the sale of these loans, Willow Financial generally
commits these loans for sale, on a best efforts basis, to a third party at the
time that the borrower locks the loan with Willow Financial.
Intangible Assets
At June
30, 2007, intangible assets aggregated $109.9 million as compared to $107.5
million at June 30, 2006. Intangible assets include a core deposit intangible of
$10.9 million, which resulted from the acquisition of Chester Valley. The core
deposit intangible is being amortized using an accelerated method over a 12-year
life. Intangible assets also include goodwill, which primarily represents the
excess cost over fair value of assets acquired over liabilities as a result of
the Chester Valley acquisition. The goodwill that resulted from the Chester
Valley acquisition was approximately $93.7 million. As a result of the BeneServ
acquisition, goodwill of $1.0 million and customer intangibles of $3.5 million
were recorded at June 30, 2007. The customer intangible balance is being
amortized using a straight line method over a 10-year life. The remaining
balance of the goodwill relates to a branch acquisition in 1994 approximated
$837 thousand at June 30, 2007. Goodwill is measured for impairment at least
annually. As discussed in Note 26 of the Notes to the Consolidated Financial
Statements, Willow Financial has incurred an impairment loss for the quarter
ended December 31, 2007 in the amount of $40.0 million as a result of the
Chester Valley Merger.
118
Deposits
During
the year ended June 30, 2007, total deposits increased by $76.2 million or 7.5%.
The increase resulted primarily from an increase in money market demand deposit
accounts as Willow Financial has been successful in migrating customer money
market balances from its business segment, WIS, as well as an increase in
certificates of deposit resulting from customer preference for higher rate
deposit accounts. Core deposits, which Willow Financial defines as savings,
checking, NOW and money market accounts, increased by $43.2 million as a result
of the migration of WIS deposits noted above. Checking accounts totaled $267.0
million or 24.4% of total deposits at June 30, 2007 compared to $275.3 million,
or 27.1% of total deposits at June 30, 2006.
Willow
Financial will continue to deploy a strategy to increase core deposit accounts
and balances through targeted marketing, cross-selling of its existing customer
base and expansion of its commercial business lending, which typically results
in the opening of a checking account.
Federal Home Loan Bank
Advances
Advances
from the Federal Home Loan Bank provide Willow Financial with an additional
source to fund interest-earning asset growth and are a tool in meeting Willow
Financials asset/liability strategies. At June 30, 2007, the total amount of
these borrowings was $189.8 million, a decrease of $92.8 million or 32.8% from
the $282.6 million outstanding at June 30, 2006. This decrease was the direct
result of repayments as the excess cash generated from the deposit growth,
investment securities sales and repayments, and loan repayments was utilized to
repay certain Federal Home Loan Bank advances.
Trust Preferred
Securities
Effective
with the acquisition of Chester Valley, Willow Financial assumed the liability
for $10.5 million of Junior Subordinated Debentures to the Chester Valley
Statutory Trust (the Chester Valley Trust), a Pennsylvania Business Trust, in
which Willow Financial owned all of the common equity as a result of the
acquisition of Chester Valley. The Chester Valley Trust issued $10.0 million of
Trust Preferred Securities to investors, which were secured by the Junior
Subordinated Debentures and the guarantee of Willow Financial. These Trust
Preferred Securities were redeemed by Willow Financial on March 26, 2007 in
accordance with the Trust Agreement.
On March
31, 2006, Willow Financial issued $25.8 million of Junior Subordinated
Debentures to Willow Financial Statutory Trust I (the Willow Financial Trust),
a Connecticut Statutory Trust, in which Willow Financial owns all of the common
equity. The Willow Financial Trust then issued $25.0 million of Trust Preferred
Securities, which pay interest quarterly at three-month LIBOR plus 1.31% to
investors, which are secured by the Junior Subordinated Debentures and the
guarantee of Willow Financial. The Junior Subordinated Debentures are treated as
debt of Willow Financial but qualify as Tier I capital of the Willow Financial
Bank to the extent of the amount of the proceeds which are invested in the
Willow Financial Bank. The Trust Preferred Securities are callable by Willow
Financial on or after September 30, 2011. The Trust Preferred Securities must be
redeemed by Willow Financial upon their maturity in the year 2036.
Accounting for Derivative
Instruments and Hedging
Willow
Financial may from time to time utilize derivative instruments such as interest
rate swaps, interest rate collars, interest rate floors, interest rate swaptions
or combinations thereof to assist in its asset/liability management. In
accordance with SFAS No. 133, Accounting for Derivative Instruments, Willow
Financial documents its hedge relationships, including identification of the
hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge. Willow Financial also
assesses, both at inception and at least quarterly thereafter, whether the
derivative instruments that are used in hedging transactions are highly
effective in offsetting the changes in either the fair value or cash flows of
the hedged item. For fair value hedges, both the effective and ineffective
portions of the changes in the fair value of the derivative, along with the gain
or loss on the hedged item that is attributable to the hedged risk, are recorded
in the statement of operations within interest income or interest expense. For
cash flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in accumulated other comprehensive income. When the
hedged item impacts the statement of operations, the gain or loss included in
accumulated other comprehensive income is reported on the same line in the
statement of operations as the hedged item. In addition, the ineffective portion
of the changes in the fair value of derivatives used as cash flow hedges is
reported in the statement of operations.
119
As part
of the Chester Valley Merger, Willow Financial assumed the responsibility for a
$20 million notional interest rate swap whereby Willow Financial paid a variable
rate and received a fixed rate. The interest rate swap had been used to hedge
certain Federal Home Loan Bank borrowings of the former Chester Valley. On the
date of the Chester Valley Merger, the interest rate swap and the hedged
borrowings were marked to fair value as a result of purchase accounting. In
September 2005, the hedged borrowings were repaid and the $10 million notional
amount of the interest rate swap was unwound with the counter-party. After
performing the appropriate documentation of the derivative instrument, Willow
Financial designated the remaining $10 million notional amount interest rate
swap as a fair value hedge of certain existing borrowings of Willow Financial
Bank. The swap had the effect of converting a fixed rate borrowing to an
adjustable rate borrowing. During the quarter ended December 31, 2005, the
derivative instrument ceased to be a highly effective hedge; therefore, Willow
Financial discontinued hedge accounting resulting in a pre-tax charge to income
of $47 thousand. The interest rate swap was unwound in February 2006 without any
additional impact to operations. The basis adjustment that was previously
recorded on the hedged borrowing that is recorded in the statement of financial
condition is amortized as an increase in interest expense over the remaining
life of the borrowing using the interest method.
Additionally, in August 2003, Chester Valley purchased a $30.0 million
notional amount 3.50% six-month LIBOR interest rate cap while simultaneously
selling a $30.0 million notional amount 6.00% six-month LIBOR interest rate cap
(Interest Rate Corridor) which expires in August 2008. Chester Valley paid a
net premium, which entitled it to receive the difference between six-month LIBOR
from 3.50% up to 6.00% applied to the $30.0 million notional amount. Upon
consummation of the Chester Valley Merger, Willow Financial assumed the Interest
Rate Corridor and designated it to hedge certain borrowings of Willow Financial
Bank, which were variable in nature and indexed to six-month LIBOR. The Interest
Rate Corridor was being used to hedge the cash flows of this borrowing. Prior to
October 23, 2006, the Interest Rate Corridor reduced the negative impact on
earnings of the borrowings in a rising interest rate environment. The fair
market value of the Interest Rate Corridor had two components: the intrinsic
value and the time value of the option. The Interest Rate Corridor was
marked-to-market quarterly, with changes in the intrinsic value of the Interest
Rate Corridor, net of tax, included as a separate component of other
comprehensive income, and the change in the time value of the option included
directly as interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, would have been expensed in the period in which
ineffectiveness was determined. On October 23, 2006, Willow Financial unwound
the Interest Rate Corridor and recognized a gain of $804 thousand upon repayment
of the $30 million Federal Home Loan Bank advance.
At June
30, 2007, Willow Financial had five interest rate swap arrangements used to
hedge specific loans originated by Willow Financial Bank for which the
transactions were economically beneficial to Willow Financial Bank in passing
along the interest rate risk to the borrower. The swaps effectively convert the
rates from a floating rate based on LIBOR to a fixed rate throughout the life of
the underlying loans. At June 30, 2007, the total outstanding notional amount on
these swaps was $9.3 million. The weighted average floating and fixed rates on
these transactions were 4.6% and 5.3%, respectively at June 30, 2007. Willow
Financial lacked sufficient documentation for these transactions to receive
hedge accounting treatment. As such, Willow Financial Bank has recorded a net
receivable of $196 thousand at June 30, 2007. The change in the fair value of
the interest rate swaps is included as a component of other income on the
consolidated statements of income.
Other Liabilities
At June
30, 2007, other liabilities increased $7.2 million to $17.0 million from $9.8
million at June 30, 2006. This increase was due primarily to a liability
established for an investment security purchase with a trade date in June 2007
for which settlement occurred in early July 2007.
Stockholders Equity
At June
30, 2007, total stockholders equity amounted to $199.4 million or 12.9% of
total assets compared to $198.6 million, or 12.6% of assets at June 30, 2006.
During the year, Willow Financial paid aggregate cash dividends of $6.9 million.
As discussed in Note 2 to Willow Financials consolidated financial statements
included elsewhere in this joint proxy statement/prospectus, the restatement of
Willow Financials statements of financial condition resulted in net reductions
in retained earnings of $1.0 million and $4.8 million in fiscal 2007 and 2006,
respectively.
120
AVERAGE BALANCES, NET INTEREST
INCOME, YIELDS EARNED AND RATES PAID
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 years ended June 30, 2007, 2006 and 2005. The table also
shows the average yields and costs on interest-earning assets and
interest-bearing liabilities for each of those years. Loans receivable include
non-accrual loans. To adjust nontaxable loans and securities to a taxable
equivalent, a 34.0%, 34.0% and 31.2% effective rate has been used for the fiscal
years ending June 30, 2007, 2006, and 2005, respectively. The adjustment of
tax-exempt loans and securities to a tax equivalent yield in the table below may
be considered to include non-GAAP financial information. Willow Financial
believes that it is a standard practice in the banking industry to present net
interest margin, net interest rate spread and net interest income on a fully tax
equivalent basis. Therefore, Willow Financial believes, these measures provide
useful information to investors by allowing them to make peer comparisons. A
GAAP reconciliation also is included below.
|
At
Jun
e
30,
|
|
2
007
|
|
2
006
|
|
2005
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
Yield/
|
|
Average
|
|
|
|
|
Yield/
|
|
Average
|
|
|
|
|
Yield/
|
|
Balance
|
|
I
nterest
|
|
Cost
|
|
Balance
|
|
I
nterest
|
|
Cost
|
|
Balance
|
|
I
nterest
|
|
Cost
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivabletaxable
|
$
|
1,033,540
|
|
$
|
68,374
|
|
6.62
|
%
|
|
$
|
986,584
|
|
$
|
64,947
|
|
6.58
|
%
|
|
$
|
567,677
|
|
$
|
34,536
|
|
6.08
|
%
|
Loans receivabletax free
|
|
16,926
|
|
|
1,271
|
|
7.51
|
|
|
|
12,238
|
|
|
808
|
|
6.60
|
|
|
|
|
|
|
|
|
|
|
Securitiestaxable
|
|
287,299
|
|
|
15,485
|
|
5.39
|
|
|
|
320,271
|
|
|
14,983
|
|
4.68
|
|
|
|
341,346
|
|
|
13,878
|
|
4.07
|
|
Securitiestax free
|
|
9,554
|
|
|
689
|
|
7.21
|
|
|
|
13,213
|
|
|
1,041
|
|
7.88
|
|
|
|
19,783
|
|
|
1,286
|
|
6.50
|
|
Interest-bearing deposits
|
|
22,640
|
|
|
756
|
|
3.34
|
|
|
|
13,110
|
|
|
304
|
|
2.32
|
|
|
|
19,502
|
|
|
363
|
|
1.86
|
|
Total interest-earning assets
|
|
1,369,959
|
|
|
86,575
|
|
6.32
|
|
|
|
1,345,416
|
|
|
82,083
|
|
6.10
|
|
|
|
948,308
|
|
|
50,063
|
|
5.28
|
|
Non-interest-earning assets
|
|
162,006
|
|
|
|
|
|
|
|
|
142,022
|
|
|
|
|
|
|
|
|
21,500
|
|
|
|
|
|
|
Total assets
|
$
|
1,531,965
|
|
|
|
|
|
|
|
$
|
1,487,438
|
|
|
|
|
|
|
|
$
|
969,808
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
900,640
|
|
|
28,698
|
|
3.19
|
|
|
$
|
820,124
|
|
|
18,476
|
|
2.25
|
|
|
$
|
529,475
|
|
$
|
9,931
|
|
1.88
|
|
FHLB borrowings
|
|
225,722
|
|
|
8,868
|
|
3.93
|
|
|
|
312,420
|
|
|
12,626
|
|
4.04
|
|
|
|
250,299
|
|
|
8,818
|
|
3.52
|
|
Repurchase agreements
|
|
22,767
|
|
|
1,135
|
|
4.99
|
|
|
|
4,959
|
|
|
228
|
|
4.60
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
32,999
|
|
|
2,361
|
|
7.15
|
|
|
|
15,548
|
|
|
875
|
|
5.63
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
1,182,128
|
|
|
41,062
|
|
3.47
|
|
|
|
1,153,051
|
|
|
32,205
|
|
2.79
|
|
|
|
779,774
|
|
|
18,749
|
|
2.40
|
|
Non-interest
bearing liabilities
|
|
146,735
|
|
|
|
|
|
|
|
|
151,331
|
|
|
|
|
|
|
|
|
84,185
|
|
|
|
|
|
|
Total stockholders equity
|
|
203,102
|
|
|
|
|
|
|
|
|
183,056
|
|
|
|
|
|
|
|
|
105,849
|
|
|
|
|
|
|
Total
liabilities and equity
|
$
|
1,531,965
|
|
|
|
|
|
|
|
$
|
1,487,438
|
|
|
|
|
|
|
|
$
|
969,808
|
|
|
|
|
|
|
Net interest-earning assets
|
$
|
187,831
|
|
|
|
|
|
|
|
$
|
192,365
|
|
|
|
|
|
|
|
$
|
168,534
|
|
|
|
|
|
|
Net interest
income
|
|
|
|
$
|
45,513
|
|
|
|
|
|
|
|
$
|
49,878
|
|
|
|
|
|
|
|
$
|
31,314
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
2.88
|
%
|
Net interest
margin
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
3.30
|
%
|
Ratio of average interest-earning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets to average interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing liabilities
|
|
|
|
|
|
|
116
|
%
|
|
|
|
|
|
|
|
117
|
%
|
|
|
|
|
|
|
|
122
|
%
|
121
Although
Willow Financial believes that the above non-GAAP financial measures enhance
investors understanding of Willow Financials business and performance, these
non-GAAP financial measures should not be considered an alternative to GAAP. The
reconciliation of these non-GAAP financial measures to GAAP is presented
below.
|
Y
ear Ended June 30,
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
|
|
Tax
|
|
Adjusted
|
|
Interest
|
|
Tax
|
|
Adjusted
|
|
Interest
|
|
Tax
|
|
Adjusted
|
|
I
ncome
|
|
Adjustment
|
|
I
ncome
|
|
I
ncome
|
|
Adjustm
ent
|
|
I
ncome
|
|
I
ncome
|
|
Adjustment
|
|
I
ncome
|
|
(Dollars in Thousands)
|
Loans
(a)
|
$
|
69,315
|
|
$330
|
|
|
$69,645
|
|
$65,472
|
|
$283
|
|
|
$65,755
|
|
$
|
34,536
|
|
$
|
|
|
$34,536
|
Investments
|
|
16,735
|
|
195
|
|
|
16,930
|
|
16,058
|
|
270
|
|
|
16,328
|
|
|
15,143
|
|
384
|
|
|
15,527
|
Total
|
$
|
86,050
|
|
$525
|
|
|
$86,575
|
|
$81,530
|
|
$553
|
|
|
$82,083
|
|
$
|
49,679
|
|
$384
|
|
|
$50,063
|
____________________
(a)
Willow Financial did not have
tax-exempt loans in fiscal 2005.
RATE/VOLUME ANALYSIS
The
following table shows the effect of changing rates and volumes on net interest
income on a tax equivalent basis for the years ended June 30, 2007 and 2006,
compared to the prior fiscal year. Information provided shows the effect on net
interest income of (1) rates (changes in rate times prior volume), (2) volume
(changes in volume times prior rate) and (3) rate/volume (changes in rate times
change in volume).
|
Increase (decrease) in net
interest
|
|
Increase (decrease) in net
interest
|
|
income for the year ended June
30,
|
|
income for the year ended June
30,
|
|
2007 compared to the year
ended
|
|
2006 compared to the year
ended
|
|
June 30, 2006 due
to
|
|
June 3
0, 2005 due to
|
|
|
|
|
|
|
|
|
|
Rate/
|
|
Increase/
|
|
|
|
|
|
|
|
|
Rate/
|
|
Increase/
|
|
Rate
|
|
Volume
|
|
Volume
|
|
Decrease
|
|
Rate
|
|
Volume
|
|
Volume
|
|
Decrease
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
$
|
506
|
|
|
$
|
3,399
|
|
|
$
|
(15
|
)
|
|
$
|
3,890
|
|
|
$
|
2,838
|
|
$
|
26,214
|
|
|
$
|
2,167
|
|
|
$
|
31,219
|
|
Securities
|
|
2,185
|
|
|
|
(1,831
|
)
|
|
|
(204
|
)
|
|
|
150
|
|
|
|
2,355
|
|
|
(1,285
|
)
|
|
|
(210
|
)
|
|
|
860
|
|
Interest-bearing deposits
|
|
134
|
|
|
|
221
|
|
|
|
97
|
|
|
|
452
|
|
|
|
90
|
|
|
(119
|
)
|
|
|
(30
|
)
|
|
|
(59
|
)
|
Total net change in income on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-earning assets
|
|
2,825
|
|
|
|
1,789
|
|
|
|
(122
|
)
|
|
|
4,492
|
|
|
|
5,283
|
|
|
24,810
|
|
|
|
1,927
|
|
|
|
32,020
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
7,709
|
|
|
|
1,812
|
|
|
|
701
|
|
|
|
10,222
|
|
|
|
3,768
|
|
|
3,462
|
|
|
|
1,315
|
|
|
|
8,545
|
|
FHLB Advances
|
|
(343
|
)
|
|
|
(3,503
|
)
|
|
|
88
|
|
|
|
(3,758
|
)
|
|
|
1,302
|
|
|
2,187
|
|
|
|
319
|
|
|
|
3,808
|
|
Repurchase agreements
|
|
19
|
|
|
|
820
|
|
|
|
68
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
228
|
|
Trust preferred Securities
|
|
236
|
|
|
|
982
|
|
|
|
268
|
|
|
|
1,486
|
|
|
|
|
|
|
|
|
|
|
875
|
|
|
|
875
|
|
Total net change in expense on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
|
7,621
|
|
|
|
111
|
|
|
|
1,125
|
|
|
|
8,857
|
|
|
|
5,070
|
|
|
5,649
|
|
|
|
2,737
|
|
|
|
13,456
|
|
Change in net
interest income
|
$
|
(4,796
|
)
|
|
$
|
1,678
|
|
|
$
|
(1,247
|
)
|
|
$
|
(4,365
|
)
|
|
$
|
213
|
|
$
|
19,161
|
|
|
$
|
(810
|
)
|
|
$
|
18,564
|
|
RESULTS OF OPERATIONS
General
Net
income for the year ended June 30, 2007 was $7.3 million, an increase of $600
thousand or 9.0% from net income for the year ended June 30, 2006. Net income
for the year ended June 30, 2006 was $6.7 million, a decrease of $59 thousand
from the year ended June 30, 2005.
122
Net Interest Income
Net
interest income decreased by $4.3 million or 8.8% to $45.0 million for the year
ended June 30, 2007 as compared to $49.3 million for the year ended June 30,
2006. This decrease was due primarily to an increase in the average cost of
interest-bearing liabilities to 3.47% for the year ended June 30, 2007 from
2.79% for the year ended June 30, 2006 while the yield on average earning assets
increased by only 22 basis points. One factor that influences net interest
income is the interest rate spread (i.e., the difference between the average
yields on interest-earning assets and the average rates paid on interest-bearing
liabilities). The average interest rate spread computed on a fully tax
equivalent basis for the years ended June 30, 2007, 2006 and 2005 was 2.85%,
3.31% and 2.88%, respectively. The net interest margin (i.e., net interest
income expressed as a percentage of average interest-earning assets) was 3.32%,
3.71% and 3.30% for the same three respective fiscal years.
Net
interest income increased by $18.4 million or 59.5% to $49.3 million for the
year ended June 30, 2006 as compared to $30.9 million for the year ended June
30, 2005. The significant improvement largely resulted from the Chester Valley
Merger and the balance sheet de-leveraging strategy deployed by Willow
Financial. Chester Valleys balance sheet was asset sensitive (assets reprice
quicker than liabilities) during a year in which the Federal Reserve Board
aggressively raised short-term rates. Additionally, Willow Financial received
the full benefit of the additional earning assets from the acquisition for ten
months. The balance sheet de-leveraging allowed Willow Financial to sell lower
yielding investment securities while repaying higher costing
borrowings.
Interest Income
Interest
income includes the interest earned on loans and investment securities, as well
as yield adjustments for the premiums, discounts and deferred fees or costs
recorded in connection with the acquisition of these assets. Total interest
income for the year ended June 30, 2007 was $86.1 million compared to $81.5
million and $49.7 million for fiscal 2006 and 2005, respectively.
The
increase in interest income in fiscal 2007 compared to fiscal 2006 was $4.5
million or 5.5% due primarily to an increase in the average balance of
outstanding loans of $51.6 million. Additionally, the yield on loans increased
approximately five basis points in fiscal 2007 compared to fiscal 2006. The
increase in the average yield of the loan portfolio was largely the result of a
change in the mix of the loan portfolio reflecting Willow Financials reduced
reliance on long-term single-family residential mortgage loans and increase in
home equity loans and lines of credit, along with the interest rate sensitive
assets acquired from Chester Valley at a time in which the Federal Reserve Board
was aggressively raising short-term interest rates. Also contributing to the
increase was an approximate 71 basis point increase in the average yield in the
investment securities portfolio.
The
increase in interest income in fiscal 2006 compared to fiscal 2005 was $31.9
million or 64.1% due primarily to an increase in the average balance of
outstanding loans of $431.1 million as a result of the Chester Valley Merger.
Additionally, the yield on loans increased approximately 50 basis points, as
Chester Valleys loans were re-pricing at a time when the Federal Reserve Board
aggressively increased short-term rates. Also contributing to the increase was
an approximate 59 basis point increase in the average yield in the investment
portfolio as Willow Financial completed a de-leveraging strategy by liquidating
approximately $95.9 million of investment securities with an average yield of
3.96%. The above factors were partially offset by reduced levels in the average
balance of investment securities.
Interest Expense
Interest
expense consists of the interest paid to depositors on their interest-bearing
deposit accounts as well as interest paid on borrowings. For the fiscal year
ended June 30, 2007, total interest expense was $41.1 million compared to $32.2
million and $18.7 million, for the fiscal years ended June 30, 2006 and 2005,
respectively.
For the
fiscal year ended June 30, 2007, interest expense increased by $8.9 million, or
27.5% compared to the fiscal year ended June 30, 2006. This increase was due
primarily to a $10.2 million, or 55.3%, increase in interest expense on
deposits, which was partially offset by a $1.4 million, or 9.9% decrease in
interest expense on borrowings and repurchase agreements. This increase in
interest expense on deposits was due primarily to the increase in average
deposits of $87.0 million, or 9.2%. In addition, the average cost of deposits
increased by 94 basis points in fiscal 2007 as compared to fiscal 2006. This
increase was partially offset by a reduction of $51.4 million or 15.5% in
average borrowings for the year ended June 30, 2007 compared to the year ended
June 30, 2006.
123
For the
fiscal year ended June 30, 2006, interest expense increased by $13.5 million, or
71.8% compared to the fiscal year ended June 30, 2005. This increase was due
primarily to an increase in average interest-bearing liabilities resulting from
the Chester Valley Merger. Average deposit and borrowings balances increased
$290.6 million and $82.6 million, respectively, in fiscal 2006 compared to
fiscal 2005. Additionally, Willow Financials cost of funds increased
approximately 39 basis points in fiscal 2006 compared to fiscal 2005, as the
Federal Reserve Board aggressively raised short-term rates coupled with the
competition for deposits in the Willow Financial Banks market area, which led
the Willow Financial Bank to raise its interest rate paid on money market
balances and certificates of deposits. Additionally, the trust preferred
security assumed in the Chester Valley Merger was a floating rate borrowing, for
which the rate increased throughout the year.
Provision for Loan
Losses
In order
to maintain the allowance for loan losses at a level that Willow Financial deems
adequate to absorb known and unknown losses which are both probable and can be
reasonably estimated, a provision for loan losses is recorded through charges to
earnings. The determination of the adequacy of the allowance is based upon
Willow Financials regular review of credit quality and is based upon, but not
limited to, the following factors: an evaluation of Willow Financials loan
portfolio, loss experience, current economic conditions, volume, growth,
composition of the loan portfolio and other relevant factors. The balance of the
allowance for loan losses is an estimate and actual losses may vary from these
estimates. Management assesses the allowance for loan losses at least quarterly
and makes any necessary adjustments to maintain the allowance for losses at a
level deemed adequate. For the years ended June 30, 2007, 2006 and 2005, the
provisions for loan losses were $653 thousand, $3.4 million, and $1.2 million,
respectively. The decreased amount of the provision in fiscal 2007 compared to
fiscal 2006 was due primarily to the decrease in non-performing assets of $11.9
million, which were partially offset by net charge-offs of $5.2 million. The
increased provision in fiscal 2006 compared to fiscal 2005 was due primarily to
the increase in non-performing assets of $12.7 million.
At June
30, 2007, the balance in the allowance for loan losses was $12.2 million
compared to $16.7 million at June 30, 2006, with the decrease resulting from
$5.2 million in net charge-offs during fiscal 2007. The percentage of the
allowance for losses to loans, net of deferred fees, decreased to 1.17% at June
30, 2007 compared to 1.55% at June 30, 2006.
Management believes the allowance for loan loss was adequate at June 30,
2007 and represents all known and inherent losses in the portfolio that are both
probable and reasonably estimable. 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 Willow Financials non-performing loans in
the remainder of Willow Financials loan portfolio. Regulatory agencies, in the
course of their regular examinations, review the allowance for losses and
carrying value of non-performing assets. No assurance can be given that these
agencies might not require changes to the allowance for losses in the
future.
Non-Interest Income
Non-interest income is comprised of investment services income, account
service fees and charges, loan servicing fees, realized gains and losses on
assets available or held for sale, increases in the cash surrender value of bank
owned life insurance (BOLI) and with the acquisition of BeneServ, insurance
premiums. Total non-interest income for the years ended June 30, 2007, 2006, and
2005 was $12.3 million, $8.1 million and $3.5 million, respectively.
The
increase in non-interest income of $4.2 million, or 51.2%, during fiscal 2007
compared to fiscal 2006 was due primarily to a $1.1 million difference in the
amount of gain (loss) recognized on the sale of securities available-for-sale, a
gain of $804 thousand recorded during the quarter ended December 31, 2006 on the
unwinding of an interest rate corridor, increased investment services income of
$687 thousand, $637 thousand for income from the insurance operations of
BeneServ, increased service charges and fees of $443 thousand, and $363 thousand
in gains on the sale of real estate. These items were partially offset by a
reduction in the fair value of interest rate swaps recognized in other income.
The increase in service charges and fees was due primarily to growth in the
deposit base. The increase in investment services income was the result of
growth in the trust operations and the sales of retail investment products
through the branch network.
124
The
increase in non-interest income of $4.6 million during fiscal 2006 compared to
fiscal 2005 was due primarily to investment services income of $2.6 million
received from the acquisition of WIS and Chester Valleys Trust division in the
Chester Valley Merger. These were two new lines of business for Willow
Financial. Service charges and fees increased by $2.6 million or 106.0% in
fiscal 2006 due primarily to increased deposit fees associated with the growth
in checking accounts from the Chester Valley Merger as well as increases in the
overdraft protection fees for which Chester Valley was further along in
implementation and thus had a higher volume of users. Gains on loans available
for sale declined $240 thousand due primarily to lower loan volumes resulting
from the rising interest rate environment. This was largely offset by an
increase in other income of $655 thousand, which resulted primarily from income
on the BOLI acquired from Chester Valley and an increase in the fair value of
certain interest rate swaps recognized in other income. As noted previously,
Willow Financial implemented a de-leveraging strategy in which it incurred
approximately $919 thousand in losses in the sale of investment
securities.
Non-Interest Expense
The
primary components of non-interest expense are compensation and employee
benefits, occupancy and equipment expenses, data processing costs, deposit
account services, professional fees and a variety of other expenses. For the
years ended June 30, 2007, 2006, and 2005, non-interest expense totaled $46.4
million, $44.4 million and $23.4 million, respectively. Non-interest expense
increased $2.1 million, or 4.7%, from the year ended June 30, 2006 to the
comparable period ended June 30, 2007.
Salaries
and employee benefit expenses totaled $24.1 million, $19.4 million and $13.1
million, respectively, for the fiscal years ended June 30, 2007, 2006, and 2005.
For the year ended June 30, 2007, compensation costs increased by $4.7 million
partially as a result of operating Willow Financials expanded branch office
network for a full 12 months after the acquisition of Chester Valley on August
31, 2005 as well as new hirings in the lending and wealth management areas
during the year ended June 30, 2007 along with normal salary increases. At June
30, 2007, Willow Financial had 374 full-time employees compared to 312 at June
30, 2006. In addition, $519 thousand of compensation costs were recorded during
fiscal 2007 due to severance payments and costs associated with the retirement
of three Board members as well as certain employee reductions. For the year
ended June 30, 2006, compensation and benefit costs increased approximately $6.4
million or 48.8% due primarily to an increased number of employees as a result
of the Chester Valley Merger.
Occupancy
and equipment expenses were $8.1 million, $6.0 million, and $2.6 million for the
fiscal years ended June 30, 2007, 2006, and 2005, respectively. During fiscal
year 2007, occupancy costs increased partially as a result of operating Willow
Financials expanded branch office network for 12 full months after the
acquisition of Chester Valley and also due to additional rental costs incurred
at the corporate headquarters building and rental expense associated with
certain Willow Financial Bank buildings sold in a sale/leaseback transaction.
During fiscal year 2006, these costs increased $3.4 million due to the addition
of 13 branch locations from the Chester Valley Merger as well as Willow
Financials relocation to a new corporate headquarters and operations building
in February 2006. In fiscal 2006, the approximate occupancy cost of $237
thousand for the headquarters building was offset by a sale-leaseback of certain
of Willow Financial Banks branches for which the cash proceeds were invested in
loans or repaid borrowings. Willow Financials rent expense increased from $2.0
million in fiscal 2006 to $2.9 million in fiscal 2007 and is expected to remain
relatively stable at $3.0 million in fiscal 2008 based on current
leases.
Advertising expenses for fiscal 2007, 2006 and 2005 were $2.0 million,
$1.5 million and $978 thousand, respectively. The increase in fiscal year 2007
was a result of Willow Financial Banks re-branding efforts during the year
associated with the change in Willow Financial Banks name. The increase during
fiscal 2006 was due primarily to direct mail campaigns to the combined companys
customer base as Willow Financial commissioned a study of its customer base and
found there were significant opportunities to cross-sell its existing
products.
For the
fiscal years ended June 30, 2007, 2006, and 2005, amortization of intangible
assets was $2.1 million, $1.9 million and $57 thousand respectively. The
significant increase in fiscal 2006 was the result of the amortization of the
core deposit intangible recorded as a result of the Chester Valley Merger. The
asset is being amortized using an accelerated method over a twelve-year period.
Amortization of intangible assets is expected to be $2.1 million for the fiscal
year ending June 30, 2008.
125
Data
processing expenses were $1.5 million, $1.2 million, and $960 thousand,
respectively, for fiscal 2007, 2006 and 2005. The increase in each year resulted
from increased accounts and a rate increase in Willow Financials third-party
data processing contract.
Professional fees were $2.4 million, $2.3 million and $1.4 million for
fiscal 2007, fiscal 2006 and fiscal 2005, respectively. In fiscal 2007,
professional fees were relatively stable as compared to fiscal 2006. The
increase in the fiscal 2006 resulted primarily from increased consulting costs
related to the integration of the Sarbanes-Oxley 404 compliance for the combined
company, an analysis of Willow Financials customer base, and assistance with
the development of the combined companys strategic plan and branding
initiatives.
For the
fiscal years ended June 30, 2007, 2006, and 2005, other expenses, which includes
miscellaneous operating items, were $6.1 million, $11.9 million and $4.2
million, respectively. The significant increase in fiscal 2006 was due to an
approximate $7.7 million write-off un-reconciled differences that were the
result of Willow Financial not completing reconciliations in a timely and
consistent manner nor investigating and resolving reconciling items identified
in the reconciliation process. This write-off was partially offset by $670
thousand in reductions to salaries and employee benefit expense and $487
thousand in increased non-interest income as a result of the reconciliation
review.
Income Tax Expense
For the
fiscal years ended June 30, 2007, 2006, and 2005, income tax expense amounted to
$2.9 million, $3.0 million, and $3.1 million, respectively. The effective tax
rates for fiscal 2007, 2006 and 2005 were 28.4%, 31.1% and 31.2%, respectively.
The decrease in the income tax expense and the effective tax rate for the year
ended June 30, 2007 was primarily related to an increase in the relative balance
of income from tax-exempt securities as a proportion of income before income
taxes.
LIQUIDITY AND
COMMITMENTS
Willow
Financials primary sources of funds are from deposits, principal amortization
of loans, loan and securities prepayments and repayments, interest income from
loans, mortgage-backed securities and other investments, and other funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities are
relatively predictable sources of funds, deposit flows and loan prepayments can
be greatly influenced by general interest rates, economic conditions and
competition. Willow Financial also maintains excess funds in short-term,
interest-bearing assets that provide additional liquidity. Willow Financial has
also utilized outside borrowings, primarily from the Federal Home Loan Bank of
Pittsburgh as an additional funding source.
Willow
Financial uses its liquidity resources to fund existing and future loan
commitments, to fund maturing certificates of deposit and demand deposit
withdrawals, to invest in other interest-earning assets, and to meet operating
expenses. At June 30, 2007, outstanding approved loan commitments were $27.4
million and certificates of deposit maturing within the next twelve months
amounted $272.4 million. Based upon historical experience, it is anticipated
that a significant portion of the maturing certificates of deposit will be
reinvested in Willow Financial Bank. However, Willow Financial Bank may not
aggressively try to retain funds from maturing certificates of deposits if it is
a single relationship customer driven by higher rates.
During
the current fiscal year, Willow Financial utilized principal repayments on
investment securities and loans to reduce its use of borrowings from the Federal
Home Loan Bank. Outstanding borrowings from the Federal Home Loan Bank have
decreased to $189.8 million at June 30, 2007 as compared to $282.6 million at
June 30, 2006. Under terms of the borrowing agreement with the Federal Home Loan
Bank, Willow Financial Bank pledges certain assets such as residential mortgage
loans and mortgage-backed securities as well as stock in the Federal Home Loan
Bank as collateral for these advances. At June 30, 2007, Willow Financial Bank
had $464.4 million in additional borrowing capacity available from the Federal
Home Loan Bank.
Prior to
the Chester Valley Merger, Willow Financial had not in the past used any
significant off-balance sheet financing arrangement for liquidity or other
purposes. Willow Financials financial assets with off-balance sheet risk are
limited to obligations to fund loans to borrowers pursuant to existing loan
commitments. Additionally, Willow Financial has not had any transactions,
arrangements or other relationships with any unconsolidated, limited
126
purpose entities that could affect its
liquidity or capital resources, nor does it currently intend to engage in
trading commodity contracts. With the Chester Valley Merger and the resulting
increased size of the combined companies, Willow Financial may, from time to
time, utilize certain derivative financial instruments to assist in its
asset/liability strategies and has in fact assumed the liability for certain
interest rate derivatives entered into by Chester Valley.
Willow
Financial fully anticipates that it will continue to have sufficient funds and
alternative funding sources to meet its current commitments.
Willow Financials contractual
obligations as of June 30, 2007 are as follows:
|
Pay
ments Due by Peri
od
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
More Than
|
|
Total
|
|
1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
5 Years
|
|
(Dollars in thousands)
|
Federal Home Loan Debt
|
$
|
189,764
|
|
$17,677
|
|
$
|
34,716
|
|
$51,728
|
|
$
|
85,643
|
Operating
Leases
|
|
29,170
|
|
2,791
|
|
|
4,926
|
|
4,059
|
|
|
17,394
|
Total Obligations
|
$
|
218,934
|
|
$20,468
|
|
$
|
39,642
|
|
$55,787
|
|
$
|
103,037
|
|
|
Pay
ments Due by Perio
d
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
More Than
|
|
Total
|
|
1 Year
|
|
1-3
Years
|
|
3
-
5 Years
|
|
5 Years
|
|
(Dollars in thousands)
|
Lines of credit
|
$
|
164,833
|
|
$35,478
|
|
$
|
6,608
|
|
$9,869
|
|
$
|
112,878
|
Standby letters
of credit
|
|
16,772
|
|
9,711
|
|
|
7,061
|
|
|
|
|
|
Other commitments to make loans
|
|
27,357
|
|
27,357
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
53,331
|
|
21,574
|
|
|
31,757
|
|
|
|
|
|
Total Obligations
|
$
|
262,293
|
|
$94,120
|
|
$
|
45,426
|
|
$9,869
|
|
$
|
112,878
|
IMPACT OF INFLATION AND CHANGING
PRICES
The
financial statements, accompanying notes, and related financial data presented
herein have been prepared in accordance with U.S. generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Willow Financials operations. Most of Willow
Financials assets and liabilities are monetary in nature; therefore, the impact
of interest rates has a greater impact on its performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
127
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Willow Financial Bancorp, Inc.:
We have
audited the accompanying consolidated statements of financial condition of
Willow Financial Bancorp, Inc. and subsidiary (the Company) as of June 30, 2007
and 2006, and the related consolidated statements of income, changes in
stockholders equity and comprehensive income, and cash flows for each of the
years in the three-year period ended June 30, 2007. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of June 30,
2007 and 2006, and the results of their operations and their cash flows for each
of the years in the three-year period ended June 30, 2007, in conformity with
U.S. generally accepted accounting principles.
As
discussed in note 2, the Company has restated its consolidated financials
statements as of June 30, 2007 and 2006, and for the two years then
ended.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial
reporting as of June 30, 2007, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated September 28, 2007, except for
the third and fourth paragraphs of Management Report on Effectiveness of
Internal Control over Financial Reporting (As Restated), which are as of May 2,
2008, expressed an adverse opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ KPMG LLP
|
|
Philadelphia, Pennsylvania
|
|
|
|
September 28, 2007, except as to
notes 2 and 26 as to which the date is May 2, 2008
|
|
128
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Willow Financial Bancorp, Inc.:
We have
audited Willow Financial Bancorp, Inc. and subsidiarys (the Company) internal
control over financial reporting as of June 30, 2007, based on criteria
established in
Internal ControlIntegrated
Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying
Management Report on Effectiveness on Internal Control over
Financial Reporting (As Restated)
in Item
9Ab. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis. Material
weaknesses have been identified and included in
Management Report on Internal Controls Over Financial Reporting (as
restated)
in the areas of review and analysis
of financial statement account reconciliations, application of accounting
resources to the evaluation of significant financial reporting matters, and
documentation and review of journal entries.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial
condition as of June 30, 2007 and 2006 and the related consolidated statements
of income, stockholders equity and comprehensive income, and cash flows for
each of the years in the three-year period ended June 30, 2007 of the Company.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the June 30, 2007 consolidated
financial statements, and this report does not affect our report dated September
28, 2007, except for note 2 and 26 to the consolidated financial statements, as
to which the date is May 2, 2008, which expressed an unqualified opinion on
those consolidated financial statements.
In our
opinion, because of the effect of the aforementioned material weaknesses on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of June 30,
2007, based on criteria established in
Internal ControlIntegrated Framework
issued by COSO.
129
Management and we previously concluded that the Company did not maintain
effective internal control over financial reporting as of June 30, 2007. In
connection with the restatement of the Companys consolidated financial
statements as described in note 2 to the consolidated financial statements,
management and we determined that an additional material weakness in internal
control over financial reporting existed as of June 30, 2007. Accordingly,
management and we have restated our respective reports in internal control over
financial reporting to include these modifications.
/s/ KPMG LLP
|
|
Philadelphia, Pennsylvania
|
|
|
|
September 28, 2007, except for the
third and
fourth paragraphs of Management Report of
Effectiveness of
Internal Control over
Financial Reporting (As Restated), as to
which
the date is May 2, 2008
|
|
130
WILLOW FINANCIAL BANCORP,
INC.
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
|
At
|
|
At
|
|
June 30, 2007
|
|
June 30, 2006
|
|
(As
restated
)
|
|
(
As restated)
|
|
|
(Dollars in thousands,
|
|
|
|
except share data)
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
Cash
on hand and non-interest-earning deposits
|
$
|
21,124
|
|
|
$
|
27,978
|
|
Interest-bearing deposits
|
|
39,153
|
|
|
|
2,977
|
|
Total cash and cash equivalents
|
|
60,277
|
|
|
|
30,955
|
|
Investment
securities:
|
|
|
|
|
|
|
|
Trading
|
|
1,176
|
|
|
|
902
|
|
Available for sale (amortized cost of $193,232 and
$203,221, respectively)
|
|
188,339
|
|
|
|
196,925
|
|
Held
to maturity (fair value of $86,488 and $102,087,
respectively)
|
|
88,363
|
|
|
|
105,561
|
|
Federal Home
Loan Bank Stock
|
|
11,394
|
|
|
|
16,856
|
|
Loans (net of allowance for loan losses of $12,210 and $16,737,
respectively)
|
|
1,035,293
|
|
|
|
1,063,601
|
|
Loans held for
sale
|
|
8,075
|
|
|
|
2,635
|
|
Accrued interest receivable
|
|
6,654
|
|
|
|
6,647
|
|
Property and
equipment, net
|
|
11,307
|
|
|
|
9,987
|
|
Bank owned life insurance
|
|
11,930
|
|
|
|
11,483
|
|
Real estate
owned
|
|
|
|
|
|
51
|
|
Other intangible assets, net
|
|
14,345
|
|
|
|
12,975
|
|
Goodwill
|
|
95,597
|
|
|
|
94,569
|
|
Other assets
|
|
18,546
|
|
|
|
17,587
|
|
Total
assets
|
$
|
1,551,296
|
|
|
$
|
1,570,734
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
$
|
951,629
|
|
|
$
|
893,253
|
|
Non-interest-bearing deposits
|
|
141,101
|
|
|
|
123,247
|
|
Securities sold
under agreements to repurchase
|
|
20,000
|
|
|
|
20,000
|
|
Federal Home Loan Bank advances
|
|
189,764
|
|
|
|
282,555
|
|
Advance payments
from borrowers for taxes
|
|
4,254
|
|
|
|
4,776
|
|
Trust preferred securities
|
|
25,774
|
|
|
|
36,198
|
|
Accrued interest
payable
|
|
2,303
|
|
|
|
2,285
|
|
Other liabilities
|
|
17,038
|
|
|
|
9,796
|
|
Total
liabilities
|
|
1,351,863
|
|
|
|
1,372,110
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
Common stock $0.01 par value; (40,000,000 authorized;
17,487,770
|
|
|
|
|
|
|
|
and
16,584,870 issued at June 30, 2007 and 2006 respectively)
|
|
175
|
|
|
|
166
|
|
Additional paid-in capital
|
|
190,776
|
|
|
|
178,886
|
|
Retained earningssubstantially restricted
|
|
46,030
|
|
|
|
55,630
|
|
Accumulated other comprehensive loss
|
|
(3,180
|
)
|
|
|
(3,317
|
)
|
Obligation of deferred compensation plan
|
|
1,277
|
|
|
|
1,258
|
|
Treasury stock at cost 1, 920,025 and 1,665,443 shares at June 30,
2007
|
|
|
|
|
|
|
|
and
2006, respectively
|
|
(31,046
|
)
|
|
|
(28,251
|
)
|
Unallocated common stock held by:
|
|
|
|
|
|
|
|
Employee Stock Ownership Plan (ESOP)
|
|
(2,958
|
)
|
|
|
(3,287
|
)
|
Recognition and Retention Plan Trust (RRP)
|
|
(1,641
|
)
|
|
|
(2,461
|
)
|
Total stockholders equity
|
|
199,433
|
|
|
|
198,624
|
|
Total liabilities and stockholders equity
|
$
|
1,551,296
|
|
|
$
|
1,570,734
|
|
See accompanying Notes to Consolidated
Financial Statements
131
WILLOW FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
Fo
r the year ended June 30
,
|
|
2007
|
|
2006
|
|
2005
|
|
(As restated)
|
|
(As restated)
|
|
|
|
(Dollars in thousands, except per share
data)
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
Loans
|
$
|
69,315
|
|
$
|
65,472
|
|
$
|
34,536
|
Investment securities and interest-bearing deposits
|
|
16,735
|
|
|
16,058
|
|
|
15,143
|
Total interest
income
|
|
86,050
|
|
|
81,530
|
|
|
49,679
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
28,698
|
|
|
18,476
|
|
|
9,931
|
Securities sold under agreements to repurchase
|
|
1,135
|
|
|
228
|
|
|
|
Borrowings
|
|
11,229
|
|
|
13,501
|
|
|
8,818
|
Total interest expense
|
|
41,062
|
|
|
32,205
|
|
|
18,749
|
Net interest
income
|
|
44,988
|
|
|
49,325
|
|
|
30,930
|
Provision for loan losses
|
|
653
|
|
|
3,380
|
|
|
1,232
|
Net interest
income after provision for loan losses
|
|
44,335
|
|
|
45,945
|
|
|
29,698
|
Non-interest income:
|
|
|
|
|
|
|
|
|
Investment services income, net
|
|
3,321
|
|
|
2,634
|
|
|
|
Income from insurance operations
|
|
637
|
|
|
|
|
|
|
Service charges and fees
|
|
5,423
|
|
|
4,980
|
|
|
2,418
|
Realized gain (loss) on sale of:
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
616
|
|
|
357
|
|
|
597
|
Investment securities available for sale
|
|
228
|
|
|
(919
|
)
|
|
73
|
Real estate
|
|
380
|
|
|
17
|
|
|
|
Gain
on termination of interest rate corridor
|
|
804
|
|
|
|
|
|
|
Other income
|
|
858
|
|
|
1,045
|
|
|
389
|
Total non-interest income
|
|
12,267
|
|
|
8,114
|
|
|
3,477
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
24,097
|
|
|
19,436
|
|
|
13,062
|
Occupancy and equipment
|
|
8,059
|
|
|
6,011
|
|
|
2,646
|
Data
processing
|
|
1,504
|
|
|
1,220
|
|
|
960
|
Advertising
|
|
2,041
|
|
|
1,504
|
|
|
978
|
Deposit insurance premiums
|
|
120
|
|
|
124
|
|
|
85
|
Amortization of intangible assets
|
|
2,131
|
|
|
1,928
|
|
|
57
|
Professional fees
|
|
2,444
|
|
|
2,303
|
|
|
1,441
|
Other expense
|
|
6,053
|
|
|
11,856
|
|
|
4,168
|
Total non-interest expense
|
|
46,449
|
|
|
44,382
|
|
|
23,397
|
Income before
income taxes
|
|
10,153
|
|
|
9,677
|
|
|
9,778
|
Income tax expense
|
|
2,886
|
|
|
3,010
|
|
|
3,052
|
Net
Income
|
$
|
7,267
|
|
$
|
6,667
|
|
$
|
6,726
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.48
|
|
$
|
0.47
|
|
$
|
0.70
|
Diluted
|
$
|
0.47
|
|
$
|
0.46
|
|
$
|
0.67
|
See accompanying Notes to Consolidated
Financial Statements
132
WILLOW FINANCIAL BANCORP,
INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Obligation
|
|
|
|
|
|
|
|
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
other
|
|
of deferred
|
|
|
|
|
|
|
|
acquired
|
|
|
|
|
|
|
|
Common
|
|
paid in
|
|
Retained
|
|
comprehensive
|
|
compensation
|
|
Treasury
|
|
by benefit
|
|
|
|
|
|
|
|
stock
|
|
capital
|
|
earning
s
|
|
income (loss)
|
|
plan
|
|
stock
|
|
plans
|
|
Total
|
|
|
(Dollars in thousands, except per share data)
|
|
Balance at June 30, 2004
|
|
$
|
114
|
|
|
|
$
|
84,915
|
|
|
|
$
|
53,151
|
|
|
|
$
|
(2,463
|
)
|
|
|
|
$
|
525
|
|
|
|
$
|
(24,926
|
)
|
|
|
|
$
|
(7,905
|
)
|
|
|
|
$
|
103,411
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
6,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,726
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
|
Exercise of
Stock Options
|
|
|
1
|
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285
|
|
|
ESOP shares committed to be released
|
|
|
|
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462
|
|
|
|
|
|
1,028
|
|
|
Obligation of
deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551
|
|
|
Amortization of RRP shares
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
588
|
|
|
|
|
|
597
|
|
|
Treasury stock
acquired (155,577 shares at cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,146
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,146
|
)
|
|
Tax benefit related to employee stock benefit plans
|
|
|
|
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312
|
|
|
Cash dividends
paid($0.44 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,196
|
)
|
|
Balance at June 30, 2005
|
|
$
|
115
|
|
|
|
$
|
86,086
|
|
|
|
$
|
55,681
|
|
|
|
$
|
(1,353
|
)
|
|
|
|
$
|
1,076
|
|
|
|
$
|
(28,072
|
)
|
|
|
|
$
|
(6,855
|
)
|
|
|
|
$
|
106,678
|
|
|
Net income (as
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
6,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,667
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,964
|
)
|
|
Common stock
issued in acquisition
|
|
|
50
|
|
|
|
|
90,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,016
|
|
|
Exercise of Stock Options
|
|
|
1
|
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,275
|
|
|
Stock based
compensation
|
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
ESOP shares committed to be released
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462
|
|
|
|
|
|
462
|
|
|
Obligation of
deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
Amortization of RRP shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
645
|
|
|
Treasury stock
acquired (15,132 shares at cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
|
Tax benefit related to employee stock benefit plans
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
|
Cash dividends
paid($0.46 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,718
|
)
|
|
Balance at June 30, 2006 (as restated)
|
|
$
|
166
|
|
|
|
$
|
178,886
|
|
|
|
$
|
55,630
|
|
|
|
$
|
(3,317
|
)
|
|
|
|
$
|
1,258
|
|
|
|
$
|
(28,251
|
)
|
|
|
|
$
|
(5,748
|
)
|
|
|
|
$
|
198,624
|
|
|
Net income (as
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
7,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,267
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
Stock
dividend
|
|
|
8
|
|
|
|
|
9,929
|
|
|
|
|
(9,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash issued in lieu of fractional shares
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
Exercise of
Stock Options
|
|
|
1
|
|
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
|
ESOP shares
committed to be released
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329
|
|
|
|
|
|
329
|
|
|
Obligation of deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
Amortization of
RRP shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
820
|
|
|
|
|
|
820
|
|
|
Restricted shares issued from Treasury
|
|
|
|
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock
acquired (269,200 shares at cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,242
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,242
|
)
|
|
Tax benefit related to employee stock benefit plans
|
|
|
|
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261
|
|
|
Cash dividends
paid($0.46 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,920
|
)
|
|
Balance at June 30, 2007 (as restated)
|
|
$
|
175
|
|
|
|
$
|
190,776
|
|
|
|
$
|
46,030
|
|
|
|
$
|
(3,180
|
)
|
|
|
|
$
|
1,277
|
|
|
|
$
|
(31,046
|
)
|
|
|
|
$
|
(4,599
|
)
|
|
|
|
$
|
199,433
|
|
|
133
|
For
the year ended June
30
,
|
|
2007
|
|
2006
|
|
2005
|
|
(As restated)
|
|
(As restated)
|
|
|
|
Net unrealized gains (losses) on securities available
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale arising during the period, net of tax
|
|
$
|
1,051
|
|
|
|
$
|
(2,937
|
)
|
|
$
|
1,061
|
Reclassification
adjustments for (gains) losses included
|
|
|
|
|
|
|
|
|
|
|
|
|
in net income, net of tax
|
|
|
(148
|
)
|
|
|
|
597
|
|
|
|
49
|
Gain on termination of interest rate corridor, net of tax
|
|
|
(523
|
)
|
|
|
|
|
|
|
|
|
Net unrealized
(loss) gain on cash flow hedge, net of tax
|
|
|
(243
|
)
|
|
|
|
376
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
137
|
|
|
|
|
(1,964
|
)
|
|
|
1,110
|
Net
income
|
|
|
7,267
|
|
|
|
|
6,667
|
|
|
|
6,726
|
Comprehensive income
|
|
$
|
7,404
|
|
|
|
$
|
4,703
|
|
|
$
|
7,836
|
See accompanying Notes to Consolidated
Financial Statements.
134
WILLOW FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
F
or the year ended June 3
0,
|
|
2007
|
|
2006
|
|
2005
|
|
(As restated)
|
|
(As restated)
|
|
|
|
(Dollars in thousands)
|
Net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
7,267
|
|
|
$
|
6,667
|
|
|
$
|
6,726
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
2,598
|
|
|
|
1,837
|
|
|
|
955
|
|
Amortization of premium and accretion of discount, net
|
|
180
|
|
|
|
347
|
|
|
|
595
|
|
Amortization of intangible assets
|
|
2,131
|
|
|
|
1,928
|
|
|
|
57
|
|
Provision for loan losses
|
|
653
|
|
|
|
3,380
|
|
|
|
1,232
|
|
Gain
on sale of loans available for sale
|
|
(616
|
)
|
|
|
(357
|
)
|
|
|
(597
|
)
|
(Gain) loss on sale of securities available for
|
|
|
|
|
|
|
|
|
|
|
|
sale and trading
|
|
(228
|
)
|
|
|
919
|
|
|
|
(73
|
)
|
Gain
on sale of interest rate corridor
|
|
(804
|
)
|
|
|
|
|
|
|
|
|
Gain
on sale of real estate
|
|
(380
|
)
|
|
|
(17
|
)
|
|
|
|
|
Increase in loans held for sale
|
|
(57,313
|
)
|
|
|
(79,068
|
)
|
|
|
(108,823
|
)
|
Proceeds from sale of loans held for sale
|
|
52,489
|
|
|
|
81,911
|
|
|
|
108,761
|
|
Purchase of trading account securities
|
|
(274
|
)
|
|
|
(820
|
)
|
|
|
(53
|
)
|
Excess tax benefit from stock options exercised
|
|
(261
|
)
|
|
|
(254
|
)
|
|
|
(312
|
)
|
Amortization of deferred loan fees,
|
|
|
|
|
|
|
|
|
|
|
|
discounts
and premiums
|
|
(843
|
)
|
|
|
(1,056
|
)
|
|
|
(124
|
)
|
(Increase) decrease in accrued interest receivable
|
|
(7
|
)
|
|
|
335
|
|
|
|
(529
|
)
|
(Increase) decrease in value of bank owned life
insurance
|
|
(447
|
)
|
|
|
(369
|
)
|
|
|
|
|
(Increase) decrease in other assets
|
|
(2,502
|
)
|
|
|
6,908
|
|
|
|
(1,129
|
)
|
(Decrease) increase in other liabilities
|
|
7,242
|
|
|
|
(13,391
|
)
|
|
|
3,171
|
|
Stock based compensation
|
|
1,931
|
|
|
|
1,963
|
|
|
|
1,625
|
|
Increase (decrease) in accrued interest payable
|
|
18
|
|
|
|
(271
|
)
|
|
|
78
|
|
Net cash provided by operating activities
|
|
10,834
|
|
|
|
10,592
|
|
|
|
11,560
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(5,080
|
)
|
|
|
(3,948
|
)
|
|
|
(631
|
)
|
Proceeds from sale of office buildings
|
|
1,914
|
|
|
|
11,139
|
|
|
|
|
|
Net
decrease (increase) in loans
|
|
26,419
|
|
|
|
(24,709
|
)
|
|
|
(61,029
|
)
|
Purchase of securities available for sale
|
|
(62,737
|
)
|
|
|
(23,027
|
)
|
|
|
(23,472
|
)
|
Purchase of investment securities held to maturity
|
|
|
|
|
|
|
|
|
|
(107,388
|
)
|
Proceeds from sales and calls of securities available for
sale
|
|
72,768
|
|
|
|
80,132
|
|
|
|
98,063
|
|
Proceeds from maturities, payments and calls of
investment
|
|
|
|
|
|
|
|
|
|
|
|
securities
held to maturity
|
|
17,205
|
|
|
|
59,159
|
|
|
|
41,450
|
|
Net
decrease (increase) in FHLB stock
|
|
5,462
|
|
|
|
11,544
|
|
|
|
(2,053
|
)
|
Proceeds from sale of other real estate owned
|
|
2,572
|
|
|
|
388
|
|
|
|
262
|
|
Net
cash used for acquisition
|
|
(4,433
|
)
|
|
|
(22,936
|
)
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
54,090
|
|
|
|
87,742
|
|
|
|
(54,798
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
76,230
|
|
|
|
(50,795
|
)
|
|
|
(437
|
)
|
Increase in securities sold under agreements to
repurchase
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Proceeds from FHLB advances
|
|
107,400
|
|
|
|
215,700
|
|
|
|
109,500
|
|
Repayment of FHLB advances
|
|
(200,191
|
)
|
|
|
(293,589
|
)
|
|
|
(78,268
|
)
|
135
|
F
or the year ended June 3
0,
|
|
2007
|
|
2006
|
|
2005
|
|
(As restated)
|
|
(As restated)
|
|
|
|
|
|
(Dollars in thousands)
|
(Decrease) increase in advance payments
|
|
|
|
|
|
|
|
|
|
|
|
from borrowers for taxes and insurance
|
|
(522
|
)
|
|
|
1,429
|
|
|
|
(13
|
)
|
Net proceeds from the issuance of trust
preferred
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
25,000
|
|
|
|
|
|
Repayment of trust preferred securities
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
Cash dividends on common stock
|
|
(6,920
|
)
|
|
|
(6,718
|
)
|
|
|
(4,196
|
)
|
Proceeds from stock issuance
|
|
|
|
|
|
|
|
|
|
285
|
|
Cash in lieu of fractional shares
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
1,392
|
|
|
|
1,275
|
|
|
|
|
|
Excess tax benefit from stock options
exercised
|
|
261
|
|
|
|
254
|
|
|
|
312
|
|
Common stock repurchased as treasury stock
|
|
(3,242
|
)
|
|
|
(179
|
)
|
|
|
(3,146
|
)
|
Net cash (used in) provided by financing
activities
|
|
(35,602
|
)
|
|
|
(87,623
|
)
|
|
|
24,037
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
29,322
|
|
|
|
10,711
|
|
|
|
(19,201
|
)
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
30,955
|
|
|
|
20,244
|
|
|
|
39,445
|
|
End of year
|
$
|
60,277
|
|
|
$
|
30,955
|
|
|
$
|
20,244
|
|
Supplemental disclosures of cash and cash flow
information
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
41,044
|
|
|
$
|
32,476
|
|
|
$
|
18,671
|
|
Income taxes paid
|
|
416
|
|
|
|
2,628
|
|
|
|
2,941
|
|
Noncash
items:
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
available for sale, net of tax
|
|
1,051
|
|
|
|
(2,937
|
)
|
|
|
1,061
|
|
Net unrealized (loss) gain on cash flow hedge, net of
tax
|
|
(766
|
)
|
|
|
376
|
|
|
|
|
|
Loans transferred to other real estate owned
|
|
|
|
|
|
|
|
|
|
532
|
|
See accompanying Notes to Consolidated
Financial Statements
136
1. Description of Business and Basis
of Financial Statement Presentation
Effective
at 11:59 p.m., September 21, 2006, Willow Grove Bancorp, Inc. and Willow Grove
Bank changed their names to Willow Financial Bancorp, Inc. and Willow Financial
Bank, respectively. As contained herein, references to the Company include both
Willow Financial Bancorp, Inc. and Willow Grove Bancorp, Inc. and references to
the Bank include both Willow Financial Bank and Willow Grove Bank. Coincident
with the name change, the Companys trading symbol on the NASDAQ Select Global
Market was changed from WGBC to WFBC.
Willow Financial Bancorp, Inc. (the
Company), is a Pennsylvania corporation and parent holding company for Willow
Financial Bank (the Bank). The Bank, which was originally organized in 1909,
is a federally chartered savings bank and wholly owned subsidiary of the
Company. The Banks business consists primarily of making commercial business
and consumer loans as well as real estate loans, both commercial and
residential, funded primarily by retail and business deposits along with
borrowings obtained from the Federal Home Loan Bank of Pittsburgh
(FHLB).
After the
close of business on August 31, 2005, the Company completed its acquisition of
Chester Valley Bancorp Inc. (Chester Valley), a registered bank holding
company headquartered in Downingtown, Pennsylvania, with over $654 million in
assets. Chester Valley had two wholly owned subsidiaries, First Financial Bank,
a Pennsylvania chartered commercial bank ( Chester Valley ) with 13
full-service banking offices, and Willow Investment Services (WIS), formerly
Philadelphia Corporation for Investment Services, a registered investment
advisor and broker dealer (PCIS). Pursuant to the Agreement and Plan of
Merger, dated as of January 20, 2005 (the Merger Agreement), Chester Valley
was merged with and into the Company, with the Company as the surviving
corporation (the Merger), and Chester Valley was merged with and into the Bank
with the Bank as the surviving bank (the Bank Merger). WIS became a wholly
owned subsidiary of the Company. As a result of the Merger, each outstanding
share of Chester Valley common stock, par value $1.00 per share (the Chester
Valley Common Stock), was converted into the right to receive, at the election
of the shareholder, either $27.90 in cash or 1.4823 shares of the Company common
stock, par value $0.01 per share (the Company Common Stock), subject to the
allocation and pro ration provisions set forth in the Merger Agreement. The
acquisition resulted in the Companys issuance of an aggregate of 4,977,256
shares of Company Common Stock and $51.0 million in cash. The total merger
consideration paid for the Chester Valley Common Stock was $145.3 million. This
included capitalized acquisition costs and the value of Chester Valley vested
stock options converted to options of the Company at the average stock price of
the Company on the four days surrounding the announcement of the acquisition.
The Company used general corporate funds to pay the aggregate cash consideration
of approximately $51.0 million for the shares of Chester Valley Common Stock
acquired in the Merger for cash, as well as the approximate $3.2 million in
acquisition costs.
The
Merger has been accounted for using the purchase method of accounting, which
requires that our financial statements include activity of Chester Valley only
subsequent to the acquisition date of August 31, 2005. Accordingly, our
consolidated financial statements and the information herein include the
combined results of the former Chester Valley and its former subsidiaries,
Chester Valley and WIS, since September 1, 2005.
Effective
February 28, 2006, the Bank completed the sale of all outstanding shares of
capital stock of PCIS to Uvest BD-A, Inc., a North Carolina Corporation and
registered broker-dealer (Uvest) for consideration of $100 but providing that
such shares may be repurchased for $100 at any time after the closing date of
the stock sale. Concurrently with the execution of the sale of PCIS, the parties
entered into a related Sub-Clearing and Brokerage Services Agreement, which
provides that an affiliate of Uvest will provide securities clearing and certain
supervisory and compliance services for PCIS, and a Financial Services Agreement
between PCIS and the Bank which provides that the Bank will be entitled to 90%
of the revenue generated by the securities brokerage activities conducted at the
PCIS office and will bear substantially all operational and overhead expenses.
Upon consummation of the sale of PCIS stock to Uvest, PCIS is no longer a
subsidiary of the Company. However, under the provisions of Financial Accounting
Standards Board Interpretation No. 46R, Consolidation of Variable Interest
Entities, the results of PCIS, which now conducts business as Willow Investment
Services (WIS) continue to be consolidated in the Companys financial
statements. The affiliation agreement with Uvest has the primary effect of
relieving PCIS of direct responsibility for securities clearing and certain
back-office and oversight obligations.
On March
30, 2007, the Company completed its acquisition of BeneServ, Inc. (BeneServ)
for a purchase price of up to $5.5 million. The purchase price includes a
payment of $4.2 million at closing plus an additional amount up to $1.3 million
in payments through the three-year anniversary date of the acquisition, subject
to the achievement of certain performance thresholds. BeneServ is an insurance
agency serving the corporate employee benefit market
137
segment. BeneServ and the Company share
a target market in small businesses located in Chester, Montgomery, Bucks,
Delaware, and Philadelphia counties, Pennsylvania, thereby providing a number of
cross selling opportunities for both companies. The Company has recorded
goodwill and other intangibles of $4.5 million on the statement of financial
condition at June 30, 2007 as a result of this acquisition based on the
preliminary purchase price allocation.
References to Company include its consolidated entities, Willow Financial
Bank, the Banks subsidiaries, and its business segment, WIS, unless the context
of the reference indicates otherwise.
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Willow Financial Bank. The accounts of
the Bank include its wholly owned subsidiaries, Willow Grove Investment
Corporation, Willow Grove Insurance Agency, LLC, BeneServ, D&S Service
Corporation, and First Financial Investments. All material intercompany balances
and transactions have been eliminated in consolidation. The Company follows
accounting and reporting practices which are in accordance with U.S. generally
accepted accounting principles.
Certain
amounts in prior years are reclassified for comparability to the current years
presentation. Such reclassifications, when applicable, have no effect on net
income. The Company reclassified collateralized customer deposit balances at
June 30, 2006 from securities sold under agreements to repurchase to
interest-bearing deposits on the consolidated statements of financial
condition.
2. Restatement of Consolidated
Financial Statements
The
Companys management along with its independent registered public accounting
firm, during the course of the Companys fiscal 2007 annual review of financial
results and application of financial controls, identified deficiencies that
represented material weaknesses in internal controls over financial reporting.
While a remediation plan was implemented to correct these material weaknesses,
in finalizing its Form 10-Q for the quarter ended September 30, 2007,
management together with its independent registered public accounting firm
identified the existence of an un-reconciled difference of approximately $6.2
million. This caused management and its independent auditors to conclude that
these deficiencies had not been properly remediated. At that time, the Companys
management began an investigation into the $6.2 million un-reconciled
difference. Throughout the course of the investigation, management performed a
thorough review of general ledger account reconciliations for various accounts
from June 2004 through September 2007. This investigation yielded adjustments
that were determined by the Companys management and its independent registered
public accounting firm to be material to financial statements for the years
ended June 30, 2007 and 2006. As a result of these adjustments, management, with
the concurrence of the Audit Committee has determined that Companys financial
statements for the fiscal years ended June 30, 2007 and 2006 required
restatement. The adjustments include errors in the accounting for the following
items:
-
improperly performed reconciliations that resulted
in un-reconciled differences and an aggregate reduction to pre-tax income of
$8.3 million ($5.5 million after tax) and a charge to fiscal 2004 retained
earnings of $365 thousand; and
-
errors in the accounting for the acquisition of
Chester Valley Bancorp and the related calculation of goodwill of
approximately $497 thousand.
In
response to the material weaknesses noted above, the Company has commenced the
following corrective actions to remediate the material weaknesses on an ongoing
basis:
-
The Company has conducted a thorough assessment of
the design of the reconciliation process as it relates to the posting of
manual journal entries. The Company has revised its reconciliation process to
require that all significant manual journal entries contain the appropriate
detailed support, and the processing of such entries be approved by the Chief
Accounting Officer, Corporate Controller and/or the Chief Financial Officer.
The approval of certain reconciliations in which the errors occurred will
require the review and approval of the Chief Accounting Officer, Corporate
Controller and/or Chief Financial Officer. Additionally, all reconciling items
are required to be cleared within a 90-day period. The Company believes that,
once fully implemented and tested, these procedures as well as certain other
process enhancements will ensure accurate and timely completion of general
ledger reconciliations with a level of precision to detect errors that, in the
future, would be material to the Companys financial statements if not so
detected.
138
-
Management has developed procedures that we
believe, once fully implemented and tested, will ensure that significant
accounting transactions are sufficiently researched and documented and
appropriately recorded
.
-
The Company has hired a new Corporate Controller
as well as additional qualified personnel within the accounting and finance
departments. We will continue to review our staffing needs in the finance and
accounting area to ensure adequate resources.
The
following tables set forth the consolidated restated financial statements for
the fiscal years ended June 30, 2007 and June 30, 2006 previously filed in the
Companys Annual Report on Form 10-K/A for the fiscal year ended June 30, 2007.
The changes to the June 30, 2005 and 2004 financial statements were considered
to be insignificant for reporting purposes in consideration of the guidance in
Staff Accounting Bulletin No. 108.
139
The
following is a summary of the adjustments to our previously issued consolidated
statements of financial condition as of June 30, 2007 and 2006:
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
|
A
t June 30, 20
07
|
|
A
t June 30, 2006
|
|
As
|
|
|
|
|
|
As
|
|
As
|
|
|
|
|
|
As
|
|
reported
|
|
Adjustments
|
|
restated
|
|
reported
|
|
Adjustments
|
|
restated
|
|
(Dollars in thousands, except
share data)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and non-interest-earning deposits
(a)
|
$
|
26,253
|
|
|
$
|
(5,129
|
)
|
|
$
|
21,124
|
|
|
32,930
|
|
|
$
|
(4,952
|
)
|
|
$
|
27,978
|
|
Interest-bearing
deposits
(a)
|
|
32,475
|
|
|
|
6,678
|
|
|
|
39,153
|
|
|
4,289
|
|
|
|
(1,312
|
)
|
|
|
2,977
|
|
Total cash and cash equivalents
|
|
58,728
|
|
|
|
1,549
|
|
|
|
60,277
|
|
|
37,219
|
|
|
|
(6,264
|
)
|
|
|
30,955
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
1,176
|
|
|
|
|
|
|
|
1,176
|
|
|
902
|
|
|
|
|
|
|
|
902
|
|
Available for
sale (amortized cost of $193,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and $203,221, respectively)
|
|
188,339
|
|
|
|
|
|
|
|
188,339
|
|
|
196,925
|
|
|
|
|
|
|
|
196,925
|
|
Held to maturity (fair value of $86,488 and $102,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
respectively)
|
|
88,363
|
|
|
|
|
|
|
|
88,363
|
|
|
105,561
|
|
|
|
|
|
|
|
105,561
|
|
Federal Home
Loan Bank Stock
|
|
11,394
|
|
|
|
|
|
|
|
11,394
|
|
|
16,856
|
|
|
|
|
|
|
|
16,856
|
|
Loans (net of allowance for loan losses of $12,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
$16,737, respectively)
(b)
|
|
1,036,098
|
|
|
|
(805
|
)
|
|
|
1,035,293
|
|
|
1,063,882
|
|
|
|
(281
|
)
|
|
|
1,063,601
|
|
Loans held for
sale
|
|
8,075
|
|
|
|
|
|
|
|
8,075
|
|
|
2,635
|
|
|
|
|
|
|
|
2,635
|
|
Accrued interest receivable
(c)
|
|
6,738
|
|
|
|
(84
|
)
|
|
|
6,654
|
|
|
6,647
|
|
|
|
|
|
|
|
6,647
|
|
Property and
equipment, net
(f)
|
|
11,307
|
|
|
|
|
|
|
|
11,307
|
|
|
10,064
|
|
|
|
(77
|
)
|
|
|
9,987
|
|
Bank owned life insurance
|
|
11,930
|
|
|
|
|
|
|
|
11,930
|
|
|
11,483
|
|
|
|
|
|
|
|
11,483
|
|
Real estate
owned
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
Other intangible assets, net
(e)
|
|
14,432
|
|
|
|
(87
|
)
|
|
|
14,345
|
|
|
12,975
|
|
|
|
|
|
|
|
12,975
|
|
Goodwill
(d)
|
|
95,100
|
|
|
|
497
|
|
|
|
95,597
|
|
|
94,072
|
|
|
|
497
|
|
|
|
94,569
|
|
Other assets
(h)
|
|
18,664
|
|
|
|
(118
|
)
|
|
|
18,546
|
|
|
17,788
|
|
|
|
(201
|
)
|
|
|
17,587
|
|
Total
assets
|
$
|
1,550,344
|
|
|
$
|
952
|
|
|
$
|
1,551,296
|
|
|
1,577,060
|
|
|
$
|
(6,326
|
)
|
|
$
|
1,570,734
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
(a)
|
$
|
941,895
|
|
|
$
|
9,734
|
|
|
$
|
951,629
|
|
|
855,526
|
|
|
$
|
37,727
|
|
|
$
|
893,253
|
|
Non-interest-bearing deposits
(a)
|
|
151,160
|
|
|
|
(10,059
|
)
|
|
|
141,101
|
|
|
162,864
|
|
|
|
(39,617
|
)
|
|
|
123,247
|
|
Securities sold
under agreements to repurchase
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
Federal Home Loan Bank advances
(g,i)
|
|
190,063
|
|
|
|
(299
|
)
|
|
|
189,764
|
|
|
282,717
|
|
|
|
(162
|
)
|
|
|
282,555
|
|
Advance payments
from borrowers for taxes
|
|
4,254
|
|
|
|
|
|
|
|
4,254
|
|
|
4,776
|
|
|
|
|
|
|
|
4,776
|
|
Trust preferred securities
(i)
|
|
25,525
|
|
|
|
249
|
|
|
|
25,774
|
|
|
36,149
|
|
|
|
49
|
|
|
|
36,198
|
|
Accrued interest
payable
(j)
|
|
2,223
|
|
|
|
80
|
|
|
|
2,303
|
|
|
2,205
|
|
|
|
80
|
|
|
|
2,285
|
|
Other liabilities
(h)
|
|
9,889
|
|
|
|
7,149
|
|
|
|
17,038
|
|
|
9,425
|
|
|
|
371
|
|
|
|
9,796
|
|
Total
liabilities
|
|
1,345,009
|
|
|
|
6,854
|
|
|
|
1,351,683
|
|
|
1,373,662
|
|
|
|
(1,552
|
)
|
|
|
1,372,110
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock $0.01 par value; (40,000,000 authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,487,770 and 16,584,870 issued at June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
2006, respectively)
|
|
175
|
|
|
|
|
|
|
|
175
|
|
|
166
|
|
|
|
|
|
|
|
166
|
|
Additional
paid-in capital
(k)
|
|
191,223
|
|
|
|
(447
|
)
|
|
|
190,776
|
|
|
178,886
|
|
|
|
|
|
|
|
178,886
|
|
Retained earningssubstantially restricted
(l)
|
|
51,932
|
|
|
|
(5,902
|
)
|
|
|
46,030
|
|
|
60,404
|
|
|
|
(4,774
|
)
|
|
|
55,630
|
|
Accumulated
other comprehensive loss
|
|
(3,180
|
)
|
|
|
|
|
|
|
(3,180
|
)
|
|
(3,317
|
)
|
|
|
|
|
|
|
(3,317
|
)
|
Obligation of deferred compensation plan
|
|
1,277
|
|
|
|
|
|
|
|
1,277
|
|
|
1,258
|
|
|
|
|
|
|
|
1,258
|
|
Treasury stock
at cost(1,920,025 and 1,665,443 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at June 30, 2007 and 2006,
respectively)
(k)
|
|
(31,493
|
)
|
|
|
447
|
|
|
|
(31,046
|
)
|
|
(28,251
|
)
|
|
|
|
|
|
|
(28,251
|
)
|
Unallocated common stock held by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock
Ownership Plan (ESOP)
|
|
(2,733
|
)
|
|
|
(225
|
)
|
|
|
(2,958
|
)
|
|
(3,287
|
)
|
|
|
|
|
|
|
(3,287
|
)
|
Recognition and Retention Plan Trust (RRP)
|
|
(1,866
|
)
|
|
|
225
|
|
|
|
(1,641
|
)
|
|
(2,461
|
)
|
|
|
|
|
|
|
(2,461
|
)
|
Total
stockholders equity
|
|
205,335
|
|
|
|
(5,902
|
)
|
|
|
199,433
|
|
|
203,398
|
|
|
|
(4,774
|
)
|
|
|
198,624
|
|
Total liabilities and stockholders equity
|
$
|
1,550,344
|
|
|
$
|
952
|
|
|
$
|
1,551,296
|
|
|
1,577,060
|
|
|
$
|
(6,326
|
)
|
|
$
|
1,570,734
|
|
140
____________________
(a)
|
|
Adjustments primarily related to the reclassification and
elimination of certain internal deposit accounts as well as the reversal
of a reclass entry that had reduced cash at June 30, 2007 despite
settlement not occurring on the purchase of an investment security until
July 2007.
|
|
(b)
|
|
Adjustment to properly reflect a loan in process account and
classify loan suspense account write-offs to the proper
period.
|
|
(c)
|
|
Adjustment related primarily to the correction of an interest
accrual on certain classified loans.
|
|
(d)
|
|
Adjustment related to the correction of the valuation of Chester
Valley effective at the close of business on August 31, 2005.
|
|
(e)
|
|
Adjustment related to the correction of the amortization of an
identifiable intangible asset recorded with the BeneServ
acquisition.
|
|
(f)
|
|
Adjustment related to the reversal of a write-down of a property
from the Chester Valley acquisition that resulted from a bookkeeping error
and should have been reflected in the fair value of Chester Valley at the
acquisition date.
|
|
(g)
|
|
Adjustment to correct the amortization of the premium recorded on
Federal Home Loan Bank advances in connection with the acquisition of
Chester Valley.
|
|
(h)
|
|
Adjustment related primarily to the reclassification of current and
deferred income taxes, the correction of improperly recorded entries to
accounts payable as well as the reversal of a reclass entry that had
reduced cash at June 30, 2007 despite settlement not occurring on the
purchase of an investment security until July 2007.
|
|
(i)
|
|
Adjustment related to reclassification between trust preferred
securities and Federal Home Loan Bank advances to properly classify
certain borrowings.
|
|
(j)
|
|
Adjustment related to the reversal of an improper journal entry
recorded to accrued interest payable.
|
|
(k)
|
|
Adjustment related to reclassification between treasury stock and
additional paid-in capital to account for the issuance of restricted stock
out of treasury.
|
|
(l)
|
|
Adjustment related primarily to the write-off of the unreconciled
differences as well as a $365 thousand adjustment to June 30, 2004
retained earnings relating to a cash out-of-balance condition that existed
as of that date.
|
141
The
following is a summary of the adjustments to our previously issued consolidated
statements of income for the fiscal years ended June 30, 2007 and
2006.
Consolidated Statements of
Income
|
For the year
ended
|
|
For the year
ended
|
|
June 30, 200
7
|
|
June 30, 2006
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
reported
|
|
Adjustments
|
|
Restated
|
|
reported
|
|
Adjustments
|
|
Restated
|
|
(Dollars in thousands, except per share data)
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(a)
|
$
|
69,538
|
|
$
|
(223
|
)
|
|
$
|
69,315
|
|
$
|
65,472
|
|
|
$
|
|
|
|
$
|
65,472
|
|
Investment securities and interest-bearing deposits
|
|
16,735
|
|
|
|
|
|
|
16,735
|
|
|
16,058
|
|
|
|
|
|
|
|
16,058
|
|
Total interest
income
|
|
86,273
|
|
|
(223
|
)
|
|
|
86,050
|
|
|
81,530
|
|
|
|
|
|
|
|
81,530
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
28,698
|
|
|
|
|
|
|
28,698
|
|
|
18,476
|
|
|
|
|
|
|
|
18,476
|
|
Securities sold under agreements to repurchase
|
|
1,135
|
|
|
|
|
|
|
1,135
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
Borrowings
(b)
|
|
11,435
|
|
|
(206
|
)
|
|
|
11,229
|
|
|
13,534
|
|
|
|
(33
|
)
|
|
|
13,501
|
|
Total interest expense
|
|
41,268
|
|
|
(206
|
)
|
|
|
41,062
|
|
|
32,238
|
|
|
|
(33
|
)
|
|
|
32,205
|
|
Net interest income
|
|
45,005
|
|
|
(17
|
)
|
|
|
44,988
|
|
|
49,292
|
|
|
|
33
|
|
|
|
49,325
|
|
Provision for loan losses
|
|
653
|
|
|
|
|
|
|
653
|
|
|
3,205
|
|
|
|
175
|
|
|
|
3,380
|
|
Net interest income after provision for loan losses
|
|
44,352
|
|
|
(17
|
)
|
|
|
44,335
|
|
|
46,087
|
|
|
|
(142
|
)
|
|
|
45,945
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment services income, net
|
|
3,321
|
|
|
|
|
|
|
3,321
|
|
|
2,634
|
|
|
|
|
|
|
|
2,634
|
|
Income from insurance operations
|
|
637
|
|
|
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
(c)
|
|
5,438
|
|
|
(15
|
)
|
|
|
5,423
|
|
|
5,000
|
|
|
|
(20
|
)
|
|
|
4,980
|
|
Realized gain (loss) on sale of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
616
|
|
|
|
|
|
|
616
|
|
|
357
|
|
|
|
|
|
|
|
357
|
|
Investment securities available for sale
|
|
228
|
|
|
|
|
|
|
228
|
|
|
(919
|
)
|
|
|
|
|
|
|
(919
|
)
|
Real
estate
(d)
|
|
303
|
|
|
77
|
|
|
|
380
|
|
|
17
|
|
|
|
|
|
|
|
17
|
|
Gain
on termination of interest rate corridor
|
|
804
|
|
|
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(e)
|
|
1,151
|
|
|
(293
|
)
|
|
|
858
|
|
|
558
|
|
|
|
487
|
|
|
|
1,045
|
|
Total non-interest income
|
|
12,498
|
|
|
(231
|
)
|
|
|
12,267
|
|
|
7,647
|
|
|
|
467
|
|
|
|
8,114
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
(f)
|
|
24,265
|
|
|
(168
|
)
|
|
|
24,097
|
|
|
20,106
|
|
|
|
(670
|
)
|
|
|
19,436
|
|
Occupancy and equipment
|
|
8,059
|
|
|
|
|
|
|
8,059
|
|
|
6,011
|
|
|
|
|
|
|
|
6,011
|
|
Data
processing
|
|
1,504
|
|
|
|
|
|
|
1,504
|
|
|
1,220
|
|
|
|
|
|
|
|
1,220
|
|
Advertising
|
|
2,041
|
|
|
|
|
|
|
2,041
|
|
|
1,504
|
|
|
|
|
|
|
|
1,504
|
|
Deposit insurance premiums
|
|
120
|
|
|
|
|
|
|
120
|
|
|
124
|
|
|
|
|
|
|
|
124
|
|
Amortization of intangible assets
(g)
|
|
2,043
|
|
|
88
|
|
|
|
2,131
|
|
|
1,928
|
|
|
|
|
|
|
|
1,928
|
|
Professional fees
|
|
2,444
|
|
|
|
|
|
|
2,444
|
|
|
2,303
|
|
|
|
|
|
|
|
2,303
|
|
Other expense
(h)
|
|
4,583
|
|
|
1,470
|
|
|
|
6,053
|
|
|
4,206
|
|
|
|
7,650
|
|
|
|
11,856
|
|
Total non-interest expense
|
|
45,059
|
|
|
1,390
|
|
|
|
46,449
|
|
|
37,402
|
|
|
|
6,980
|
|
|
|
44,382
|
|
Income before income taxes
|
|
11,791
|
|
|
(1,638
|
)
|
|
|
10,153
|
|
|
16,332
|
|
|
|
(6,655
|
)
|
|
|
9,677
|
|
Income tax expense
(i)
|
|
3,396
|
|
|
(510
|
)
|
|
|
2,886
|
|
|
5,256
|
|
|
|
(2,246
|
)
|
|
|
3,010
|
|
Net Income
|
$
|
8,395
|
|
$
|
(1,128
|
)
|
|
$
|
7,267
|
|
$
|
11,076
|
|
|
$
|
(4,409
|
)
|
|
$
|
6,667
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.55
|
|
|
(0.07
|
)
|
|
|
0.48
|
|
|
0.79
|
|
|
|
(0.32
|
)
|
|
|
0.47
|
|
Diluted
|
|
0.54
|
|
|
(0.07
|
)
|
|
|
0.47
|
|
|
0.77
|
|
|
|
(0.31
|
)
|
|
|
0.46
|
|
____________________
(a)
|
|
Adjustment related primarily to the correction of an interest
accrual on certain classified loans.
|
|
(b)
|
|
Adjustment to correct the amortization of a premium on Federal Home
Loan Bank advances as well as the correction of an accrual on trust
preferred securities.
|
142
(c)
|
|
Adjustment for proper amortization of mortgage servicing
rights.
|
|
(d)
|
|
Adjustment related to the reversal of a write-down of a
property from the Chester Valley acquisition that resulted from a
bookkeeping error and should have been reflected in the fair value of
Chester Valley at the acquisition date.
|
|
(e)
|
|
Adjustment related to proper classification of the
change in the fair market value of certain interest rate
swaps.
|
|
(f)
|
|
Adjustment related to correction of the accrual for
certain commissions earned but unpaid at the date of the balance sheet as
well as properly recording salary expense relating to the Chester Valley
acquisition.
|
|
(g)
|
|
Adjustment related to the correction of the amortization
of an identifiable intangible asset recorded with the BeneServ
acquisition.
|
|
(h)
|
|
Adjustment related primarily to the write-off of the
unidentified differences in the year ended June 30, 2006 as well as
identified reconciliation differences in the year ended June 30,
2007.
|
|
(i)
|
|
Adjustment related to the tax effect of the above
adjustments.
|
143
The
following tables present unaudited operating information for each quarter within
the two most recent years. Included herein is restated financial information for
interim periods of 2007 and 2006. The earnings per share amounts for periods
prior to March 31, 2007 have been adjusted to give retroactive effect to the 5%
stock dividend. In addition, as a result of the matters discussed above, the
amounts reported for each quarter in the fiscal years ended June 30, 2007 and
2006 have been revised from previously reported amounts. The adjustments
presented relate to the allocation of adjustments annotated above to the proper
reporting period in the years ended June 30, 2007 and 2006.
|
For the three months
ended
|
|
For the three months
ended
|
|
June 30,
2007
|
|
March 31,
200
7
|
|
As
|
|
|
|
|
|
As
|
|
As
|
|
|
|
|
|
As
|
|
r
eported
|
|
Adjustments
|
|
restated
|
|
reported
|
|
Adjustments
|
|
r
estated
|
|
(Dollars in thousands, except per share data)
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
17,512
|
|
$
|
(58
|
)
|
|
$
|
17,454
|
|
|
$
|
17,193
|
|
$
|
(125
|
)
|
|
$
|
17,068
|
Investment securities and interest-bearing deposits
|
|
4,200
|
|
|
|
|
|
|
4,200
|
|
|
|
4,054
|
|
|
|
|
|
|
4,054
|
Total interest
income
|
|
21,712
|
|
|
(58
|
)
|
|
|
21,654
|
|
|
|
21,247
|
|
|
(125
|
)
|
|
|
21,122
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
7,843
|
|
|
31
|
|
|
|
7,874
|
|
|
|
7,247
|
|
|
(32
|
)
|
|
|
7,215
|
Securities sold under agreements to repurchase
|
|
358
|
|
|
|
|
|
|
358
|
|
|
|
269
|
|
|
|
|
|
|
269
|
Borrowings
|
|
2,478
|
|
|
24
|
|
|
|
2,502
|
|
|
|
2,874
|
|
|
23
|
|
|
|
2,897
|
Total interest expense
|
|
10,679
|
|
|
55
|
|
|
|
10,734
|
|
|
|
10,390
|
|
|
(9
|
)
|
|
|
10,381
|
Net interest
income
|
|
11,033
|
|
|
(113
|
)
|
|
|
10,920
|
|
|
|
10,857
|
|
|
(116
|
)
|
|
|
10,741
|
Provision for loan losses
|
|
753
|
|
|
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income after provision for loan losses
|
|
10,280
|
|
|
(113
|
)
|
|
|
10,167
|
|
|
|
10,857
|
|
|
(116
|
)
|
|
|
10,741
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment services income, net
|
|
769
|
|
|
|
|
|
|
769
|
|
|
|
946
|
|
|
|
|
|
|
946
|
Income from insurance operations
|
|
637
|
|
|
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
1,304
|
|
|
3
|
|
|
|
1,307
|
|
|
|
1,380
|
|
|
(6
|
)
|
|
|
1,374
|
Realized gain (loss) on sale of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
177
|
|
|
|
|
|
|
177
|
|
|
|
192
|
|
|
|
|
|
|
192
|
Investment securities available for sale
|
|
14
|
|
|
|
|
|
|
14
|
|
|
|
100
|
|
|
|
|
|
|
100
|
Real
estate
|
|
380
|
|
|
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on termination of interest rate corridor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
225
|
|
|
218
|
|
|
|
443
|
|
|
|
310
|
|
|
(24
|
)
|
|
|
286
|
Total non-interest income
|
|
3,506
|
|
|
221
|
|
|
|
3,727
|
|
|
|
2,928
|
|
|
(30
|
)
|
|
|
2,898
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
6,535
|
|
|
(264
|
)
|
|
|
6,271
|
|
|
|
6,081
|
|
|
95
|
|
|
|
6,176
|
Occupancy and equipment
|
|
2,091
|
|
|
|
|
|
|
2,091
|
|
|
|
2,081
|
|
|
|
|
|
|
2,081
|
Data
processing
|
|
428
|
|
|
|
|
|
|
428
|
|
|
|
358
|
|
|
|
|
|
|
358
|
Advertising
|
|
522
|
|
|
|
|
|
|
522
|
|
|
|
557
|
|
|
|
|
|
|
557
|
Deposit insurance premiums
|
|
30
|
|
|
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
30
|
Amortization of intangible assets
|
|
382
|
|
|
88
|
|
|
|
470
|
|
|
|
543
|
|
|
|
|
|
|
543
|
Professional fees
|
|
770
|
|
|
|
|
|
|
770
|
|
|
|
593
|
|
|
|
|
|
|
593
|
Other expense
|
|
1,533
|
|
|
1,058
|
|
|
|
2,591
|
|
|
|
1,008
|
|
|
87
|
|
|
|
1,095
|
Total non-interest expense
|
|
12,291
|
|
|
882
|
|
|
|
13,173
|
|
|
|
11,251
|
|
|
182
|
|
|
|
11,433
|
Income before
income taxes
|
|
1,495
|
|
|
(774
|
)
|
|
|
721
|
|
|
|
2,534
|
|
|
(328
|
)
|
|
|
2,206
|
Income tax expense
|
|
178
|
|
|
(221
|
)
|
|
|
(43
|
)
|
|
|
812
|
|
|
(108
|
)
|
|
|
704
|
Net
Income
|
$
|
1,317
|
|
$
|
(553
|
)
|
|
$
|
764
|
|
|
$
|
1,722
|
|
$
|
(220
|
)
|
|
$
|
1,502
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.09
|
|
|
(0.04
|
)
|
|
|
0.05
|
|
|
|
0.12
|
|
|
(0.02
|
)
|
|
|
0.10
|
Diluted
|
|
0.09
|
|
|
(0.04
|
)
|
|
|
0.05
|
|
|
|
0.11
|
|
|
(0.01
|
)
|
|
|
0.10
|
See accompanying notes to the annual
restatement tables
144
|
For the three months
ended
|
|
|
For the three months
ended
|
|
D
ecember 31, 2006
|
|
S
eptember 30, 200
6
|
|
As
|
|
|
|
|
|
|
As
|
|
As
|
|
|
|
|
|
|
As
|
|
r
eported
|
|
Adjustments
|
|
r
estated
|
|
reported
|
|
Adjustments
|
|
restated
|
|
(Dollars in thousands, except per share data)
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
17,150
|
|
|
$
|
(40
|
)
|
|
$
|
17,110
|
|
|
$
|
17,683
|
|
|
|
$
|
|
|
|
$
|
17,683
|
|
Investment securities and interest-bearing deposits
|
|
4,274
|
|
|
|
|
|
|
|
4,274
|
|
|
|
4,207
|
|
|
|
|
|
|
|
|
4,207
|
|
Total interest
income
|
|
21,424
|
|
|
|
(40
|
)
|
|
|
21,384
|
|
|
|
21,890
|
|
|
|
|
|
|
|
|
21,890
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
7,113
|
|
|
|
|
|
|
|
7,113
|
|
|
|
6,495
|
|
|
|
|
|
|
|
|
6,495
|
|
Securities sold under agreements to repurchase
|
|
253
|
|
|
|
|
|
|
|
253
|
|
|
|
255
|
|
|
|
|
|
|
|
|
255
|
|
Borrowings
|
|
3,075
|
|
|
|
(45
|
)
|
|
|
3,030
|
|
|
|
3,008
|
|
|
|
|
(207
|
)
|
|
|
2,801
|
|
Total interest expense
|
|
10,441
|
|
|
|
(45
|
)
|
|
|
10,396
|
|
|
|
9,758
|
|
|
|
|
(207
|
)
|
|
|
9,551
|
|
Net interest
income
|
|
10,983
|
|
|
|
5
|
|
|
|
10,988
|
|
|
|
12,132
|
|
|
|
|
207
|
|
|
|
12,339
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
(100
|
)
|
Net interest
income after provision for loan losses
|
|
10,983
|
|
|
|
5
|
|
|
|
10,988
|
|
|
|
12,232
|
|
|
|
|
207
|
|
|
|
12,439
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment services income, net
|
|
858
|
|
|
|
|
|
|
|
858
|
|
|
|
748
|
|
|
|
|
|
|
|
|
748
|
|
Income from insurance operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
1,311
|
|
|
|
(6
|
)
|
|
|
1,305
|
|
|
|
1,443
|
|
|
|
|
(6
|
)
|
|
|
1,437
|
|
Realized gain (loss) on sale of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
94
|
|
|
|
|
|
|
|
94
|
|
|
|
153
|
|
|
|
|
|
|
|
|
153
|
|
Investment securities available for sale
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
77
|
|
|
|
|
|
Gain
on termination of interest rate corridor
|
|
804
|
|
|
|
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
157
|
|
|
|
|
|
|
|
157
|
|
|
|
459
|
|
|
|
|
(487
|
)
|
|
|
(28
|
)
|
Total non-interest income
|
|
3,338
|
|
|
|
(6
|
)
|
|
|
3,332
|
|
|
|
2,726
|
|
|
|
|
(416
|
)
|
|
|
2,310
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
5,779
|
|
|
|
|
|
|
|
5,779
|
|
|
|
5,871
|
|
|
|
|
|
|
|
|
5,871
|
|
Occupancy and equipment
|
|
1,979
|
|
|
|
|
|
|
|
1,979
|
|
|
|
1,908
|
|
|
|
|
|
|
|
|
1,908
|
|
Data
processing
|
|
369
|
|
|
|
|
|
|
|
369
|
|
|
|
349
|
|
|
|
|
|
|
|
|
349
|
|
Advertising
|
|
568
|
|
|
|
|
|
|
|
568
|
|
|
|
394
|
|
|
|
|
|
|
|
|
394
|
|
Deposit insurance premiums
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
|
|
30
|
|
Amortization of intangible assets
|
|
543
|
|
|
|
|
|
|
|
543
|
|
|
|
575
|
|
|
|
|
|
|
|
|
575
|
|
Professional fees
|
|
549
|
|
|
|
|
|
|
|
549
|
|
|
|
532
|
|
|
|
|
|
|
|
|
532
|
|
Other expense
|
|
1,030
|
|
|
|
40
|
|
|
|
1,070
|
|
|
|
1,011
|
|
|
|
|
286
|
|
|
|
1,297
|
|
Total non-interest expense
|
|
10,847
|
|
|
|
40
|
|
|
|
10,887
|
|
|
|
10,670
|
|
|
|
|
286
|
|
|
|
10,956
|
|
Income before
income taxes
|
|
3,474
|
|
|
|
(41
|
)
|
|
|
3,433
|
|
|
|
4,288
|
|
|
|
|
(495
|
)
|
|
|
3,793
|
|
Income tax expense
|
|
1,039
|
|
|
|
(14
|
)
|
|
|
1,025
|
|
|
|
1,367
|
|
|
|
|
(167
|
)
|
|
|
1,200
|
|
Net
Income
|
$
|
2,435
|
|
|
$
|
(27
|
)
|
|
$
|
2,408
|
|
|
$
|
2,921
|
|
|
|
$
|
(328
|
)
|
|
$
|
2,593
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.16
|
|
|
|
(0.00
|
)
|
|
|
0.16
|
|
|
|
0.19
|
|
|
|
|
(0.02
|
)
|
|
|
0.17
|
|
Diluted
|
|
0.16
|
|
|
|
(0.00
|
)
|
|
|
0.16
|
|
|
|
0.19
|
|
|
|
|
(0.02
|
)
|
|
|
0.17
|
|
See accompanying notes to the annual
restatement tables
145
|
For the three months ended
|
|
For the three months ended
|
|
June 30,
2006
|
|
M
arch 31, 2006
|
|
Adjustment
|
|
Adjustment
|
|
As
|
|
|
|
|
|
As
|
|
As
|
|
|
|
|
|
As
|
|
reported
|
|
$
|
|
restated
|
|
r
eported
|
|
$
|
|
r
estated
|
|
(dollars in thousands, except per share
data)
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
18,271
|
|
|
$
|
|
|
|
$
|
18,271
|
|
|
$
|
17,957
|
|
$
|
|
|
|
$
|
17,957
|
Investment securities and
interest-bearing deposits
|
|
4,290
|
|
|
|
|
|
|
|
4,290
|
|
|
|
3,835
|
|
|
|
|
|
|
3,835
|
Total interest income
|
|
22,561
|
|
|
|
|
|
|
|
22,561
|
|
|
|
21,792
|
|
|
|
|
|
|
21,792
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
5,678
|
|
|
|
|
|
|
|
5,678
|
|
|
|
4,999
|
|
|
|
|
|
|
4,999
|
Securities sold under
agreements to repurchase
|
|
(15
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
3,663
|
|
|
|
3
|
|
|
|
3,666
|
|
|
|
3,587
|
|
|
(5
|
)
|
|
|
3,582
|
Total interest expense
|
|
9,326
|
|
|
|
3
|
|
|
|
9,329
|
|
|
|
8,586
|
|
|
(5
|
)
|
|
|
8,581
|
Net interest income
|
|
13,235
|
|
|
|
(3
|
)
|
|
|
13,232
|
|
|
|
13,206
|
|
|
5
|
|
|
|
13,211
|
Provision for loan losses
|
|
2,485
|
|
|
|
175
|
|
|
|
2,660
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
10,750
|
|
|
|
(178
|
)
|
|
|
10,572
|
|
|
|
13,206
|
|
|
5
|
|
|
|
13,211
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment services
income, net
|
|
899
|
|
|
|
|
|
|
|
899
|
|
|
|
705
|
|
|
|
|
|
|
705
|
Income from insurance
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and
fees
|
|
1,746
|
|
|
|
(6
|
)
|
|
|
1,740
|
|
|
|
1,126
|
|
|
(7
|
)
|
|
|
1,119
|
Realized gain (loss) on
sale of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
26
|
|
|
|
|
|
|
|
26
|
|
|
|
77
|
|
|
|
|
|
|
77
|
Investment securities available for sale
|
|
38
|
|
|
|
|
|
|
|
38
|
|
|
|
19
|
|
|
|
|
|
|
19
|
Real
estate
|
|
17
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
Gain on termination of
interest rate corridor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
154
|
|
|
|
157
|
|
|
|
311
|
|
|
|
151
|
|
|
198
|
|
|
|
349
|
Total non-interest income
|
|
2,880
|
|
|
|
151
|
|
|
|
3,031
|
|
|
|
2,078
|
|
|
191
|
|
|
|
2,269
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
5,097
|
|
|
|
|
|
|
|
5,097
|
|
|
|
5,039
|
|
|
|
|
|
|
5,039
|
Occupancy and
equipment
|
|
1,977
|
|
|
|
|
|
|
|
1,977
|
|
|
|
1,753
|
|
|
|
|
|
|
1,753
|
Data
processing
|
|
238
|
|
|
|
|
|
|
|
238
|
|
|
|
304
|
|
|
|
|
|
|
304
|
Advertising
|
|
729
|
|
|
|
|
|
|
|
729
|
|
|
|
264
|
|
|
|
|
|
|
264
|
Deposit insurance
premiums
|
|
31
|
|
|
|
|
|
|
|
31
|
|
|
|
33
|
|
|
|
|
|
|
33
|
Amortization of
intangible assets
|
|
576
|
|
|
|
|
|
|
|
576
|
|
|
|
587
|
|
|
|
|
|
|
587
|
Professional
fees
|
|
641
|
|
|
|
|
|
|
|
641
|
|
|
|
443
|
|
|
|
|
|
|
443
|
Other expense
|
|
1,001
|
|
|
|
497
|
|
|
|
1,498
|
|
|
|
1,080
|
|
|
|
|
|
|
1,080
|
Total non-interest expense
|
|
10,290
|
|
|
|
497
|
|
|
|
10,787
|
|
|
|
9,503
|
|
|
|
|
|
|
9,503
|
Income before income taxes
|
|
3,340
|
|
|
|
(524
|
)
|
|
|
2,816
|
|
|
|
5,781
|
|
|
196
|
|
|
|
5,977
|
Income tax expense
|
|
991
|
|
|
|
(178
|
)
|
|
|
813
|
|
|
|
1,857
|
|
|
67
|
|
|
|
1,924
|
Net Income
|
$
|
2,349
|
|
|
$
|
(346
|
)
|
|
$
|
2,003
|
|
|
$
|
3,924
|
|
$
|
129
|
|
|
$
|
4,053
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.16
|
|
|
|
(0.03
|
)
|
|
|
0.13
|
|
|
|
0.25
|
|
|
0.02
|
|
|
|
0.27
|
Diluted
|
|
0.15
|
|
|
|
(0.02
|
)
|
|
|
0.13
|
|
|
|
0.25
|
|
|
0.02
|
|
|
|
0.27
|
See accompanying notes to the annual
restatement tables
146
|
For the three months ended
|
|
For the three months
ended
|
|
December 31,
2005
|
|
September 30,
2005
|
|
Adjustment
|
|
Adjustment
|
|
As
|
|
|
|
|
|
As
|
|
As
|
|
|
|
|
As
|
|
r
eported
|
|
$
|
|
r
estated
|
|
reported
|
|
$
|
|
restated
|
|
(dollars in thousands, except per share data)
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
17,495
|
|
$
|
|
|
|
$
|
17,495
|
|
$
|
11,749
|
|
|
|
|
|
$
|
11,749
|
|
Investment securities and
interest-bearing deposits
|
|
4,110
|
|
|
|
|
|
|
4,110
|
|
|
3,823
|
|
|
|
|
|
|
3,823
|
|
Total interest income
|
|
21,605
|
|
|
|
|
|
|
21,605
|
|
|
15,572
|
|
|
|
|
|
|
15,572
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
4,424
|
|
|
|
|
|
|
4,424
|
|
|
3,375
|
|
|
|
|
|
|
3,375
|
|
Securities sold under
agreements to repurchase
|
|
243
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
3,304
|
|
|
(31
|
)
|
|
|
3,273
|
|
|
2,980
|
|
|
|
|
|
|
2,980
|
|
Total interest expense
|
|
7,971
|
|
|
(31
|
)
|
|
|
7,940
|
|
|
6,355
|
|
|
|
|
|
|
6,355
|
|
Net interest income
|
|
13,634
|
|
|
31
|
|
|
|
13,665
|
|
|
9,217
|
|
|
|
|
|
|
9,217
|
|
Provision for loan losses
|
|
207
|
|
|
|
|
|
|
207
|
|
|
513
|
|
|
|
|
|
|
513
|
|
Net interest income after provision for loan losses
|
|
13,427
|
|
|
31
|
|
|
|
13,458
|
|
|
8,704
|
|
|
|
|
|
|
8,704
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment services
income, net
|
|
681
|
|
|
|
|
|
|
681
|
|
|
349
|
|
|
|
|
|
|
349
|
|
Income from insurance
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and
fees
|
|
1,301
|
|
|
(7
|
)
|
|
|
1,294
|
|
|
827
|
|
|
|
|
|
|
827
|
|
Realized gain (loss) on
sale of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
140
|
|
|
|
|
|
|
140
|
|
|
114
|
|
|
|
|
|
|
114
|
|
Investment securities available for sale
|
|
45
|
|
|
|
|
|
|
45
|
|
|
(1,021
|
)
|
|
|
|
|
|
(1,021
|
)
|
Real
estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on termination of
interest rate corridor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
159
|
|
|
53
|
|
|
|
212
|
|
|
94
|
|
|
79
|
|
|
|
173
|
|
Total non-interest income
|
|
2,326
|
|
|
46
|
|
|
|
2,372
|
|
|
363
|
|
|
79
|
|
|
|
442
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
5,560
|
|
|
(167
|
)
|
|
|
5,393
|
|
|
4,410
|
|
|
(503
|
)
|
|
|
3,907
|
|
Occupancy and
equipment
|
|
1,372
|
|
|
|
|
|
|
1,372
|
|
|
909
|
|
|
|
|
|
|
909
|
|
Data
processing
|
|
343
|
|
|
|
|
|
|
343
|
|
|
335
|
|
|
|
|
|
|
335
|
|
Advertising
|
|
358
|
|
|
|
|
|
|
358
|
|
|
153
|
|
|
|
|
|
|
153
|
|
Deposit insurance
premiums
|
|
35
|
|
|
|
|
|
|
35
|
|
|
25
|
|
|
|
|
|
|
25
|
|
Amortization of
intangible assets
|
|
587
|
|
|
|
|
|
|
587
|
|
|
178
|
|
|
|
|
|
|
178
|
|
Professional
fees
|
|
510
|
|
|
|
|
|
|
510
|
|
|
709
|
|
|
|
|
|
|
709
|
|
Other
expense
|
|
1,002
|
|
|
2,736
|
|
|
|
3,738
|
|
|
1,123
|
|
|
4,417
|
|
|
|
5,540
|
|
Total non-interest expense
|
|
9,767
|
|
|
2,569
|
|
|
|
12,336
|
|
|
7,842
|
|
|
3,914
|
|
|
|
11,756
|
|
Income before income taxes
|
|
5,986
|
|
|
(2,492
|
)
|
|
|
3,494
|
|
|
1,225
|
|
|
(3,835
|
)
|
|
|
(2,610
|
)
|
Income tax expense
|
|
2,109
|
|
|
(849
|
)
|
|
|
1,260
|
|
|
299
|
|
|
(1,286
|
)
|
|
|
(987
|
)
|
Net Income
|
$
|
3,877
|
|
$
|
(1,643
|
)
|
|
$
|
2,234
|
|
$
|
926
|
|
|
(2,549
|
)
|
|
|
(1,623
|
)
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.26
|
|
|
(0.11
|
)
|
|
|
0.15
|
|
|
0.08
|
|
|
(0.23
|
)
|
|
|
(0.15
|
)
|
Diluted
|
|
0.26
|
|
|
(0.11
|
)
|
|
|
0.15
|
|
|
0.08
|
|
|
(0.22
|
)
|
|
|
(0.14
|
)
|
See accompanying notes to the annual
restatement tables
147
The
following tables present a reconciliation of the effects of adjustments made to
the Companys previously reported interim statements of financial condition for
2007 and 2006:
|
March
31,
200
7
|
|
As reported
|
|
Adjustment
s
|
|
As Restated
|
|
(Dollars in thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and
non-interest-earning deposits
|
$
|
28,464
|
|
|
$ (5,240
|
)
|
|
$
|
23,224
|
|
Interest-bearing
deposits
|
|
35,774
|
|
|
(1,388
|
)
|
|
|
34,386
|
|
Total cash and cash equivalents
|
|
64,238
|
|
|
(6,628
|
)
|
|
|
57,610
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
1,116
|
|
|
|
|
|
|
1,116
|
|
Available for sale
(amortized cost of $169,373)
|
|
167,236
|
|
|
|
|
|
|
167,236
|
|
Held to maturity (fair value of
$91,736)
|
|
93,107
|
|
|
|
|
|
|
93,107
|
|
Federal Home Loan Bank Stock
|
|
13,298
|
|
|
|
|
|
|
13,298
|
|
Loans (net of allowance for loan losses)
|
|
1,028,731
|
|
|
(446
|
)
|
|
|
1,028,285
|
|
Loans held for sale
|
|
5,926
|
|
|
|
|
|
|
5,926
|
|
Accrued interest receivable
|
|
6,599
|
|
|
|
|
|
|
6,599
|
|
Property and equipment, net
|
|
11,075
|
|
|
|
|
|
|
11,075
|
|
Bank owned life insurance
|
|
11,814
|
|
|
|
|
|
|
11,814
|
|
Real estate owned
|
|
1,991
|
|
|
|
|
|
|
1,991
|
|
Other intangible assets, net
|
|
11,315
|
|
|
|
|
|
|
11,315
|
|
Goodwill
|
|
98,595
|
|
|
497
|
|
|
|
99,092
|
|
Other assets
|
|
18,256
|
|
|
(717
|
)
|
|
|
17,539
|
|
Total assets
|
$
|
1,533,297
|
|
|
$ (7,294
|
)
|
|
$
|
1,526,003
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
$
|
898,460
|
|
|
$ 14,132
|
|
|
$
|
912,592
|
|
Non-interest-bearing deposits
|
|
161,643
|
|
|
(16,494
|
)
|
|
|
145,149
|
|
Securities sold under agreements to repurchase
|
|
30,000
|
|
|
|
|
|
|
30,000
|
|
Federal Home Loan Bank advances
|
|
195,073
|
|
|
(208
|
)
|
|
|
194,865
|
|
Advance payments from borrowers for taxes
|
|
3,208
|
|
|
|
|
|
|
3,208
|
|
Trust preferred securities
|
|
25,694
|
|
|
|
|
|
|
25,694
|
|
Accrued interest payable
|
|
2,316
|
|
|
80
|
|
|
|
2,396
|
|
Other liabilities
|
|
8,064
|
|
|
534
|
|
|
|
8,598
|
|
Total liabilities
|
|
1,324,458
|
|
|
(1,956
|
)
|
|
|
1,322,502
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 40,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
|
|
17,417,278
issued
|
|
174
|
|
|
|
|
|
|
174
|
|
Additional paid-in capital
|
|
180,563
|
|
|
(426
|
)
|
|
|
180,137
|
|
Retained earningssubstantially restricted
|
|
62,226
|
|
|
(5,338
|
)
|
|
|
56,888
|
|
Accumulated other comprehensive loss
|
|
(1,409
|
)
|
|
|
|
|
|
(1,409
|
)
|
Obligation of deferred compensation plan
|
|
1,241
|
|
|
|
|
|
|
1,241
|
|
Treasury stock at cost (1,705,452 shares at March 31,
2007)
|
|
(29,060
|
)
|
|
426
|
|
|
|
(28,634
|
)
|
Unallocated common stock held by:
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Ownership
Plan (ESOP)
|
|
(2,759
|
)
|
|
|
|
|
|
(2,759
|
)
|
Recognition and Retention
Plan Trust (RRP)
|
|
(2,137
|
)
|
|
|
|
|
|
(2,137
|
)
|
Total stockholders equity
|
|
208,839
|
|
|
(5,338
|
)
|
|
|
203,501
|
|
Total liabilities and stockholders equity
|
$
|
1,533,297
|
|
|
$
(7,294
|
)
|
|
$
|
1,526,003
|
|
See accompanying notes to the annual
restatement tables
148
|
D
ecember 31, 200
6
|
|
S
eptember 30, 200
6
|
|
Adjustment
|
|
Adjustment
|
|
As
|
|
|
|
|
|
As
|
|
As
|
|
|
|
|
|
As
|
|
reported
|
|
$
|
|
restated
|
|
reported
|
|
$
|
|
restated
|
|
(dollars in thousands, except per share data)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and
non-interest-earning deposits
|
$
|
24,840
|
|
|
$
|
(2,312
|
)
|
|
$
|
22,528
|
|
|
$
|
27,306
|
|
|
$
|
(779
|
)
|
|
$
|
26,527
|
|
Interest-bearing
deposits
|
|
27,414
|
|
|
|
(2,971
|
)
|
|
|
24,443
|
|
|
|
17,429
|
|
|
|
(250
|
)
|
|
|
17,179
|
|
Total cash and cash equivalents
|
|
52,254
|
|
|
|
(5,283
|
)
|
|
|
46,971
|
|
|
|
44,735
|
|
|
|
(1,029
|
)
|
|
|
43,706
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
1,012
|
|
|
|
|
|
|
|
1,012
|
|
|
|
1,012
|
|
|
|
|
|
|
|
1,012
|
|
Available for sale
(amortized cost of $181,940 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$206,471,
respectively)
|
|
179,324
|
|
|
|
|
|
|
|
179,324
|
|
|
|
203,567
|
|
|
|
|
|
|
|
203,567
|
|
Held to maturity (fair
value of $95,513 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$102,087, respectively)
|
|
97,384
|
|
|
|
|
|
|
|
97,384
|
|
|
|
101,455
|
|
|
|
|
|
|
|
101,455
|
|
Federal Home Loan Bank Stock
|
|
13,551
|
|
|
|
|
|
|
|
13,551
|
|
|
|
14,580
|
|
|
|
|
|
|
|
14,580
|
|
Loans (net of allowance for loan losses)
|
|
1,035,671
|
|
|
|
(321
|
)
|
|
|
1,035,350
|
|
|
|
1,029,281
|
|
|
|
(281
|
)
|
|
|
1,029,000
|
|
Loans held for sale
|
|
5,052
|
|
|
|
|
|
|
|
5,052
|
|
|
|
3,829
|
|
|
|
|
|
|
|
3,829
|
|
Accrued interest receivable
|
|
6,323
|
|
|
|
|
|
|
|
6,323
|
|
|
|
6,474
|
|
|
|
|
|
|
|
6,474
|
|
Property and equipment, net
|
|
11,494
|
|
|
|
(452
|
)
|
|
|
11,042
|
|
|
|
10,743
|
|
|
|
|
|
|
|
10,743
|
|
Bank owned life insurance
|
|
11,695
|
|
|
|
|
|
|
|
11,695
|
|
|
|
11,591
|
|
|
|
|
|
|
|
11,591
|
|
Real estate owned
|
|
2,016
|
|
|
|
|
|
|
|
2,016
|
|
|
|
2,003
|
|
|
|
|
|
|
|
2,003
|
|
Other intangible assets, net
|
|
11,858
|
|
|
|
|
|
|
|
11,858
|
|
|
|
12,401
|
|
|
|
|
|
|
|
12,401
|
|
Goodwill
|
|
94,072
|
|
|
|
497
|
|
|
|
94,569
|
|
|
|
94,072
|
|
|
|
497
|
|
|
|
94,569
|
|
Other assets
|
|
17,861
|
|
|
|
163
|
|
|
|
18,024
|
|
|
|
17,413
|
|
|
|
(748
|
)
|
|
|
16,665
|
|
Total assets
|
$
|
1,539,567
|
|
|
$
|
(5,396
|
)
|
|
$
|
1,534,171
|
|
|
$
|
1,553,156
|
|
|
$
|
(1,561
|
)
|
|
$
|
1,551,595
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
$
|
876,924
|
|
|
$
|
12,022
|
|
|
$
|
888,946
|
|
|
$
|
870,441
|
|
|
$
|
39,531
|
|
|
$
|
909,972
|
|
Non-interest-bearing deposits
|
|
160,302
|
|
|
|
(13,203
|
)
|
|
|
147,099
|
|
|
|
158,195
|
|
|
|
(37,944
|
)
|
|
|
120,251
|
|
Securities sold under agreements to repurchase
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
Federal Home Loan Bank advances
|
|
220,816
|
|
|
|
(231
|
)
|
|
|
220,585
|
|
|
|
245,664
|
|
|
|
(185
|
)
|
|
|
245,479
|
|
Advance payments from borrowers for taxes
|
|
3,396
|
|
|
|
|
|
|
|
3,396
|
|
|
|
2,414
|
|
|
|
|
|
|
|
2,414
|
|
Trust preferred securities
|
|
36,065
|
|
|
|
|
|
|
|
36,065
|
|
|
|
36,101
|
|
|
|
|
|
|
|
36,101
|
|
Accrued interest payable
|
|
2,529
|
|
|
|
81
|
|
|
|
2,610
|
|
|
|
2,229
|
|
|
|
80
|
|
|
|
2,309
|
|
Other liabilities
|
|
10,905
|
|
|
|
1,063
|
|
|
|
11,968
|
|
|
|
10,600
|
|
|
|
2,058
|
|
|
|
12,658
|
|
Total liabilities
|
|
1,330,937
|
|
|
|
(268
|
)
|
|
|
1,330,669
|
|
|
|
1,345,644
|
|
|
|
3,540
|
|
|
|
1,349,184
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 40,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized; 16,633,575
and 16,612,445 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued at December 31,
2006, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 2006,
respectively
|
|
166
|
|
|
|
|
|
|
|
166
|
|
|
|
166
|
|
|
|
|
|
|
|
166
|
|
Additional paid-in capital
|
|
179,855
|
|
|
|
|
|
|
|
179,855
|
|
|
|
179,344
|
|
|
|
|
|
|
|
179,344
|
|
Retained earningssubstantially restricted
|
|
62,367
|
|
|
|
(5,128
|
)
|
|
|
57,239
|
|
|
|
61,656
|
|
|
|
(5,101
|
)
|
|
|
56,555
|
|
Accumulated other comprehensive loss
|
|
(1,714
|
)
|
|
|
|
|
|
|
(1,714
|
)
|
|
|
(1,333
|
)
|
|
|
|
|
|
|
(1,333
|
)
|
Obligation of deferred compensation plan
|
|
1,369
|
|
|
|
|
|
|
|
1,369
|
|
|
|
1,369
|
|
|
|
|
|
|
|
1,369
|
|
Treasury stock at cost (1,665,443 shares at
both
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, and
September 30, 2006)
|
|
(28,251
|
)
|
|
|
|
|
|
|
(28,251
|
)
|
|
|
(28,251
|
)
|
|
|
|
|
|
|
(28,251
|
)
|
Unallocated common stock held by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Ownership
Plan (ESOP)
|
|
(2,839
|
)
|
|
|
|
|
|
|
(2,839
|
)
|
|
|
(2,949
|
)
|
|
|
|
|
|
|
(2,949
|
)
|
Recognition and Retention
Plan Trust (RRP)
|
|
(2,323
|
)
|
|
|
|
|
|
|
(2,323
|
)
|
|
|
(2,490
|
)
|
|
|
|
|
|
|
(2,490
|
)
|
Total stockholders equity
|
|
208,630
|
|
|
|
(5,128
|
)
|
|
|
203,502
|
|
|
|
207,512
|
|
|
|
(5,101
|
)
|
|
|
202,411
|
|
Total liabilities and stockholders equity
|
$
|
1,539,567
|
|
|
$
|
(5,396
|
)
|
|
$
|
1,534,171
|
|
|
$
|
1,553,156
|
|
|
$
|
(1,561
|
)
|
|
$
|
1,551,595
|
|
See accompanying notes to the annual
restatement tables
149
|
March 31,
200
6
|
|
As reported
|
|
Adjustments
|
|
As Restated
|
|
(Dollars in thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and
non-interest-earning deposits
|
$
|
19,808
|
|
|
$ (6,043
|
)
|
|
$
|
13,765
|
|
Interest-bearing
deposits
|
|
13,650
|
|
|
(1,664
|
)
|
|
|
11,986
|
|
Total cash and cash equivalents
|
|
33,458
|
|
|
(7,707
|
)
|
|
|
25,751
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
885
|
|
|
|
|
|
|
885
|
|
Available for sale
(amortized cost of $210,603)
|
|
205,317
|
|
|
|
|
|
|
205,317
|
|
Held to maturity (fair
value of $106,814)
|
|
110,268
|
|
|
|
|
|
|
110,268
|
|
Federal Home Loan Bank Stock
|
|
19,507
|
|
|
|
|
|
|
19,507
|
|
Loans (net of allowance for loan losses)
|
|
1,081,848
|
|
|
(118
|
)
|
|
|
1,081,730
|
|
Loans held for sale
|
|
3,035
|
|
|
|
|
|
|
3,035
|
|
Accrued interest receivable
|
|
6,182
|
|
|
|
|
|
|
6,182
|
|
Property and equipment, net
|
|
10,418
|
|
|
(77
|
)
|
|
|
10,341
|
|
Bank owned life insurance
|
|
11,379
|
|
|
|
|
|
|
11,379
|
|
Real estate owned
|
|
50
|
|
|
|
|
|
|
50
|
|
Other intangible assets, net
|
|
13,649
|
|
|
|
|
|
|
13,649
|
|
Goodwill
|
|
91,481
|
|
|
497
|
|
|
|
91,978
|
|
Other assets
|
|
16,176
|
|
|
131
|
|
|
|
16,307
|
|
Total assets
|
$
|
1,603,653
|
|
|
$ (7,274
|
)
|
|
$
|
1,596,379
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
974,648
|
|
|
$
(5,762
|
)
|
|
$
|
968,886
|
|
Securities sold under agreements to
repurchase
|
|
32,555
|
|
|
|
|
|
|
32,555
|
|
Federal Home Loan Bank advances
|
|
338,703
|
|
|
(117
|
)
|
|
|
338,586
|
|
Advance payments from borrowers for taxes
|
|
3,936
|
|
|
|
|
|
|
3,936
|
|
Trust preferred securities
|
|
36,234
|
|
|
|
|
|
|
36,234
|
|
Accrued interest payable
|
|
1,956
|
|
|
80
|
|
|
|
2,036
|
|
Other liabilities
|
|
13,573
|
|
|
2,953
|
|
|
|
16,526
|
|
Total liabilities
|
|
1,401,605
|
|
|
(2,846
|
)
|
|
|
1,398,759
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 40,000,000 shares authorized;
and
|
|
|
|
|
|
|
|
|
|
|
1,748,715 shares issued
at March 31, 2006
|
|
165
|
|
|
|
|
|
|
165
|
|
Additional paid-in capital
|
|
176,908
|
|
|
|
|
|
|
176,908
|
|
Retained earningssubstantially restricted
|
|
59,764
|
|
|
(4,428
|
)
|
|
|
55,336
|
|
Accumulated other comprehensive loss
|
|
(3,091
|
)
|
|
|
|
|
|
(3,091
|
)
|
Obligation of deferred compensation plan
|
|
1,242
|
|
|
|
|
|
|
1,242
|
|
Treasury stock at cost, 1,665,443 shares at March 31,
2006
|
|
(28,251
|
)
|
|
|
|
|
|
(28,251
|
)
|
Unallocated common stock held by:
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Ownership
Plan (ESOP)
|
|
(4,689
|
)
|
|
|
|
|
|
(4,689
|
)
|
Recognition and Retention
Plan Trust (RRP)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
202,048
|
|
|
(4,428
|
)
|
|
|
197,620
|
|
Total liabilities and stockholders equity
|
$
|
1,603,653
|
|
|
$ (7,274
|
)
|
|
$
|
1,596,379
|
|
See accompanying notes to the annual
restatement tables
150
|
D
ecember 31, 2005
|
|
Se
ptember 30, 2005
|
|
Adjustment
|
|
Adjustment
|
|
As
|
|
|
|
|
|
As
|
|
As
|
|
|
|
|
|
As
|
|
reported
|
|
$
|
|
restated
|
|
reported
|
|
$
|
|
restated
|
|
(dollars in thousands, except per share data)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash on hand and
non-interest-earning deposits
|
$
|
22,318
|
|
|
$
|
(1,753
|
)
|
|
$
|
20,565
|
|
|
$
|
16,771
|
|
|
$
|
|
|
|
$
|
16,771
|
|
Interest-bearing
deposits
|
|
12,666
|
|
|
|
(1,664
|
)
|
|
|
11,002
|
|
|
|
26,866
|
|
|
|
(364
|
)
|
|
|
26,502
|
|
Total cash and cash equivalents
|
|
34,984
|
|
|
|
(3,417
|
)
|
|
|
31,567
|
|
|
|
43,637
|
|
|
|
(364
|
)
|
|
|
43,273
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
885
|
|
|
|
|
|
|
|
885
|
|
|
|
82
|
|
|
|
|
|
|
|
82
|
|
Available for sale
(amortized cost of $196,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
$233,304, respectively)
|
|
192,881
|
|
|
|
|
|
|
|
192,881
|
|
|
|
231,252
|
|
|
|
|
|
|
|
231,252
|
|
Held to maturity (fair
value of $112,787 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$119,434, respectively)
|
|
114,605
|
|
|
|
|
|
|
|
114,605
|
|
|
|
120,335
|
|
|
|
|
|
|
|
120,335
|
|
Federal Home Loan Bank Stock
|
|
16,997
|
|
|
|
|
|
|
|
16,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (net of allowance for loan losses)
|
|
1,053,160
|
|
|
|
(118
|
)
|
|
|
1,053,042
|
|
|
|
1,045,704
|
|
|
|
|
|
|
|
1,045,704
|
|
Loans held for sale
|
|
3,614
|
|
|
|
|
|
|
|
3,614
|
|
|
|
5,592
|
|
|
|
|
|
|
|
5,592
|
|
Accrued interest receivable
|
|
6,265
|
|
|
|
|
|
|
|
6,265
|
|
|
|
6,227
|
|
|
|
|
|
|
|
6,227
|
|
Property and equipment, net
|
|
20,427
|
|
|
|
(77
|
)
|
|
|
20,350
|
|
|
|
19,639
|
|
|
|
(77
|
)
|
|
|
19,562
|
|
Bank owned life insurance
|
|
11,280
|
|
|
|
|
|
|
|
11,280
|
|
|
|
11,178
|
|
|
|
|
|
|
|
11,178
|
|
Real estate owned
|
|
284
|
|
|
|
|
|
|
|
284
|
|
|
|
437
|
|
|
|
|
|
|
|
437
|
|
Other intangible assets, net
|
|
14,224
|
|
|
|
|
|
|
|
14,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
91,686
|
|
|
|
497
|
|
|
|
92,183
|
|
|
|
106,164
|
|
|
|
497
|
|
|
|
106,661
|
|
Other assets
|
|
16,662
|
|
|
|
(59
|
)
|
|
|
16,603
|
|
|
|
15,360
|
|
|
|
(151
|
)
|
|
|
15,209
|
|
Total assets
|
$
|
1,577,954
|
|
|
$
|
(3,174
|
)
|
|
$
|
1,574,780
|
|
|
$
|
1,605,607
|
|
|
$
|
(95
|
)
|
|
$
|
1,605,512
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
1,007,555
|
|
|
$
|
(1,472
|
)
|
|
$
|
1,006,083
|
|
|
$
|
1,030,711
|
|
|
$
|
|
|
|
$
|
1,030,711
|
|
Securities sold under agreements to repurchase
|
|
28,025
|
|
|
|
|
|
|
|
28,025
|
|
|
|
24,436
|
|
|
|
|
|
|
|
24,436
|
|
Federal Home Loan Bank advances
|
|
312,117
|
|
|
|
(50
|
)
|
|
|
312,067
|
|
|
|
328,144
|
|
|
|
|
|
|
|
328,144
|
|
Advance payments from borrowers for taxes
|
|
3,649
|
|
|
|
|
|
|
|
3,649
|
|
|
|
2,040
|
|
|
|
|
|
|
|
2,040
|
|
Trust preferred securities
|
|
10,496
|
|
|
|
|
|
|
|
10,496
|
|
|
|
10,532
|
|
|
|
|
|
|
|
10,532
|
|
Accrued interest payable
|
|
2,153
|
|
|
|
18
|
|
|
|
2,171
|
|
|
|
1,708
|
|
|
|
|
|
|
|
1,708
|
|
Other liabilities
|
|
12,773
|
|
|
|
2,887
|
|
|
|
15,660
|
|
|
|
9,966
|
|
|
|
2,819
|
|
|
|
12,785
|
|
Total liabilities
|
|
1,376,768
|
|
|
|
1,383
|
|
|
|
1,378,151
|
|
|
|
1,407,537
|
|
|
|
2,819
|
|
|
|
1,410,356
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 40,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
authorized; and
16,517,973 and 16,465,922 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issued at December 31,
2005 and September 30, 2005,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
respectively
|
|
165
|
|
|
|
|
|
|
|
165
|
|
|
|
165
|
|
|
|
|
|
|
|
165
|
|
Additional paid-in capital
|
|
176,786
|
|
|
|
|
|
|
|
176,786
|
|
|
|
176,741
|
|
|
|
|
|
|
|
176,741
|
|
Retained earningssubstantially restricted
|
|
57,978
|
|
|
|
(4,557
|
)
|
|
|
53,421
|
|
|
|
55,794
|
|
|
|
(2,914
|
)
|
|
|
52,880
|
|
Accumulated other comprehensive loss
|
|
(1,929
|
)
|
|
|
|
|
|
|
(1,929
|
)
|
|
|
(1,134
|
)
|
|
|
|
|
|
|
(1,134
|
)
|
Obligation of deferred compensation plan
|
|
1,242
|
|
|
|
|
|
|
|
1,242
|
|
|
|
1,076
|
|
|
|
|
|
|
|
1,076
|
|
Treasury stock at cost, (1,665,443 shares at both
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, and
September 30, 2005)
|
|
(28,251
|
)
|
|
|
|
|
|
|
(28,251
|
)
|
|
|
(28,085
|
)
|
|
|
|
|
|
|
(28,085
|
)
|
Unallocated common stock held by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Ownership
Plan (ESOP)
|
|
(4,805
|
)
|
|
|
|
|
|
|
(4,805
|
)
|
|
|
(4,795
|
)
|
|
|
|
|
|
|
(4,795
|
)
|
Recognition and Retention
Plan Trust (RRP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,692
|
)
|
|
|
|
|
|
|
(1,692
|
)
|
Total stockholders equity
|
|
201,186
|
|
|
|
(4,557
|
)
|
|
|
196,629
|
|
|
|
198,070
|
|
|
|
(2,914
|
)
|
|
|
195,156
|
|
Total liabilities and stockholders equity
|
$
|
1,577,954
|
|
|
$
|
(3,174
|
)
|
|
$
|
1,574,780
|
|
|
$
|
1,605,607
|
|
|
$
|
(95
|
)
|
|
$
|
1,605,512
|
|
See accompanying notes to the annual
restatement tables
151
The
following table presents a reconciliation of the effects of adjustments made to
the Companys previously reported consolidated statements of changes in
stockholders equity and comprehensive income for 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
of
deferred
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
Common
|
|
paid in
|
|
Retained
|
|
comprehensive
|
|
compensation
|
|
Treasury
|
|
acquired by
|
|
|
|
|
|
Stock
|
|
capital
|
|
earnings
|
|
in
come (lo
ss)
|
|
plan
|
|
stock
|
|
b
enefit pla
ns
|
|
Total
|
|
(Dollars in thousands)
|
Balance at June 30, 2006,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as reported
|
|
$166
|
|
|
$
|
178,886
|
|
|
$
|
60,404
|
|
|
|
$(3,317
|
)
|
|
|
$1,258
|
|
|
$
|
(28,251
|
)
|
|
|
$(5,748
|
)
|
|
$
|
203,398
|
|
Restatement
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
(4,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,409
|
)
|
Cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restatement
|
|
|
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(365
|
)
|
Balance at June 30, 2006,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as restated
|
|
$166
|
|
|
$
|
178,886
|
|
|
$
|
55,630
|
|
|
|
$(3,317
|
)
|
|
|
$1,258
|
|
|
$
|
(28,251
|
)
|
|
|
$(5,748
|
)
|
|
$
|
198,624
|
|
Balance at June
30, 2007,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as reported
|
|
$175
|
|
|
$
|
191,223
|
|
|
$
|
51,932
|
|
|
|
$(3,180
|
)
|
|
|
$1,277
|
|
|
$
|
(31,493
|
)
|
|
|
$(4,599
|
)
|
|
$
|
205,335
|
|
Restatement adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,128
|
)
|
Issuance of
restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock
|
|
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
Cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restatement
|
|
|
|
|
|
|
|
|
|
(4,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,774
|
)
|
Balance at June 30, 2007,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as restated
|
|
$175
|
|
|
$
|
190,776
|
|
|
$
|
46,030
|
|
|
|
$(3,180
|
)
|
|
|
$1,277
|
|
|
$
|
(31,046
|
)
|
|
|
$(4,599
|
)
|
|
$
|
199,433
|
|
The
following table presents a reconciliation of the effects of adjustments made to
the Companys previously reported consolidated statements of cash flows for 2007
and 2006:
|
For the
year ended June 30,
2007
|
|
For
th
e year ended June 30,
2006
|
|
As reported
|
|
Adjustments
|
|
As restated
|
|
As reported
|
|
Adjustment
s
|
|
As restated
|
|
(Dollars in thousands)
|
Net cash flows from operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
8,395
|
|
|
|
$(1,128
|
)
|
|
$
|
7,267
|
|
|
$
|
11,076
|
|
|
|
$
(4,409
|
)
|
|
$
|
6,667
|
|
Adjustments to reconcile net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to net cash provided by
operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
2,598
|
|
|
|
|
|
|
|
2,598
|
|
|
|
1,837
|
|
|
|
|
|
|
|
1,837
|
|
Amortization of premium
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accretion of discount, net
|
|
180
|
|
|
|
|
|
|
|
180
|
|
|
|
347
|
|
|
|
|
|
|
|
347
|
|
Amortization of
intangible assets
|
|
2,043
|
|
|
|
88
|
|
|
|
2,131
|
|
|
|
1,928
|
|
|
|
|
|
|
|
1,928
|
|
Provision for loan
losses
|
|
653
|
|
|
|
|
|
|
|
653
|
|
|
|
3,205
|
|
|
|
175
|
|
|
|
3,380
|
|
Gain on sale of loans
available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for sale
|
|
(616
|
)
|
|
|
|
|
|
|
(616
|
)
|
|
|
(370
|
)
|
|
|
13
|
|
|
|
(357
|
)
|
(Gain) loss on sale of
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available for sale and trading
|
|
(228
|
)
|
|
|
|
|
|
|
(228
|
)
|
|
|
936
|
|
|
|
(17
|
)
|
|
|
919
|
|
Gain on sale of interest
rate corridor
|
|
(804
|
)
|
|
|
|
|
|
|
(804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real
estate
|
|
(303
|
)
|
|
|
(77
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Increase in loans held
for sale
|
|
(57,313
|
)
|
|
|
|
|
|
|
(57,313
|
)
|
|
|
(76,020
|
)
|
|
|
(3,048
|
)
|
|
|
(79,068
|
)
|
Proceeds from sale of
loans held
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for sale
|
|
52,489
|
|
|
|
|
|
|
|
52,489
|
|
|
|
81,911
|
|
|
|
|
|
|
|
81,911
|
|
152
|
For the
year ended June 30,
2007
|
|
For
th
e year ended June 30,
2006
|
|
As reported
|
|
Adjustments
|
|
As restated
|
|
As reported
|
|
Adjustment
s
|
|
As restated
|
|
(Dollars in thousands)
|
Purchase of trading
account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
(274
|
)
|
|
|
|
|
(274
|
)
|
|
(820
|
)
|
|
|
|
|
(820
|
)
|
Excess tax benefit from
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options exercised
|
(261
|
)
|
|
|
|
|
(261
|
)
|
|
(198
|
)
|
|
(56
|
)
|
|
(254
|
)
|
Amortization of deferred
loan fees,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discounts and premiums
|
(1,266
|
)
|
|
423
|
|
|
(843
|
)
|
|
(1,442
|
)
|
|
386
|
|
|
(1,056
|
)
|
(Increase) decrease in
accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest receivable
|
(91
|
)
|
|
84
|
|
|
(7
|
)
|
|
335
|
|
|
|
|
|
335
|
|
(Increase) decrease in
value of bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
owned life insurance
|
(447
|
)
|
|
|
|
|
(447
|
)
|
|
6,036
|
|
|
(6,405
|
)
|
|
(369
|
)
|
(Increase) decrease in
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
(2,434
|
)
|
|
(68
|
)
|
|
(2,502
|
)
|
|
3,225
|
|
|
3,683
|
|
|
6,908
|
|
Increase (decrease) in
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
479
|
|
|
6,763
|
|
|
7,242
|
|
|
(8,455
|
)
|
|
(4,936
|
)
|
|
(13,391
|
)
|
Stock based
compensation
|
1,931
|
|
|
|
|
|
1,931
|
|
|
1,963
|
|
|
|
|
|
1,963
|
|
Increase (decrease) in
accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest payable
|
18
|
|
|
|
|
|
18
|
|
|
(351
|
)
|
|
80
|
|
|
(271
|
)
|
Net cash provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
4,749
|
|
|
6,085
|
|
|
10,834
|
|
|
25,143
|
|
|
(14,551
|
)
|
|
10,592
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
(5,080
|
)
|
|
|
|
|
(5,080
|
)
|
|
(3,287
|
)
|
|
(661
|
)
|
|
(3,948
|
)
|
Proceeds from sale of
office
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
buildings
|
1,649
|
|
|
265
|
|
|
1,914
|
|
|
11,139
|
|
|
|
|
|
11,139
|
|
Net decrease (increase)
in loans
|
26,118
|
|
|
301
|
|
|
26,419
|
|
|
(25,825
|
)
|
|
1,116
|
|
|
(24,709
|
)
|
Purchase of securities
available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for sale
|
(62,737
|
)
|
|
|
|
|
(62,737
|
)
|
|
(23,027
|
)
|
|
|
|
|
(23,027
|
)
|
Proceeds from sales and
calls of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available for sale
|
72,768
|
|
|
|
|
|
72,768
|
|
|
80,132
|
|
|
|
|
|
80,132
|
|
Proceeds from maturities,
payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and calls of investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held to maturity
|
17,205
|
|
|
|
|
|
17,205
|
|
|
59,159
|
|
|
|
|
|
59,159
|
|
Net decrease (increase)
in FHLB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
5,462
|
|
|
|
|
|
5,462
|
|
|
11,544
|
|
|
|
|
|
11,544
|
|
Proceeds from sale of
other real
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
estate owned
|
2,572
|
|
|
|
|
|
2,572
|
|
|
388
|
|
|
|
|
|
388
|
|
Net cash used for
acquisition
|
(4,433
|
)
|
|
|
|
|
(4,433
|
)
|
|
(35,032
|
)
|
|
12,096
|
|
|
(22,936
|
)
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investing
activities
|
53,524
|
|
|
566
|
|
|
54,090
|
|
|
75,191
|
|
|
12,551
|
|
|
87,742
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
in deposits
|
74,932
|
|
|
1,298
|
|
|
76,230
|
|
|
(55,519
|
)
|
|
4,724
|
|
|
(50,795
|
)
|
Increase in securities
sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
|
|
|
|
|
|
|
26,636
|
|
|
(6,636
|
)
|
|
20,000
|
|
Proceeds from FHLB
advances
|
107,400
|
|
|
|
|
|
107,400
|
|
|
215,700
|
|
|
|
|
|
215,700
|
|
Repayment of FHLB
advances
|
(200,054
|
)
|
|
(137
|
)
|
|
(200,191
|
)
|
|
(291,724
|
)
|
|
(1,865
|
)
|
|
(293,589
|
)
|
(Decrease) increase in
advance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments from borrowers for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes and insurance
|
(522
|
)
|
|
|
|
|
(522
|
)
|
|
1,428
|
|
|
1
|
|
|
1,429
|
|
Net proceeds from the
issuance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
trust preferred securities
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
25,000
|
|
153
|
For the
year ended June 30,
2007
|
|
For
th
e year ended June 30,
2006
|
|
As reported
|
|
Adjustments
|
|
As restated
|
|
As reported
|
|
Adjustment
s
|
|
As restated
|
|
(Dollars in thousands)
|
Repayment of trust preferred
securities
|
|
(10,000
|
)
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common
stock
|
|
(6,920
|
)
|
|
|
|
|
|
|
(6,920
|
)
|
|
|
(6,718
|
)
|
|
|
|
|
|
|
(6,718
|
)
|
Proceeds from stock
issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash in lieu of
fractional shares
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercised
|
|
1,392
|
|
|
|
|
|
|
|
1,392
|
|
|
|
1,275
|
|
|
|
|
|
|
|
1,275
|
|
Excess tax benefit from
stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercised
|
|
261
|
|
|
|
|
|
|
|
261
|
|
|
|
198
|
|
|
|
56
|
|
|
|
254
|
|
Common stock repurchased
as treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
|
|
(3,242
|
)
|
|
|
|
|
|
|
(3,242
|
)
|
|
|
|
|
|
|
(179
|
)
|
|
|
(179
|
)
|
Net cash (used in) provided by financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
(36,763
|
)
|
|
|
1,161
|
|
|
|
(35,602
|
)
|
|
|
(83,724
|
)
|
|
|
(3,899
|
)
|
|
|
(87,623
|
)
|
Net increase (decrease) in cash and cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
|
21,510
|
|
|
|
7,812
|
|
|
|
29,322
|
|
|
|
16,610
|
|
|
|
(5,899
|
)
|
|
|
10,711
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
37,219
|
|
|
|
(6,264
|
)
|
|
|
30,955
|
|
|
|
20,609
|
|
|
|
(365
|
)
|
|
|
20,244
|
|
End of year
|
$
|
58,729
|
|
|
|
$ 1,548
|
|
|
|
$ 60,277
|
|
|
$
|
37,219
|
|
|
|
$(6,264
|
)
|
|
|
$ 30,955
|
|
Supplemental disclosures of cash and cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
41,126
|
|
|
|
$ (82
|
)
|
|
|
$ 41,044
|
|
|
$
|
32,589
|
|
|
|
$ (113
|
)
|
|
|
$ 32,476
|
|
Income taxes paid
|
|
416
|
|
|
|
|
|
|
|
416
|
|
|
|
2,628
|
|
|
|
|
|
|
|
2,628
|
|
Noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available for
sale, net of tax
|
|
1,051
|
|
|
|
|
|
|
|
1,051
|
|
|
|
(3,424
|
)
|
|
|
487
|
|
|
|
(2,937
|
)
|
Net unrealized (loss) gain on cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedge, net of
tax
|
|
(766
|
)
|
|
|
|
|
|
|
(766
|
)
|
|
|
505
|
|
|
|
(129
|
)
|
|
|
376
|
|
3. Risks and
Uncertainties
In the
normal course of its business, the Company encounters two significant types of
risk: economic and regulatory. There are three main components of economic risk:
interest rate risk, credit risk and market risk. The Company is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
re-price at different speeds, or on a different basis, from its interest-earning
assets. The Companys primary credit risk is the risk of default on the
Companys loan portfolio that results from the borrowers inability to make
contractually required payments. The Companys lending activities are
concentrated in Pennsylvania. The largest concentration of the Companys loan
portfolio is located in southeastern Pennsylvania. The ability of the Companys
borrowers to repay amounts owed is dependent on several factors, including the
economic conditions in the borrowers geographic region and the borrowers
financial condition. Market risk reflects changes in the value of collateral
underlying loans, the valuation of real estate held by the Company, the
valuation of loans held for sale, securities available for sale and mortgage
servicing assets. The Company is subject to certain Federal banking laws and
regulations as further described herein and in note 19. Compliance with
regulations causes the Company to incur significant costs. In addition, the
possibility of future changes to such regulations presents the risk that future
additional costs will be incurred that may impact the Company.
154
4. Acquisition of Chester Valley
Bancorp
The above
noted Chester Valley acquisition cost was approximately $145.3 million,
comprised of $88.5 million related to 4,977,256 shares of common stock issued by
the Company, $54.2 million in cash, consisting of $51.0 million paid to
shareholders of Chester Valley and $3.2 million in capitalized acquisition costs
along with $2.6 million related to the conversion of former stock options of
Chester Valley to options of the Company. As a result of the Merger, the Company
recorded an approximate $108.6 million intangible asset, including a $14.9
million core deposit intangible asset with the remainder recorded as goodwill.
The Companys statement of operations for the twelve months ended June 30, 2006
includes the results of operations of the former Chester Valley Bancorp and
subsidiaries only for the period beginning on September 1, 2005. The fair values
used in computing the purchase accounting adjustments were finalized at June 30,
2006.
The following table summarizes the
purchase accounting adjustments resulting from the Merger:
Chester Valley Acquisition Summary
(Dollars in Thousands)
|
(As restated)
|
Total acquisition price
|
$
|
145,334
|
|
Book value of
Chester Valley
|
|
48,391
|
|
Adjustments to record assets and liabilities at fair value:
|
|
|
|
Loan discount
|
|
(1,181
|
)
|
FHLB advance
discount
|
|
(1,747
|
)
|
Certificate of deposit premium
|
|
(1,036
|
)
|
Trust preferred
premium
|
|
(277
|
)
|
Write-off existing intangibles
|
|
(3,193
|
)
|
Other
liabilities
|
|
(3,505
|
)
|
Market value adjustment on premises and
equipment
|
|
(738
|
)
|
Core deposit
intangible
|
|
14,883
|
|
Resulting
goodwill
|
|
93,737
|
|
The
following table summarizes the pro forma operating results of Willow Financial
Bancorp, Inc. had the acquisition of Chester Valley occurred on July 1,
2005.
Willow Financial Bancorp,
Inc.
Pro-forma Operating Results with
Chester Valley Acquisition
For year ended June 30, 2006
(Dollars in
thousands, except per share amounts)
|
(As restated)
|
Total interest income
|
$
|
87,506
|
Total interest
expense
|
|
34,390
|
Provision for loan losses
|
|
3,824
|
Other
income
|
|
8,620
|
Other expense
|
|
53,955
|
Income before
tax
|
|
3,957
|
Income tax
|
|
1,000
|
Net
income
|
|
2,957
|
Non-recurring items
(a)
|
|
5,492
|
Adjusted net
income
(b)
|
$
|
8,449
|
Earnings per Share:
|
|
|
Basic
|
$
|
0.21
|
Diluted
|
$
|
0.20
|
____________________
(a)
|
|
Reflects gross losses on
securities sales ($1.8 million), professional fees ($1.8 million) and
stock option compensation payments to holders of certain Chester Valley
options ($4.7 million).
|
|
(b)
|
|
Adjusted for non-recurring items
at an effective tax rate of 34%.
|
155
The
Company does not believe the pro-forma operating results for the year ended June
30, 2005 would provide meaningful information to the reader of the financial
statements as the change in interest rates occurring during the fiscal year
ended June 30, 2006 resulted in significant changes in the purchase accounting
adjustments resulting from the Merger. Additionally, the Merger was effective on
the close of business on August 31, 2005 and was therefore close to the
beginning of the fiscal year ending on June 30, 2006.
The
Company has deemed the acquisition of BeneServ, Inc. to be immaterial to the
consolidated financial statements.
5. Summary of Significant Accounting
Policies
Use of Estimates
In
preparing the consolidated financial statements, the Company is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenue
and expense for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change in the near-term include the determination of the allowance for loan
losses and income taxes. Management believes that the allowance for loan losses
and the balances in income tax accounts are adequate. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Banks allowance for loan losses and valuations of real estate owned. Such
agencies may require the Bank to recognize additions to the allowance or
adjustments to the valuations based on their judgments about information
available to them at the time of their examination.
Cash and Cash
Equivalents
For
purposes of the consolidated statements of cash flows, cash and cash equivalents
include cash and interest-bearing deposits with original maturities of three
months or less.
Loans Held for Sale
Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or market calculated on an aggregate basis, with any
unrealized losses reflected in the consolidated statements of income. Loans
transferred from loans held for sale to loans receivable are transferred at the
lower of cost or market value at the date of transfer. Gains are recognized upon
delivery to the purchaser of said loans.
Investment Securities
The
Company divides its securities portfolio into three segments: (a) held to
maturity, (b) available for sale and (c) trading. Securities in the held to
maturity category are carried at cost, adjusted for amortization of premiums and
accretion of discounts, using the level yield method, based on the Companys
intent and ability to hold the securities until maturity. Marketable securities
included in the available for sale category are carried at fair value, with
unrealized gains or losses that are temporary in nature, net of taxes, reflected
as an adjustment to equity. Trading securities consist of mutual funds related
to the Companys deferred compensation plan for certain executive level
employees. Changes in the fair value of trading securities are recorded through
earnings. There is a corresponding liability in other liabilities on the
consolidated statements of financial condition. Securities held to maturity and
available for sale are evaluated periodically to determine whether a decline in
their fair value is other than temporary. Management utilizes criteria such as
the magnitude and duration of the decline, in addition to the reasons underlying
the decline, to determine whether the loss in value is other than temporary. The
term other than temporary is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support
realizable value equal to or greater than carrying value of the investment. Once
a decline in fair value is determined to be other than temporary, the fair value
of the security is reduced and reflected in the consolidated statements of
income.
The fair
value of marketable securities is determined from publicly quoted market prices.
Securities available for sale that are not readily marketable, which include
Federal Home Loan Bank of Pittsburgh stock, are carried at cost, which
approximates liquidation value. Premiums and discounts on securities are
amortized/accreted using the level yield method. Trading account securities are
carried at fair value, with unrealized gains and losses reflected in the
consolidated statements of income.
156
At the
time of purchase, the Company makes a determination of whether or not it will
hold the securities to maturity, based upon an evaluation of the probability of
future events. Those securities that the Company believes may not be held to
maturity, due to interest rate risk, liquidity needs, or other asset/liability
decisions, are classified as available for sale. If securities are sold, a gain
or loss is determined by the specific identification method and is reflected in
the operating results in the period the sale occurs.
Allowance for Loan
Losses
The
allowance for loan losses is maintained at a level that management believes is
adequate to cover known and inherent losses in the loan portfolio that are both
probable and reasonable to estimate at each reporting date. Management
establishes the loan loss allowance in accordance with guidance provided by the
Securities and Exchange Commissions Staff Accounting Bulletin 102 (SAB 102).
The determination of the adequacy of the allowance is based upon an evaluation
of the portfolio, loss experience, current economic conditions, volume, growth,
composition of the portfolio, and other relevant factors. The Company uses
historical loss factors for each loan type and, for loans that we consider
higher risk for all but single-family mortgage loans and guaranteed consumer
loans, qualitative factors are also considered. This component establishes a
range for factors such as, but not limited to, delinquency trends, asset
classification trends and current economic conditions. Management then assesses
these conditions and establishes, to the best of its ability, the allowance for
loan losses from within the range calculated, based upon the facts known at that
time. The methodology does not imply that any portion of the allowance for loan
loss is restricted, but the allowance for loan loss applies to the entire loan
portfolio.
Loans
Loans are
recorded at cost, net of unearned discounts, deferred fees, and allowances.
Discounts or premiums on purchased loans are amortized using the level yield
method over the remaining contractual life of each loan, adjusted for actual
prepayments. Loan origination fees and certain direct origination costs are
deferred and amortized over the contractual life of the related loans using the
level yield method.
Interest
receivable on loans is accrued to income as earned. Non-accrual loans are loans
on which the accrual of interest has ceased because the collection of principal
or interest payments is determined to be doubtful by management. It is the
policy of the Company to discontinue the accrual of interest and reverse any
accrued interest when principal or interest payments are delinquent more than 90
days (unless the loan principal and interest are determined by management to be
fully secured and in the process of collection), or earlier if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the terms of the loan.
Interest income on such loans is not accrued until the financial condition and
payment record of the borrower demonstrates the ability to service the debt.
Subsequent cash receipts are applied either to the outstanding principal or
recorded as interest income, depending on managements assessment of ultimate
collectibility of principal and interest.
Loans are
considered past due after one payment has been missed. Loans are charged off
when they reach loss status in accordance with the Banks asset classification
policy. There are three classifications for problem assets: substandard,
doubtful, and loss. Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that the Bank will sustain
some loss if the deficiencies are not corrected. Doubtful assets have weaknesses
of substandard assets with the additional characteristic that the weaknesses
make collection or liquidation in full on the basis of current existing facts,
conditions and values, questionable, and there is a high probability of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.
Property and
Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. The Company computes depreciation and amortization using the
straight-line method over the estimated useful lives of the assets, which range
from three to 40 years. Significant renovations and additions are capitalized.
Leasehold improvements are depreciated over the shorter of the useful lives of
the assets or the related lease term. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income for the period.
The cost of maintenance and repairs is charged to expense as
incurred.
157
Goodwill and Other
Intangibles
Goodwill
represents the excess cost over fair value of assets acquired over liabilities
as a result of the Merger and earlier branch acquisitions. Included in other
intangibles are core deposit intangibles, a measure of the value of checking and
savings deposits acquired in the Merger accounted for under the purchase method.
The core deposit intangible is being amortized to expense over a fourteen-year
life using a method that approximates a level yield method. A customer
intangible recorded as a result of the acquisition of BeneServ is being
amortized to expense over a ten-year life using a straight line basis. The
Company follows the provisions of Statements of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, and performs impairment
tests of the intangible assets at least annually and impairment losses are
recognized if the carrying value of the intangible exceeds its fair value. As
discussed in Note 26 of the Notes to the Consolidated Financial Statements, the
Company has incurred an impairment loss for the quarter ended December 31, 2007
in the amount of $40.0 million as a result of the Chester Valley
acquisition.
Income Taxes
Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Share
Earnings
per share (EPS) consists of two separate components, basic EPS and diluted
EPS. Basic EPS is computed by dividing net income by the weighted average number
of common shares outstanding for each period presented, see Note 7. Diluted EPS
is calculated by dividing net income by the weighted average number of common
shares outstanding plus dilutive common stock equivalents (CSEs). CSEs consist
of dilutive stock options granted through the Companys stock option plans and
unvested common stock awards.
Stock Based
Compensation
On July
1, 2005, the Company adopted SFAS No. 123R, Share-based Payment. This
Statement establishes the standards for accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
equity instruments of the enterprise or liabilities that are based on the fair
value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the statement of operations. The revised
Statement generally requires that an entity account for those transactions using
the fair-value based method and eliminates an entitys ability to account for
share-based compensation transactions using the intrinsic value method of
accounting provided in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, which was permitted under Statement
No. 123, as originally issued. Prior to July 1, 2005, the Company did not
recognize employee equity-based compensation costs in net income. The adoption
of SFAS No. 123R had the following impact on reported amounts compared with
amounts that would have been reported using the intrinsic value method under
previous accounting:
|
Year ended June 30,
2
005
|
|
|
|
|
|
Pro Forma
|
|
Pro Forma if
|
|
A
s Report
ed
|
|
Adjustm
ents
|
|
under SFAS
123R
|
|
(Dollars in thousands,
|
|
Except per share data)
|
Income before taxes
|
|
$9,778
|
|
|
|
$ (350
|
)
|
|
|
$9,428
|
|
Income taxes
|
|
3,052
|
|
|
|
(118
|
)
|
|
|
2,934
|
|
Net Income
|
|
$6,726
|
|
|
|
$ (232
|
)
|
|
|
$6,494
|
|
Net income available to common Stockholders
|
|
$6,627
|
|
|
|
$ (232
|
)
|
|
|
$6,395
|
|
Basic earnings per share
|
|
$ 0.70
|
|
|
|
$(0.02
|
)
|
|
|
$ 0.68
|
|
Diluted earnings per share
|
|
$ 0.67
|
|
|
|
$(0.02
|
)
|
|
|
$ 0.65
|
|
158
Recent Accounting
Pronouncements
FASB Statement No, 159, The Fair
Value Option for Financial Assets and Financial Liabilities
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS 159 provides
entities with the opportunity to reduce volatility in reported earnings caused
by measuring related assets and liabilities differently. SFAS 159 is effective
as of the beginning of an entitys first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of FASB Statement No. 157, Fair Value Measurements. The Company
did not elect early adoption and is currently assessing the implications of this
Statement on its financial statements.
FASB Statement No, 157, Fair Value
Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 establishes a framework for measuring fair value in accordance
with U.S. generally accepted accounting principles, and enhances disclosures
about fair value measurements. SFAS 157 applies when other accounting
pronouncements require fair value measurements; it does not require new fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and for interim periods within
those years. The Company is currently assessing the implications of this
Statement on its financial statements.
Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
In
September 2006, the Securities and Exchange Commission (SEC) published Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 expresses the SEC staffs views regarding the
process of quantifying financial statement misstatements. The SEC staff suggests
that registrants electing not to restate prior periods should reflect the
effects of applying the guidance in this interpretation in the annual financial
statements covering the first fiscal year ending after November 15, 2006. This
interpretation did not have a material impact on the Companys consolidated
financial statements.
FASB Interpretation 48, Accounting
for Uncertainty in Income Tax Positions
Effective
July 1, 2007 the Company adopted Financial Interpretation No. 48, Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 provides guidance on financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
According to FIN 48, a tax position is recognized if it is more-likely-than-not
that the tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of
the position. If the tax position meets the more-likely-than-not recognition
threshold, the position is measured to determine the amount of benefit to
recognize and should be measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
As of
July 1, 2007, the Company had no material unrecognized tax benefits, accrued
interest or penalties. Penalties are recorded in non-interest expense in the
year they are assessed and are treated as a non-deductible expense for tax
purposes. Interest is recorded in non-interest expense in the year it is
assessed and is treated as a deductible expense for tax purposes. As of July 1,
2007, tax years 2004 through 2007 remain subject to Federal examination as well
as examination by state taxing jurisdictions.
FASB Statement No, 155, Accounting
for Certain Hybrid Financial Instruments
In
February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
. Under this new statement, an entity may re-measure at fair
value a hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation from the host, if the holder irrevocably
elects to account for the
159
whole instrument on a fair value basis.
Subsequent changes in the fair value of the instrument would be recognized in
earnings. This statement is effective for all financial instruments that the
Company acquires or issues after July 1, 2007. The adoption of this statement
will not have a material impact on the Companys financial position or results
of operations.
EITF 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements
In June
2006, the Emerging Issues Task Force reached a consensus that, for endorsement
split-dollar life insurance arrangements, an employer should recognize the
liability for future benefits based on the substantive agreement with the
employee, since the postretirement benefit obligation is not effectively
settled. An entity is permitted to apply the consensus by retrospective
application to all prior periods in accordance with FASB Statement No. 154,
including its required disclosures. The consensus is effective for fiscal years
beginning after December 15, 2007, with early adoption permitted as of the
beginning of an entitys fiscal year. The Bank has recorded a liability of $246
thousand within other liabilities on the consolidated statements of financial
condition to account for the settlement of the future benefit
obligation.
6. Stock Compensation
Plans
The
stockholders of the Company approved a stock option plan in fiscal 2000 (the
1999 Plan) for officers, directors and certain employees of the Company and
its subsidiaries. Pursuant to the terms of the 1999 Plan, the number of common
shares reserved for issuance was a total of 536,509, of which 53,544 options
were unawarded at June 30, 2007. Included in this amount are 9,405 shares
forfeited during the year ended June 30, 2007. Additionally, the stockholders of
the Company approved a stock option plan in fiscal 2003 (the 2002 Plan) for
officers, directors and certain employees of the Company and its subsidiaries.
Pursuant to the terms of the 2002 Plan, the number of common shares reserved for
issuance was 673,483 of which 187,985 were available for future grants at June
30, 2007. Included in this amount are 64,268 shares forfeited during the year
ended June 30, 2007. Generally, options were granted with an exercise price
equal to fair market value at the date of grant and expire in 10 years from the
date of grant. Generally, stock options granted vest over a five-year period
commencing on the first anniversary of the date of grant. In addition, as part
of the Merger, options previously granted under plans of Chester Valley were
converted into options to acquire 383,945 shares of Company common stock.
Unrecognized compensation cost on unvested option awards and weighted average
period to be recognized are $292 thousand and 3.3 years, respectively at June
30, 2007. Compensation expense related to option awards was $208 thousand, $306
thousand, and $350 thousand for the years ended June 30, 2007, 2006 and 2005,
respectively.
The following table provides
information about options outstanding for the year ended June 30,
2007:
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
Exercise
|
|
Grant Date
|
|
Shares
|
|
Price
|
|
F
air Val
ue
|
Options outstanding, beginning of period
|
1,063,382
|
|
|
|
$ 9.91
|
|
|
|
$3.61
|
|
Granted
|
70,025
|
|
|
|
12.90
|
|
|
|
2.61
|
|
Forfeited
|
(73,673
|
)
|
|
|
11.89
|
|
|
|
2.59
|
|
Exercised
|
(157,241
|
)
|
|
|
8.84
|
|
|
|
3.22
|
|
Options outstanding, end of period
|
902,493
|
|
|
|
10.39
|
|
|
|
3.68
|
|
Options
exercisable end of period
|
751,299
|
|
|
|
9.92
|
|
|
|
3.9
|
|
The Company expects approximately
7,500 of unvested options to be forfeited.
Proceeds,
related tax benefits realized from options exercised and intrinsic value of
options exercised were as follows:
|
Yea
r ended June 3
0
|
|
2007
|
|
2006
|
|
2005
|
Proceeds of options exercised
|
$
|
1,390,643
|
|
$
|
1,275,040
|
|
$
|
288,171
|
Related tax
benefit recognized
|
$
|
234,024
|
|
$
|
198,851
|
|
$
|
|
Intrinsic value of options exercised
|
$
|
687,451
|
|
$
|
1,134,995
|
|
$
|
245,762
|
160
The following table provides
information about options outstanding and exercisable options at June 30,
2007:
|
Options
|
|
Exercisable
|
|
O
utstanding
|
|
Options
|
Number
|
|
902,493
|
|
|
751,299
|
Weighted average
exercise price
|
$
|
10.39
|
|
$
|
9.92
|
Aggregate intrinsic value
|
$
|
2,355,507
|
|
$
|
2,314,001
|
Weighted average
contractual term
|
|
5.1
|
|
|
4.5
|
The
weighted average remaining contractual life for options outstanding and weighted
average exercise price per share for exercisable options at June 30, 2007 were
as follows:
|
|
|
|
O
ptions Outstanding
|
|
Exer
cisable Options
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
Remaining
|
|
|
|
Average
|
|
|
|
|
Exercise Price
|
|
Contractual
Life
|
|
|
|
Exercise
Price
|
Exercise Price
|
|
Shares
|
|
Per Shar
e
|
|
(in
Ye
ars)
|
|
Shares
|
|
P
er Sha
re
|
$
3.50- $5.00
|
|
106,255
|
|
|
$ 3.79
|
|
|
2.3
|
|
106,255
|
|
$ 3.79
|
$
7.50-
$9.50
|
|
221,765
|
|
|
8.29
|
|
|
4.2
|
|
221,765
|
|
8.29
|
$
9.51- $14.00
|
|
509,817
|
|
|
12.15
|
|
|
5.8
|
|
374,373
|
|
12.05
|
$
14.01-
$16.50
|
|
64,656
|
|
|
14.55
|
|
|
7.0
|
|
48,906
|
|
14.24
|
Total
|
|
902,493
|
|
|
$10.39
|
|
|
5.1
|
|
751,299
|
|
$ 9.92
|
The
Company granted 70,025, 22,096 and zero stock options during the years ended
June 30, 2007, 2006 and 2005, respectively. The weighted average grant date fair
value of options granted was $2.61 and $2.89 for the years ended June 30, 2007
and 2006, respectively. The fair value for stock options granted during the year
ended June 30, 2007 was determined at the date of grant using a Black-Scholes
options-pricing model. The fair value of option awards under the Option Plans is
estimated on the date of grant using the Black-Scholes valuation methodology,
which is dependent upon certain assumptions, as summarized in the following
table:
|
Year Ended
|
|
June
3
0
|
Assumption
|
|
2007
|
|
2006
|
Expected average risk-free interest
rate
|
4.63
|
%
|
|
4.37
|
%
|
Expected average life (in years)
|
5.50
|
|
5.51
|
Expected volatility
|
25.03
|
%
|
|
17.7
|
%
|
Expected dividend yield
|
3.72
|
%
|
|
3.37
|
%
|
The
expected average risk-free rate is based on the U.S. Treasury yield curve on the
day of grant. The expected average life represents the weighted average period
of time that options granted are expected to be outstanding giving consideration
to vesting schedules and historical option exercise experience. Expected
volatility is based on historical volatilities of the Companys common stock.
The expected dividend yield is based on historical information.
The fair
value of options vested was $241,918 and $333,799 for the years ended June 30,
2007 and 2006, respectively.
RRP
Pursuant
to the 1999 Recognition and Retention Plan and Trust Agreement (the 1999 RRP),
the Company acquired 214,603 shares at a cost of $929 thousand. Pursuant to the
terms of the agreement, all 214,603 shares have been awarded to directors and
management from the 1999 RRP Trust. As of June 30, 2007, 207,503 granted shares
were vested pursuant to the terms of the 1999 Plan. In fiscal 2003, the Company
adopted the 2002 Recognition and Retention Plan and Trust Agreement (the 2002
RRP), and acquired 269,393 shares at a cost of $3.2 million. Pursuant to the
terms of the 2002 RRP, 227,711 shares have been awarded to directors and
management; however 20,160 shares have been forfeited. As of June 30, 2007,
197,128 granted shares were vested pursuant to the terms of the 2002 RRP.
161
At the November 9, 2005 Annual Meeting,
shareholders approved the 2005 Recognition and Retention Plan and Trust
Agreement (the 2005 RRP). Under the 2005 RRP, the Trust can purchase 367,500
shares of common stock for future awards of restricted stock to certain officers
and directors of the Company. Coincident with the approval of the 2005 RRP, the
Company terminated its Directors Retirement Plan and the Directors Incentive
Compensation Plan, at which time the directors became fully vested in their
accrued benefit under the Directors Retirement Plan. As of June 30, 2007,
175,511 shares were granted under the 2005 RRP; however, 12,167 shares were
forfeited.
Compensation expense related to the RRP shares was $833 thousand, $701
thousand and $597 thousand for the years ended June 30, 2007, 2006 and 2005,
respectively. Unrecognized compensation cost on unvested RRP shares and weighted
average period to be recognized are $1.8 million and 2.0 years,
respectively.
Activity
in issued but unvested RRP shares under the three plans during the year ended
June 30, 2007 was as follows:
|
|
|
|
Weighted Average
|
|
|
|
|
Grant Date Fair
|
RRP Shares
|
|
RRP Shares
|
|
Value
|
Unvested awards beginning of period
|
150,605
|
|
|
$
|
13.28
|
|
Granted
|
88,736
|
|
|
|
13.86
|
|
Vested
|
(54,774
|
)
|
|
|
13.41
|
|
Forfeited
|
(18,047
|
)
|
|
|
13.93
|
|
Unvested awards period end
|
166,520
|
|
|
$
|
13.85
|
|
The aggregate intrinsic value of
unvested RRP awards under the three plans at June 30, 2007 was
$2,164,760.
7. Earnings Per Share
For the
years ended June 30, 2007, 2006 and 2005 earnings per share, basic and diluted,
were $0.48 and $0.47, $0.47 and $0.46, and $0.70 and $0.67,
respectively.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share calculations.
|
Year
En
ded J
une 30,
|
|
200
7
|
|
2006
|
|
200
5
|
|
(As restated)
|
|
(As restated)
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
(Dollars in thousands, except share data)
|
Net income
|
$
|
7,267
|
|
|
$
|
7,267
|
|
|
$
|
6,667
|
|
|
$
|
6,667
|
|
|
$
|
6,726
|
|
|
$
|
6,726
|
|
Dividends on unvested stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
awards
|
|
(56
|
)
|
|
|
(56
|
)
|
|
|
(76
|
)
|
|
|
(76
|
)
|
|
|
(99
|
)
|
|
|
(99
|
)
|
Income available to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
holders
|
$
|
7,211
|
|
|
$
|
7,211
|
|
|
$
|
6,591
|
|
|
$
|
6,591
|
|
|
$
|
6,627
|
|
|
$
|
6,627
|
|
Weighted average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
15,117,871
|
|
|
|
15,117,871
|
|
|
|
13,934,631
|
|
|
|
13,934,631
|
|
|
|
9,409,145
|
|
|
|
9,409,145
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents
|
|
|
|
|
|
226,283
|
|
|
|
|
|
|
|
338,155
|
|
|
|
|
|
|
|
304,147
|
|
Unvested stock awards
|
|
|
|
|
|
6,705
|
|
|
|
|
|
|
|
18,915
|
|
|
|
|
|
|
|
144,752
|
|
Adjusted weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares used in earnings
per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share
calculation
|
|
15,117,871
|
|
|
|
15,350,859
|
|
|
|
13,934,631
|
|
|
|
14,291,701
|
|
|
|
9,409,145
|
|
|
|
9,858,044
|
|
Earnings per share
|
$
|
0.48
|
|
|
$
|
0.47
|
|
|
$
|
0.47
|
|
|
$
|
0.46
|
|
|
$
|
0.70
|
|
|
$
|
0.67
|
|
162
8. Investment
Securities
HTM and AFS investment securities at
June 30, 2007 and 2006 consisted of the following:
|
J
une 30, 2
007
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
cost
|
|
gains
|
|
losses
|
|
fair value
|
|
(Dollars in thousands)
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
$
|
16,253
|
|
|
$ 4
|
|
|
$
|
(414
|
)
|
|
$
|
15,843
|
FHLMC
|
|
11,839
|
|
|
|
|
|
|
(455
|
)
|
|
|
11,384
|
CMOs
|
|
60,271
|
|
|
|
|
|
|
(1,010
|
)
|
|
|
59,261
|
Total held to maturity
|
|
88,363
|
|
|
4
|
|
|
|
(1,879
|
)
|
|
|
86,488
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government agency
securities
|
|
35,285
|
|
|
|
|
|
|
(1,077
|
)
|
|
|
34,208
|
Municipal
bonds
|
|
30,585
|
|
|
55
|
|
|
|
(635
|
)
|
|
|
30,005
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
38,007
|
|
|
5
|
|
|
|
(1,050
|
)
|
|
|
36,962
|
FHLMC
|
|
35,833
|
|
|
2
|
|
|
|
(1,028
|
)
|
|
|
34,807
|
GNMA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOs
|
|
22,080
|
|
|
20
|
|
|
|
(331
|
)
|
|
|
21,769
|
Corporate debt
securities
|
|
19,978
|
|
|
73
|
|
|
|
(625
|
)
|
|
|
19,426
|
Equities
|
|
11,464
|
|
|
69
|
|
|
|
(371
|
)
|
|
|
11,162
|
Total available for sale
|
|
193,232
|
|
|
224
|
|
|
|
(5,117
|
)
|
|
|
188,339
|
Total securities
|
$
|
281,595
|
|
|
$228
|
|
|
$
|
(6,996
|
)
|
|
$
|
274,827
|
|
|
June
30, 20
06
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
cost
|
|
gains
|
|
losses
|
|
fair value
|
|
(Dollars in thousands)
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
$
|
18,639
|
|
|
$
|
|
|
$
|
(779
|
)
|
|
$
|
17,860
|
FHLMC
|
|
14,567
|
|
|
|
|
|
|
(765
|
)
|
|
|
13,802
|
CMOs
|
|
72,355
|
|
|
|
|
|
|
(1,930
|
)
|
|
|
70,425
|
Total held to maturity
|
|
105,561
|
|
|
|
|
|
|
(3,474
|
)
|
|
|
102,087
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government agency
securities
|
|
35,473
|
|
|
|
|
|
|
(1,176
|
)
|
|
|
34,297
|
Municipal
bonds
|
|
9,105
|
|
|
90
|
|
|
|
(68
|
)
|
|
|
9,127
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
52,181
|
|
|
13
|
|
|
|
(2,054
|
)
|
|
|
50,140
|
FHLMC
|
|
47,153
|
|
|
6
|
|
|
|
(1,988
|
)
|
|
|
45,171
|
GNMA
|
|
4,189
|
|
|
4
|
|
|
|
(35
|
)
|
|
|
4,158
|
CMOs
|
|
29,059
|
|
|
|
|
|
|
(561
|
)
|
|
|
28,498
|
Corporate debt
securities
|
|
14,419
|
|
|
24
|
|
|
|
(235
|
)
|
|
|
14,208
|
Equities
|
|
11,642
|
|
|
69
|
|
|
|
(385
|
)
|
|
|
11,326
|
Total available for sale
|
|
203,221
|
|
|
206
|
|
|
|
(6,502
|
)
|
|
|
196,925
|
Total securities
|
$
|
308,782
|
|
|
$206
|
|
|
$
|
(9,976
|
)
|
|
$
|
299,012
|
Proceeds
from the sales of securities available for sale for the years ended June 30,
2007, 2006, and 2005 were $47.8 million, $103.3 million, and $51.3 million,
respectively. Gross gains of $279 thousand, $533 thousand, and $415 thousand
were realized in fiscal 2007, 2006, and 2005, respectively. There were gross
losses of $51 thousand, $1.5 million, and $342 thousand for fiscal 2007, 2006
and 2005, respectively. Additionally, there were no recognized losses in fiscal
2007, 2006 or fiscal 2005 resulting from other than temporary declines in values
of certain equity securities.
163
As a
result of the Companys de-leveraging strategy implemented as a result of the
Merger, $34.9 million in held-to-maturity (HTM) securities were liquidated. This
was performed in accordance with the provisions of SFAS No. 115, which allows
for a sale of HTM securities coincident with a merger to allow the Company to
maintain its interest rate sensitivity immediately prior to the merger. The
Company realized a net gain of approximately $181 thousand on the sale of the
securities in fiscal year 2006. This gain is reflected in loss (gain) on sale of
securities available for sale and trading on the consolidated statements of cash
flow.
At June
30, 2007, securities with a total carrying value of $23.7 million are held as
collateral for the Companys reverse repurchase arrangements. Accrued interest
receivable on securities amounted to $1.5 million at June 30, 2007 and
2006.
The
amortized cost and estimated fair value of investment securities held to
maturity, investment securities and available for sale at June 30, 2007, by
contractual maturity, are shown below.
|
|
|
|
After
|
|
After
|
|
After
|
|
|
|
|
|
|
|
1 year
|
|
5 years
|
|
10 years or
|
|
|
|
|
|
|
|
but less
|
|
but less
|
|
with
|
|
|
|
|
1 Year
|
|
than 5
|
|
than 10
|
|
no stated
|
|
|
|
|
or less
|
|
years
|
|
years
|
|
maturity
|
|
Total
|
|
(Dollars in thousands)
|
US government agency securities
|
$
|
|
|
$
|
4,446
|
|
$
|
9,752
|
|
$
|
20,010
|
|
$
|
34,208
|
Mortgage-backed securities and CMOs
|
|
6,392
|
|
|
81,913
|
|
|
23,742
|
|
|
67,979
|
|
|
180,026
|
Municipal bonds
|
|
1,645
|
|
|
576
|
|
|
3,476
|
|
|
24,308
|
|
|
30,005
|
Corporate bonds
|
|
|
|
|
|
|
|
1,193
|
|
|
18,233
|
|
|
19,426
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
11,162
|
|
|
11,162
|
Total securities at fair value
|
$
|
8,037
|
|
$
|
86,935
|
|
$
|
38,163
|
|
$
|
141,692
|
|
$
|
274,827
|
Total securities at
amortized Cost
|
$
|
8,150
|
|
$
|
88,778
|
|
$
|
39,626
|
|
$
|
145,041
|
|
$
|
281,595
|
The
Company must maintain ownership of specified amounts of stock as a member of the
FHLB. The Companys ownership of FHLB stock was $11.4 million and $16.9 million
as of June 30, 2007 and 2006, respectively.
For
mortgage-backed securities, expected maturities will differ from contractual
maturities because borrowers may have the right to prepay the obligation. Of the
Companys $34.2 million of U.S. Government and Government agency securities at
June 30, 2007, none are callable within one year.
As
described in note 13, certain investment securities available for sale are
maintained to collateralize advances from the FHLB. Provided below is a summary
of investment securities classified as held to maturity and available-for-sale
which were in an unrealized loss position at June 30, 2007 and 2006.
Approximately $3.4 million, or 66.0%, of the unrealized loss at June 30, 2007
was comprised of securities in a continuous loss position for twelve months or
more, which included certain equity securities. This aggregate loss compares to
an aggregate loss of $255 thousand, or 4.1%, at June 30, 2006.
164
|
Jun
e 30,
2007
|
|
Under
One
Year
|
|
One
Ye
ar or
More
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
(Dollars in thousands)
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
$
|
|
|
$
|
|
|
|
$
|
15,007
|
|
$
|
(414
|
)
|
FHLMC
|
|
|
|
|
|
|
|
|
11,384
|
|
|
(455
|
)
|
CMOs
|
|
|
|
|
|
|
|
59,261
|
|
|
(1,010
|
)
|
Total held to maturity
|
|
|
|
|
|
|
|
85,652
|
|
|
(1,879
|
)
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
government agency securities
|
|
18,625
|
|
|
(777
|
)
|
|
15,583
|
|
|
(300
|
)
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
1,077
|
|
|
(8
|
)
|
|
35,105
|
|
|
(1,042
|
)
|
FHLMC
|
|
|
|
|
|
|
|
34,053
|
|
|
(1,027
|
)
|
CMOs
|
|
7,727
|
|
|
(83
|
)
|
|
|
11,731
|
|
|
(249
|
)
|
Corporate debt securities
|
|
8,257
|
|
|
(238
|
)
|
|
|
3,036
|
|
|
(386
|
)
|
Municipal bonds
|
|
15,795
|
|
|
(636
|
)
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
10,511
|
|
|
(371
|
)
|
Total available for sale
|
|
51,481
|
|
|
(1,742
|
)
|
|
110,019
|
|
|
(3,375
|
)
|
Total securities
|
$
|
51,481
|
|
$
|
(1,742
|
)
|
|
$
|
195,671
|
|
$
|
(5,254
|
)
|
|
|
Jun
e 30, 20
06
|
|
Under
One
Year
|
|
One Year or
More
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
F
air Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
(Dollars in thousands)
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
$
|
17,860
|
|
$
|
(779
|
)
|
|
$
|
|
|
$
|
|
|
FHLMC
|
|
13,802
|
|
|
(765
|
)
|
|
|
|
|
|
|
|
CMOs
|
|
70,425
|
|
|
(1,930
|
)
|
|
|
|
|
|
|
|
Total held to maturity
|
|
102,087
|
|
|
(3,474
|
)
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
government agency securities
|
|
34,297
|
|
|
(1,176
|
)
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
49,317
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
FHLMC
|
|
43,962
|
|
|
(1,988
|
)
|
|
|
|
|
|
|
|
GNMA
|
|
4,158
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
CMOs
|
|
28,480
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
7,916
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
Municipal bonds
|
|
5,656
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
Equity securities
|
|
2,320
|
|
|
(130
|
)
|
|
|
8,304
|
|
|
(255
|
)
|
Total available for sale
|
|
176,106
|
|
|
(6,247
|
)
|
|
|
8,304
|
|
|
(255
|
)
|
Total securities
|
|
278,193
|
|
$
|
(9,721
|
)
|
|
$
|
8,304
|
|
$
|
(255
|
)
|
165
Approximately $10.0 million of the investment in equity securities is an
investment in mutual funds, which are comprised of adjustable rate mortgage
securities and thus the fair values are directly correlated to movements in
interest rates. Additionally, the Company has both the ability and the intent to
hold fixed income securities until such time as the value recovers or the
security matures and for the equity securities, management believes that the
unrealized losses are temporary and overall not significant to the value of
equity securities.
Management does not believe any individual unrealized loss as of June 30,
2007 represents an other-than-temporary impairment. The temporary impairment is
directly related to changes in market interest rates and/or rating downgrades.
In general, as interest rates rise, the fair value of fixed-rate securities will
decrease and, as interest rates fall, the fair value of fixed-rate securities
will increase. The severity of the impairment as a percent of the total
investment position is nominal and the duration of the impairment to date is
short. The impairments are deemed temporary based on the direct relationship of
the decline in fair value to movements in interest rates, as well as the
relatively short duration of the investments and their high credit quality. In
evaluating the securities portfolio for impairment, the Company has considered
analyst reports and sector credit ratings. None of the bonds in the Companys
securities portfolio are below investment grade. Additionally, the Company has
the ability and intent to hold these securities until such time as the value
recovers or the securities mature.
9. Loans
Loans receivable as of June 30, 2007
and 2006 consisted of the following (as restated):
|
June 30,
2007
|
|
June 30,
2006
|
|
(Dollars in thousands)
|
Mortgage loans:
|
|
|
|
|
|
|
|
Single-family
|
$
|
273,247
|
|
|
$
|
298,509
|
|
Multi-family &
commercial real estate
|
|
316,099
|
|
|
|
325,987
|
|
Construction
|
|
93,180
|
|
|
|
112,774
|
|
Home
equity
|
|
272,295
|
|
|
|
259,119
|
|
Total mortgage
loans
|
|
954,821
|
|
|
|
996,389
|
|
Consumer loans
|
|
3,917
|
|
|
|
4,304
|
|
Commercial business loans
|
|
88,274
|
|
|
|
80,815
|
|
Total loans receivable
|
|
1,047,012
|
|
|
|
1,081,508
|
|
Allowance for loan losses
|
|
(12,210
|
)
|
|
|
(16,737
|
)
|
Deferred loan costs (fees), net
|
|
491
|
|
|
|
(1,170
|
)
|
Loans receivable, net
|
$
|
1,035,293
|
|
|
$
|
1,063,601
|
|
Included
in loans receivable are loans on non-accrual status in the amounts of $3.9
million, $15.5 million and $666 thousand at June 30, 2007, 2006 and 2005,
respectively. Interest income that would have been recognized on such
non-accrual loans during the years ended June 30, 2007, 2006 and 2005, had they
been current in accordance with their original terms, was $224 thousand, $1.4
million, and $34 thousand, respectively. There were no loans that were 90 days
or more delinquent for which the Company continued to accrue interest at June
30, 2007.
As of
June 30, 2007, 2006 and 2005, the Company had impaired loans with a total
recorded investment of $1.4 million, $12.8 million, and $121 thousand,
respectively. Average impaired loans were $7.0 million, $5.0 million and $414
thousand for the years ended June 30, 2007, 2006 and 2005, respectively. Cash of
$116 thousand, $281 thousand and $77 thousand was collected on these impaired
loans during the years ended June 30, 2007, 2006 and 2005, respectively.
Interest income of $0, $196 thousand, and $0 was recognized on such loans during
the years ended June 20, 2007, 2006 and 2005, respectively. As of June 30, 2007,
2006 and 2005, there were no recorded investments in impaired loans for which
there was a related specific allowance for credit losses.
166
The
following is a summary of the activity in the allowance for loan losses for the
years ended June 30, 2007, 2006 and 2005:
|
For
the year ended June 3
0,
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in thousands)
|
Balance, beginning of the period
|
$16,737
|
|
|
$ 6,113
|
|
|
$5,220
|
|
Plus: Provisions for loan losses
|
653
|
|
|
3,380
|
|
|
1,232
|
|
Less charge-offs
for:
|
|
|
|
|
|
|
|
|
Mortgage loans
|
(76
|
)
|
|
(24
|
)
|
|
(7
|
)
|
Consumer loans
|
(277
|
)
|
|
(237
|
)
|
|
(22
|
)
|
Commercial real estate loans
|
(1,848
|
)
|
|
|
|
|
|
|
Commercial business loans
|
(3,185
|
)
|
|
(47
|
)
|
|
(316
|
)
|
Total
Charge-offs
|
(5,386
|
)
|
|
(308
|
)
|
|
(345
|
)
|
Plus:
Recoveries
|
206
|
|
|
615
|
|
|
6
|
|
Allowance acquired in the Merger
|
|
|
|
6,937
|
|
|
|
|
Balance, end of the period
|
$12,210
|
|
|
$16,737
|
|
|
$6,113
|
|
10. Goodwill and Other Intangible
Assets (as restated)
The
Company recorded goodwill of $1.0 million during 2007 relating to the
acquisition of BeneServ and $93.7 million in 2006 that resulted from the Merger.
The remaining goodwill balance, which approximates $836 thousand at June 30,
2007, relates to a branch acquisition in 1994. The net other intangible balance
of $14.3 million at June 30, 2007 primarily resulted from the Merger as well as
the customer intangible from the acquisition of BeneServ. The amortization
expense of the other intangible assets for the fiscal year ended June 30, 2007
was $2.1 million.
The
estimated aggregate amortization expense related to other intangibles for each
of the five succeeding calendar years is:
Year ending
|
|
(Dollars
in tho
usands)
|
June 30, 2008
|
|
|
|
$2,063
|
|
June 30,
2009
|
|
|
|
1,917
|
|
June 30, 2010
|
|
|
|
1,771
|
|
June 30,
2011
|
|
|
|
1,625
|
|
June 30, 2012
|
|
|
|
1,480
|
|
|
|
|
|
$8,856
|
|
As
discussed in Note 26 to the Consolidated Financial Statements, the Company
incurred an impairment charge to goodwill for the quarter ended December 31,
2007 in the amount of $40.0 million.
11. Property and Equipment (as
restated)
Property and equipment by major
classification are summarized as follows:
|
|
|
For the year ended
|
|
|
|
J
une 30
,
|
|
Depreciable
life
|
|
2007
|
|
2006
|
|
(Dollars in thousands)
|
Land
|
|
|
$
|
1,129
|
|
|
$
|
1,129
|
|
Buildings
|
15 to 40 years
|
|
|
6,849
|
|
|
|
5,710
|
|
Furniture, fixtures and equipment
|
3 to 7 years
|
|
|
10,806
|
|
|
|
6,572
|
|
Total
|
|
|
|
18,784
|
|
|
|
13,411
|
|
Accumulated depreciation
|
|
|
|
(7,477
|
)
|
|
|
(3,424
|
)
|
Property and equipment, net
|
|
|
$
|
11,307
|
|
|
$
|
9,987
|
|
167
Depreciation expense for the years ended June 30, 2007, 2006 and 2005
amounted to $2.6 million, $1.8 million, and $955 thousand,
respectively.
In
February 2006, the Bank completed a sale-leaseback of eight of its branch
offices resulting in the receipt of approximately $11.1 million in cash and an
excess over book value of approximately $722 thousand. The premium attributed to
the former First Financial branches of $194 thousand reduced goodwill while the
balance of such premium of $528 thousand is deferred and amortized as a
reduction of rent expense over the term of the leases.
12. Deposits (as
restated)
Deposit balances by type consisted
of the following at June 30, 2007, and 2006 (as restated):
|
June 3
0, 20
07
|
|
June
30, 20
06
|
|
|
|
|
Percent of
|
|
|
|
|
Percent of
|
|
Amount
|
|
total
|
|
Amount
|
total
|
|
(Dollars in thousands)
|
Savings accounts (passbooks, statements, clubs)
|
$
|
87,565
|
|
|
8.0
|
%
|
|
$
|
101,119
|
|
|
9.9
|
%
|
Money market
accounts
|
|
403,487
|
|
|
36.9
|
|
|
|
338,451
|
|
|
33.3
|
|
Certificates of deposit less than $100,000
|
|
239,967
|
|
|
22.0
|
|
|
|
238,603
|
|
|
23.5
|
|
Certificates of
deposit greater or equal to $100,000
|
|
94,705
|
|
|
8.7
|
|
|
|
63,024
|
|
|
6.2
|
|
Interest-bearing checking accounts
|
|
125,905
|
|
|
11.5
|
|
|
|
152,056
|
|
|
15.0
|
|
Non-interest-bearing checking accounts
|
|
141,101
|
|
|
12.9
|
|
|
|
123,24
7
|
|
|
12.1
|
|
Total
|
$
|
1,092,730
|
|
|
100.0
|
%
|
|
$
|
1,016,500
|
|
|
100.0
|
%
|
While
certificates of deposit are frequently renewed at maturity rather than paid out,
a summary of certificates of deposit by contractual maturity and rate at June
30, 2007 is as follows:
|
|
Am
ounts maturing i
n
|
|
|
|
|
Over
|
|
Over
|
|
Over
|
|
|
|
|
|
|
|
|
six months
|
|
one year
|
|
two years
|
|
|
|
|
|
|
Six months
|
|
through
|
|
through
|
|
through
|
|
Over
|
Interest
rates:
|
|
or less
|
|
one year
|
|
two years
|
|
three years
|
|
three years
|
|
|
(Dollars in thousands)
|
|
0.00% to 2.99%
|
|
$ 10,405
|
|
$
|
3,920
|
|
$
|
2,592
|
|
$
|
567
|
|
|
$1,063
|
|
3.00% to
3.99%
|
|
8,711
|
|
|
3,805
|
|
|
2,020
|
|
|
1,275
|
|
|
985
|
|
4.00% to
4.99%
|
|
97,353
|
|
|
55,253
|
|
|
23,587
|
|
|
16,026
|
|
|
4,486
|
|
5.00% to
5.99%
|
|
51,140
|
|
|
41,575
|
|
|
4,976
|
|
|
2,932
|
|
|
1,176
|
|
6.00% and
over
|
|
204
|
|
|
15
|
|
|
41
|
|
|
303
|
|
|
262
|
|
Total
|
|
$ 167,813
|
|
$
|
104,568
|
|
$
|
33,216
|
|
$
|
21,103
|
|
|
$7,972
|
|
As of June 30, 2007 certificates of
deposit contractual maturities are:
Year ending
|
|
(Dollars in thousands)
|
June 30, 2008
|
|
|
$272,382
|
|
June 30,
2009
|
|
|
33,215
|
|
June 30, 2010
|
|
|
21,104
|
|
June 30,
2011
|
|
|
3,246
|
|
June 30, 2012
|
|
|
3,177
|
|
Thereafter
|
|
|
1,548
|
|
|
|
|
$334,672
|
|
168
Interest expense on deposits for the
years ended June 30, 2007, 2006 and 2005 consisted of the following:
|
For th
e year ended June
30,
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in thousands)
|
Savings accounts
|
$15,460
|
|
$ 6,808
|
|
$ 411
|
Checking
accounts
|
349
|
|
1,962
|
|
2,687
|
Certificates of deposit
|
12,889
|
|
9,706
|
|
6,833
|
Total
|
$28,698
|
|
$18,476
|
|
$9,931
|
13. Federal Home Loan Bank Advances
(as restated)
Under
terms of its collateral agreement with the FHLB, the Company maintains otherwise
unencumbered qualifying assets (principally qualifying 1-4 family residential
mortgage loans and U.S. government agency, and mortgage-backed securities) in
the amount of at least as much as its advances from the FHLB. The Companys FHLB
stock is also pledged to secure these advances.
At June 30, 2007, the Companys FHLB
advances have contractual maturities as follows (as restated):
|
Amount
|
|
Weighted
|
|
outstanding
|
|
averag
e rate
|
|
(dollars in thousands)
|
Due by:
|
|
|
|
|
|
|
|
June 30, 2008
|
$
|
17,677
|
|
|
|
3.8
|
%
|
June 30,
2009
|
|
24,443
|
|
|
|
3.7
|
|
June 30,
2010
|
|
10,273
|
|
|
|
4.7
|
|
June 30,
2011
|
|
22,675
|
|
|
|
5.4
|
|
June 30,
2012
|
|
29,053
|
|
|
|
4.5
|
|
Thereafter
|
|
85,643
|
|
|
|
4.0
|
|
Total
|
$
|
189,764
|
|
|
|
4.2
|
%
|
At June
30, 2007, $152.5 million of the above advances were callable at the direction of
the FHLB within certain parameters, of which $107.5 million could be called
within one year. Included in the $152.5 million are $47.5 million in advances
which could only be called if an index reaches a certain strike rate. At June
30, 2007, these advances were between approximately 2.13 % and 4.25% from the
strike rate.
14. Trust Preferred Securities and
Other Borrowings
Effective
with the acquisition of Chester Valley, the Company assumed the liability for
$10.5 million of Junior Subordinated Debentures to the Chester Valley Statutory
Trust, a Pennsylvania Business Trust, in which the Company owned all of the
common equity as a result of the acquisition of Chester Valley. The Trust issued
$10.0 million of Trust Preferred Securities to investors, which were secured by
the Junior Subordinated Debentures and the guarantee of the Company. These Trust
Preferred Securities were redeemed by the Company on March 26, 2007 in
accordance with the Trust Agreement.
On March
31, 2006, the Company issued $25.8 million of Junior Subordinated Debentures to
Willow Grove Statutory Trust I, a Connecticut Statutory Trust, in which the
Company owns all of the common equity. The Trust then issued $25.0 million of
Trust Preferred Securities, which pay interest quarterly at three-month Libor
plus 1.31% to investors, which are secured by the Junior Subordinated Debentures
and the guarantee of the Company. The Junior Subordinated Debentures are treated
as debt of the Company but qualify as Tier I capital of the Bank to the extent
of the amount of the proceeds, which are invested in the Bank. The Trust
Preferred Securities are callable by the Company on or after September 30, 2011.
The Trust Preferred Securities must be redeemed by the Company upon their
maturity in the year 2036.
The Bank
utilizes outside borrowings to supplement its funding needs. At June 30, 2007,
the Bank had $20.0 million outstanding in repurchase agreements with a weighted
average interest rate of 4.50%. The underlying securities collateralizing these
repurchase agreements had a market value of $23.7 million at June 30,
2007.
169
15. Income Taxes (as
restated)
Income tax
expense for the years ended June 30, 2007, 2006 and 2005 consisted of the
following:
|
|
|
Current
|
|
Deferred
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
For the year ended June 30, 2007
|
Federal
|
|
$
|
1,150
|
|
|
$1,718
|
|
|
$
|
2,868
|
|
State
|
|
|
18
|
|
|
|
|
|
|
18
|
|
Total
|
|
$
|
1,168
|
|
|
$1,718
|
|
|
$
|
2,886
|
For the year
ended June 30, 2006
|
Federal
|
|
$
|
697
|
|
|
$2,289
|
|
|
$
|
2,986
|
|
State
|
|
|
24
|
|
|
|
|
|
|
24
|
|
Total
|
|
$
|
721
|
|
|
$2,289
|
|
|
$
|
3,010
|
For the year ended June 30, 2005
|
Federal
|
|
$
|
3,050
|
|
|
$ 2
|
|
|
$
|
3,052
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,050
|
|
|
$ 2
|
|
|
$
|
3,052
|
The
expense (benefit) for income taxes differed from that computed at the statutory
federal corporate rate for the years ended June 30, 2007, 2006 and 2005 as
follows:
|
For the year ended
June
30,
|
|
2007
|
|
2006
|
|
20
05
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
Amoun
t
|
|
pretax income
|
|
Amoun
t
|
|
pretax income
|
|
Amoun
t
|
|
i
ncom
e
|
|
(Dollars in thousands)
|
At statutory rate
|
$
|
3,554
|
|
|
|
35.0
|
%
|
|
$
|
3,387
|
|
|
|
35.0
|
%
|
|
$
|
3,324
|
|
|
|
34.0
|
%
|
State tax, net of federal tax benefit
|
|
12
|
|
|
|
0.1
|
|
|
|
15
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Low income housing credits
|
|
(162
|
)
|
|
|
(1.6
|
)
|
|
|
(154
|
)
|
|
|
(1.6
|
)
|
|
|
(29
|
)
|
|
|
(0.3
|
)
|
Tax-exempt interest
|
|
(601
|
)
|
|
|
(5.9
|
)
|
|
|
(269
|
)
|
|
|
(2.8
|
)
|
|
|
(280
|
)
|
|
|
(2.9
|
)
|
Meals and entertainment
|
|
11
|
|
|
|
0.1
|
|
|
|
6
|
|
|
|
0.1
|
|
|
|
6
|
|
|
|
0.1
|
|
BOLI
|
|
(152
|
)
|
|
|
(1.5
|
)
|
|
|
(130
|
)
|
|
|
(1.3
|
)
|
|
|
(65
|
)
|
|
|
(0.7
|
)
|
Dividends on ESOP shares
|
|
(93
|
)
|
|
|
(0.9
|
)
|
|
|
(106
|
)
|
|
|
(1.1
|
)
|
|
|
(108
|
)
|
|
|
(1.1
|
)
|
ESOP compensation expense
|
|
138
|
|
|
|
1.4
|
|
|
|
174
|
|
|
|
1.8
|
|
|
|
196
|
|
|
|
2.0
|
|
Stock based compensation
|
|
16
|
|
|
|
0.1
|
|
|
|
107
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Change in statutory federal tax rate
|
|
|
|
|
|
|
|
|
|
(93
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
163
|
|
|
|
1.6
|
|
|
|
73
|
|
|
|
0.7
|
|
|
|
8
|
|
|
|
0.1
|
|
Income tax expense
|
$
|
2,886
|
|
|
|
28.4
|
%
|
|
$
|
3,010
|
|
|
|
31.1
|
%
|
|
$
|
3,052
|
|
|
|
31.2
|
%
|
170
Significant deferred tax assets and liabilities included in other assets
and liabilities of the Company as of June 30, 2007 and 2006 are as
follows:
|
J
une 3
0
|
|
2007
|
|
2006
|
|
(Dollars in thousands)
|
Deferred loan fees
|
$
|
84
|
|
|
$
|
115
|
|
Retirement plan
reserves
|
|
488
|
|
|
|
586
|
|
Employee benefits
|
|
234
|
|
|
|
222
|
|
Uncollected
interest
|
|
78
|
|
|
|
274
|
|
Book bad debt reserves
|
|
4,274
|
|
|
|
6,024
|
|
Unrealized loss
on available for sale securities
|
|
1,712
|
|
|
|
1,966
|
|
Investment impairment reserves
|
|
1,360
|
|
|
|
1,504
|
|
Loan
discounts
|
|
66
|
|
|
|
325
|
|
Sale/Leaseback
|
|
159
|
|
|
|
167
|
|
Purchase
accounting fair value adjustments
|
|
88
|
|
|
|
292
|
|
Fixed asset write-downs
|
|
|
|
|
|
326
|
|
Investment in
joint venture
|
|
236
|
|
|
|
188
|
|
Net operating loss carryover
|
|
|
|
|
|
196
|
|
Low income
housing credit carryover
|
|
686
|
|
|
|
289
|
|
AMT credit carryover
|
|
691
|
|
|
|
272
|
|
Other,
net
|
|
222
|
|
|
|
207
|
|
Gross deferred tax assets
|
|
10,378
|
|
|
|
12,953
|
|
Intangible asset
amortization
|
|
(3,022
|
)
|
|
|
(3,534
|
)
|
Depreciation
|
|
(372
|
)
|
|
|
(411
|
)
|
Other
|
|
(99
|
)
|
|
|
(151
|
)
|
Gross deferred tax liabilities
|
|
(3,493
|
)
|
|
|
(4,096
|
)
|
Net tax deferred
asset
|
$
|
6,885
|
|
|
$
|
8,857
|
|
The
realizability of deferred tax assets is dependent upon a variety of factors,
including the generation of future taxable income, the existence of taxes paid
and recoverable, the reversal of deferred tax liabilities and tax planning
strategies. Based upon these and other factors, management believes it is more
likely than not that the Company will realize the benefits of these deferred tax
assets.
At June
30, 2007, the Company had $686 thousand in low income housing tax credit
carry-forwards. These carry-forwards expire after June 30, 2026 if not utilized.
In addition, the Company has $691 thousand of alternative minimum tax credit
carry-forwards that have an indefinite life.
The Small
Business Job Protection Act of 1996 (the 1996 Act) eliminated the use of the
reserve method of accounting for bad debt reserves by savings institutions,
effective for taxable years beginning after 1995. Prior to the 1996 Act, bad
debt reserves created prior to January 1, 1988 were subject to recapture into
taxable income if the Bank failed to meet certain thrift asset and definitional
tests. New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or ceases to maintain a bank
charter.
At June
30, 2007, the Banks total federal pre-1988 tax bad debt reserve was
approximately $8.9 million. The reserve reflects the cumulative effects of
federal tax deductions for which no federal income tax provisions have been
made.
171
16. Benefit Plans (as
restated)
401(k) Plan
The
Banks benefit plans cover all eligible employees and permits them to make
certain contributions to their 401(k) accounts in the plan on a pretax basis.
Effective January 1, 2006, employees are permitted to contribute up to 25% of
their salary to this plan. The Company matches every dollar contributed up to 4%
of salary, plus 50% of the amount of an employees salary reductions in excess
of 4% of salary, but not in excess of 6% of salary. The expense related to the
401(k) portion of this plan was $628 thousand, $255 thousand, and $70 thousand
for the years ended June 30, 2007, 2006 and 2005, respectively.
Employee Stock Ownership
Plan
On
December 23, 1998, the Company adopted an Employee Stock Ownership Plan
(ESOP). The ESOP borrowed $1.8 million from the Company and used the funds to
purchase 429,207 shares (179,270 shares pre-exchange) of the Companys common
stock. The loan has an interest rate of 7.75% and has an amortization schedule
of 15 years. In April 2002, an additional ESOP loan was made of $5.1 million to
purchase an additional 538,787 shares of the Companys common stock issued in
its second step reorganization. This loan has an interest rate of 4.75% and an
amortization schedule of 15 years. Shares purchased are held in a suspense
account for allocation among the participants as the loans are repaid. Effective
January 31, 2000, the Company merged the 401(k) Plan and ESOP. Contributions to
the ESOP portion of the 401(k)/ESOP and shares released from the loan collateral
will be in an amount proportional to repayment of the original ESOP loans.
Shares are allocated to participants based on compensation as described in the
401(k)/ESOP Plan Documents, in the year of allocation. At June 30, 2007, there
were 431,791 ESOP shares allocated to participants, representing a fair value of
$2.8 million, in addition, there were 32,267 shares committed to be released.
The Company recorded compensation expense of $890 thousand, $955 thousand and
$1.0 million for the ESOP for the years ended June 30, 2007, 2006 and 2005,
respectively.
Supplemental Retirement
Plans
Effective
June 30, 1998, the Company adopted non-qualified supplemental retirement plans
for the Companys Board of Directors (the Directors Plan) and for the
Companys former president (the Presidents Plan). The Directors Plan
provided for fixed annual payments to qualified directors for a period of ten
years from retirement. Benefits to be paid accrued at the rate of 20% per year
on completion of six full years of service, with full benefit accrual at ten
years of service. At the time these plans were adopted credit was given for past
service. The Presidents Plan provides for payments for a period of ten years
beginning at retirement based on a percentage of annual compensation not to
exceed an established cap. Full benefits become accrued at age 68 with partial
vesting prior thereto. Both plans provide for full payments in the event of a
change in control of the Company. The Directors Plan and Presidents Plan are
intended to be, and are, unfunded. The accrued liability of the Directors Plan
and the Presidents Plan were $801 thousand and $648 thousand and $965 thousand
and $710 thousand at June 30, 2007 and 2006, respectively.
In
November 2005, the Company terminated its Directors Retirement Plan and the
Directors Incentive Compensation Plan, at which time the directors became fully
vested in their accrued benefit as of October 31, 2005, under the Directors
Retirement Plan. The Companys former President has retired and is fully vested
in the Presidents Plan.
17. Commitments and
Contingencies
At June 30, 2007 and 2006, the
Company was committed to fund loans as follows:
|
J
une 30
|
|
2007
|
|
2006
|
|
(Dollars in thousands)
|
Loans with fixed interest rates
|
$
|
21,316
|
|
$
|
5,923
|
Loans with
variable interest rates
|
|
6,041
|
|
|
8,824
|
Total Commitments to fund loans
|
$
|
27,357
|
|
$
|
14,747
|
172
Financial Instruments With
Off-Balance Sheet Risk
The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet. The Companys
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments (see Note 5 above). At
June 30, 2007 and June 30, 2006, respectively, the Company was committed to the
funding of first mortgage loans of $15.3 million and $9.9 million, respectively,
construction loans of $48.7 million and $61.6 million, respectively, commercial
real estate loans of $1.8 million and $5.7 million, respectively, lines of
credit of $164.8 million and $146.0 million, respectively, and standby letters
of credit of $16.8 million and $9.0 million, respectively.
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 obligation to
repurchase loans by the Company, under certain circumstances. In most cases
repurchases and losses are rare, and no provision is made for losses at the time
of sale. When repurchases and losses are probable and reasonably estimable, a
provision is made in the financial statements for such estimated
losses.
On May
12, 2003, the Company entered into a sales and servicing master agreement with
the Federal Home Loan Bank of Pittsburgh (FHLB). The agreement allows the
Company to sell loans to the FHLB while retaining servicing and providing for a
credit enhancement. Under the terms of the agreement, the Company receives a ten
basis point annual fee in exchange for assuming the credit risk on losses in
excess of its contractual obligation up to a maximum of $605 thousand. The
Company has sold $16.6 million in loans under this agreement and had a maximum
credit risk exposure of $461 thousand at June 30, 2007. The fair value of these
guarantees was determined to be $0 at June 30, 2007.
Concentration of Credit
Risk
The
Company offers residential and construction real estate loans as well as
commercial and consumer loans. The Companys lending activities are concentrated
in Pennsylvania. The largest concentration of the Companys loan portfolio is
located in eastern Pennsylvania. The ability of the Companys borrowers to repay
amounts owed is dependent on several factors, including the economic conditions
in the borrowers geographic region and the borrowers financial
condition.
Legal Proceedings
As
previously described in the companys prospectus/joint proxy statement dated
April 27, 2005 and included in its registration statement on Form S-4 (file No.
333-123622) filed in connection with the Merger, FFB previously received a
subpoena from the Regional Municipal Securities Counsel in the Philadelphia
Office of the Securities and Exchange Commission (the SEC). The subpoena arose
out of a non-public SEC investigation titled Hummelstown General Authority,
which Authority issued non-rated revenue bonds now in default, underwritten by
the firm of a former director of Chester Valley and FFB. The SEC subpoena
requested the production of certain documents concerning FFBs involvement with
non-rated municipal securities, including those issued to finance the Whitetail
Golf Course by the Dauphin County General Authority and the Hummelstown General
Authority, through the former directors firm, and related matters. FFB
previously produced documents to the SEC and certain officers of FFB provided
testimony to the SEC in response to the SECs voluntary request for assistance
in this matter. On August 3, 2006, the SEC filed a complaint in federal court
against the former director, his wife, and the former directors firm. The Bank
is not named as a defendant in the complaint filed by the SEC.
FFB is a
party to three civil actions relating to some of the revenue bonds which are the
subject of the SEC investigation described above. On August 30, 2005, a writ of
summons was filed by the Boyertown Area School District (Boyertown) in the
Court of Common Pleas, Montgomery County, Pennsylvania commencing a civil action
against,
inter alia,
FFB.
Boyertown Area School
District v. First Financial Bank et. al.
, No.
0521799.
173
A complaint was filed on November 9,
2005, asserting the following claims against FFB: Breach of Trust Indenture and
Fiduciary Duties (Count 1), Breach of Fiduciary Duties (Count 2), Civil
Conspiracy (Count 3), and Concerted Action (Count 4). On September 19, 2005, Red
Lion Area School District (Red Lion) filed a complaint in the Court of Common
Pleas, York County, Pennsylvania, against
inter alia
, FFB.
Red Lion Area School District v. Bradbury et.
al.
, No. 2005-SU-1656-Y01; No.
2005-SU-2544-Y01. This case has been transferred to the Court of Common Pleas of
Montgomery County, Pennsylvania, and an amended complaint was filed on October
18, 2006. The amended complaint asserts the following claims against FFB:
Declaratory Judgment (Count 15), Breach of Trust Indenture (Count 16), Civil
Conspiracy (Count 17), Civil ConspiracyAlternative Legal Basis (Count 18),
Breach of Common Law Duties as Trustee (Count 19), Tortious Action in
Concert/Aiding and Abetting Fraud (Count 20), Breach of Trust Indenture (Count
21), Breach of Fiduciary Duties (Count 22), Vicarious Liability and Respondeat
Superior (Count 23), Unjust Enrichment (Count 24), and Unjust Enrichment (Count
25). On March 16, 2006, Perkiomen Valley School District (Perkiomen) filed a
complaint in the Court of Common Pleas, Montgomery County, Pennsylvania,
against,
inter alia
, FFB
Perkiomen Valley School District
v. First Financial Bank et.al.
, No. 06-06533.
The complaint asserts the following claims against FFB: Breach of Trust
Indenture (Count 1), Breach of Fiduciary Duties (Count 2), Vicarious Liability
and Respondeat Superior (Count 3), Civil Conspiracy (Count 4), and Concert of
Action (Count 5). The actions have been consolidated for discovery and case
management purposes, but not for trial. The Banks answers were provided on
September 6, 2007, with respect to the Red Lion matter, and September 10, 2007,
with respect to the Boyertown and Perkiomen matters. Discovery is in its initial
stages. The Company believes the above noted lawsuits are without merit and
intends to vigorously defend itself in the suits.
On June
16, 2007, Cincinnati Insurance Company (Cincinnati) commenced a declaratory
judgment action in federal court against the Bank, Red Lion, Boyertown, and
Perkiomen seeking a declaration that Cincinnati is not obligated to provide
insurance coverage to the Bank in connection with the SEC subpoena and the
litigation brought by Red Lion, Boyertown, and Perkiomen:
Cincinnati Insurance Company v. First Financial Bank et
al.
, 07-02389 (E.D. Pa.). The Banks answer
was provided on September 20, 2007.
In the
normal course of business, the Company is involved in various legal proceedings.
Management of the Company, based on discussions with legal counsel, believes
that such proceedings will not have a material adverse effect on the financial
condition or operations of the Company. There can be no assurance that any of
the outstanding legal proceedings to which the Company is a party will not be
decided adversely to the Companys interests and have a material adverse effect
on the financial condition and operations of the Company.
Other Commitments
In
connection with the operation of 29 of its banking offices and an operations
center, the Company leases certain office space. The leases are classified as
operating leases, with rent expense of $2.9 million, $2.0 million, and $837
thousand for the years ended June 30, 2007, 2006 and 2005, respectively. Minimum
payments over the remainder of the leases are summarized as follows:
|
Minimum lease
|
|
payments
|
|
(Dollars in thousands)
|
Year ended:
|
|
|
|
|
|
June 30, 2008
|
|
$
|
2,791
|
|
|
June 30, 2009
|
|
|
2,644
|
|
|
June 30, 2010
|
|
|
2,282
|
|
|
June 30, 2011
|
|
|
2,145
|
|
|
June 30, 2012
|
|
|
1,914
|
|
|
Thereafter
|
|
|
17,394
|
|
|
Total
|
|
$
|
29,170
|
|
|
18. Accounting for Derivative
Instruments and Hedging (as restated)
The
Company may from time to time utilize derivative instruments such as interest
rate swaps, interest rate collars, interest rate floors, interest rate swap
options or combinations thereof to assist in its asset/liability management. In
accordance with SFAS No. 133, Accounting for Derivative Instruments, the
Company documents
174
its hedge relationships, including
identification of the hedging instruments and the hedged items, as well as its
risk management objectives and strategies for undertaking the hedge. The Company
also assesses, both at inception and at least quarterly thereafter, whether the
derivative instruments that are used in hedging transactions are highly
effective in offsetting the changes in either the fair value or cash flows of
the hedged item. For fair value hedges, both the effective and ineffective
portions of the changes in the fair value of the derivative, along with the gain
or loss on the hedged item that is attributable to the hedged risk, are recorded
in the statement of operations within interest income or interest expense. For
cash flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in accumulated other comprehensive income. When the
hedged item impacts the statement of operations, the gain or loss included in
accumulated other comprehensive income is reported on the same line in the
statement of operations as the hedged item. In addition, the ineffective portion
of the changes in the fair value of derivatives used as cash flow hedges is
reported in the statement of operations.
As part
of the Merger, the Company assumed the responsibility for a $20 million notional
interest rate swap whereby the Company paid a variable rate and received a fixed
rate. The interest rate swap had been used to hedge certain Federal Home Loan
Bank borrowings of the former Chester Valley. On the date of the Merger, the
interest rate swap and the hedged borrowings were marked to fair value in
purchase accounting. In September 2005, the hedged borrowings were repaid and
$10 million notional amount of the interest rate swap was unwound with the
counter-party. After performing the appropriate documentation of the derivative
instrument, the Company designated the remaining $10 million notional amount
interest rate swap as a fair value hedge of certain existing borrowings of
Willow Financial Bank. The swap had the effect of converting a fixed rate
borrowing to an adjustable rate borrowing. During the quarter ended December 31,
2005, the derivative instrument ceased to be a highly effective hedge;
therefore, the Company discontinued hedge accounting resulting in a pre-tax
charge of $47 thousand. The interest rate swap was unwound in February 2006
without resulting in any additional impact to the statement of operations. The
basis adjustment that was previously recorded on the hedged borrowing that is
recorded in the statement of financial condition is amortized as an increase in
interest expense over the remaining life of the borrowing using the interest
method.
Additionally, in August 2003, Chester Valley purchased a $30.0 million
notional amount 3.50% six-month LIBOR interest rate cap while simultaneously
selling a $30.0 million notional amount 6.00% six-month LIBOR interest rate cap
(Interest Rate Corridor) which was to expire in August 2008. Chester Valley
paid a net premium, which entitled it to receive the difference between
six-month LIBOR from 3.50% up to 6.00% applied to the $30.0 million notional
amount. Upon consummation of the Merger, the Company assumed the Interest Rate
Corridor and designated it to hedge certain borrowings of Willow Financial Bank,
which were variable in nature and indexed to six-month LIBOR. The Interest Rate
Corridor was being used to hedge the cash flows of this borrowing. Prior to
October 23, 2006, the Interest Rate Corridor reduced the negative impact on
earnings of the borrowings in a rising interest rate environment. The fair
market value of the Interest Rate Corridor had two components: the intrinsic
value and the time value of the option. The Interest Rate Corridor was
marked-to-market quarterly, with changes in the intrinsic value of the Interest
Rate Corridor, net of tax, included as a separate component of other
comprehensive income, and the change in the time value of the option included
directly as interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, would have been expensed in the period in which
ineffectiveness was determined.
On
October 23, 2006, the Company unwound the Interest Rate Corridor and recognized
a gain of $804 thousand in the statement of operations upon repayment of the $30
million FHLB advance.
At June
30, 2007, the Company had five interest rate swap arrangements used to hedge
specific loans originated by the Bank for which the transactions were
economically beneficial to the Bank in passing along the interest rate risk to
the borrower. The swaps effectively convert the rates from a floating rate based
on LIBOR to a fixed rate throughout the life of the underlying loans. At June
30, 2007, the total outstanding notional amount on these swaps was $9.3 million.
The weighted average floating and fixed rates on these transactions were 4.6%
and 5.3%, respectively at June 30, 2007. The Company lacked sufficient
documentation for these transactions to receive hedge accounting treatment. As
such, the Bank has recorded a net receivable of $196 thousand and $480 thousand,
respectively, at June 30, 2007 and 2006. The change in the fair value of the
interest rate swaps is included as a component of other income on the
consolidated statements of income.
175
19. Regulatory
Matters
The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that if undertaken, could have a direct material effect on the
Companys financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Banks assets,
liabilities, and certain off-balance sheet items as calculated under accounting
practices. The Banks capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
At June
30, 2007, 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 Banks actual capital levels are detailed below (as
restated):
|
|
|
|
|
|
|
|
Required to Be Well
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
Required
for Capital 1
|
|
Prompt
Corrective
|
|
Actual Cap
ital
|
|
Adequacy P
urposes
|
|
Action Pro
vision
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
A
mount
|
|
Ratio
|
|
(Dollars in thousands)
|
As of
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital
(to tangible assets)
|
$
|
117,703
|
|
8.2%
|
|
$
|
21,580
|
|
1.5
|
%
|
|
$
|
28,773
|
|
2.0%
|
Core capital (to adjusted tangible assets)
|
|
117,703
|
|
8.2%
|
|
|
57,547
|
|
4.0
|
%
|
|
|
71,933
|
|
5.0%
|
Tier I capital
(to risk-weighted assets)
|
|
117,703
|
|
12.2%
|
|
|
N/A
|
|
N/A
|
|
|
57,682
|
|
6.0%
|
Risk-based capital (to risk-weighted assets)
|
|
127,983
|
|
13.3%
|
|
|
76,909
|
|
8.0
|
%
|
|
|
96,136
|
|
10.0%
|
As of June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital (to tangible assets)
|
$
|
108,354
|
|
7.4%
|
|
$
|
21,910
|
|
1.5
|
%
|
|
$
|
29,214
|
|
2.0%
|
Core capital (to
adjusted tangible assets)
|
|
108,354
|
|
7.4%
|
|
|
58,428
|
|
4.0
|
%
|
|
|
73,035
|
|
5.0%
|
Tier I capital (to risk-weighted assets)
|
|
108,354
|
|
11.3%
|
|
|
N/A
|
|
N/A
|
|
|
57,091
|
|
6.0%
|
Risk-based
capital (to risk-weighted assets)
|
|
119,875
|
|
12.6%
|
|
|
76,121
|
|
8.0
|
%
|
|
|
95,151
|
|
10.0%
|
In its
letter approving the merger of Willow Financial Bank and First Financial Bank,
the Office of Thrift Supervision (OTS), as one of the conditions for approval,
indicated that, for the periods ending December 31, 2005, 2006, and 2007, Willow
Financial Bank must have tier one core capital ratios at least equal to 6.50%,
6.75%, and 7.25%, respectively, and total risk-based capital equal to 11.97%,
12.02% and 12.40%, respectively. Willow Financial Bank must also submit to the
Office of Thrift Supervision, quarterly status reports detailing its compliance
with the conditions on regulatory capital outlined in its approval letter. The
Office of Thrift Supervisions conditions for approval of the Bank Merger also
indicated that, for the periods ending December 31, 2005, 2006, and 2007, Willow
Financial Bancorp must have consolidated tangible capital ratios at least equal
to 5.14%, 5.59% and 6.12%, respectively. The Bank and the Company currently
exceed all of these requirements.
20. Fair Value of Financial
Instruments
The
Companys methods for determining the fair value of its financial instruments as
well as significant assumptions and limitations are set forth below.
Limitations
Estimates
of fair value are made at a specific point in time, based upon, where available,
relevant market prices and information about the financial instrument. Such
estimates do not include any premium or discount that could result from offering
for sale at one time the Companys entire holdings of a particular financial
instrument. For a substantial portion of the Companys financial instruments, no
quoted market price exists. Therefore, estimates of fair value are necessarily
based on a number of significant assumptions (many of which involve events
outside the control of management). Such assumptions include assessments of
current economic condition, perceived risks associated with these financial
instruments and their counterparties, future expected loss experience, and other
factors. Given the uncertainties surrounding these assumptions, the reported
fair values represent estimates only and, therefore, cannot be compared to the
historical accounting model. Use of different assumptions or methodologies is
likely to result in significantly different fair value estimates.
176
The
estimated fair values presented neither include nor give effect to the values
associated with the Companys banking or other businesses, existing customer
relationships, branch banking network, property, equipment, goodwill, or certain
tax implications related to the realization of unrealized gains or losses. The
fair value of non-interest-bearing demand deposits, savings and NOW accounts,
and money market deposit accounts is equal to the carrying amount because these
deposits have no stated maturity. This approach to estimating fair value
excludes the significant benefit that results from the low-cost funding provided
by such deposit liabilities, as compared to alternative sources of funding. As a
consequence, this presentation may distort the actual fair value of a banking
organization that is a going concern.
The
following methods and assumptions were used to estimate the fair value of each
major classification of financial instruments at June 30, 2007 and
2006:
Cash and Cash Equivalents,
Accrued Interest Receivable, Deposits with No Stated Maturities, Accrued
Interest Payable, and Certificates of Deposit
These financial instruments have
carrying values that approximate fair value.
Securities Available for Sale,
Trading and Held to Maturity
Current quoted market prices were
used to determine fair value.
Loans
Fair
values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type and each loan category was
further segmented by fixed and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
based on estimated maturity and prepayment speeds using estimated market
discounted rates that reflected credit and interest risk inherent in the loans.
The estimate of the maturities and prepayment speeds was based on the Companys
historical experience. Cash flows were discounted using market rates adjusted
for portfolio differences.
Loans Available for
Sale
The fair
value of mortgage loans originated and intended for sale in the secondary market
is based on contractual cash flows using current market rates, calculated on an
aggregate basis.
FHLB Advances
Fair
value was estimated using discounted cash flow analysis based on the Companys
current incremental borrowing rate for similar types of borrowing
arrangements.
Trust Preferred
Securities
Fair
value was determined using discounted cash flow analysis based on changes in the
market rates since date of issuance.
Commitments to Extend
Credit
The
majority of the Companys commitments to extend credit carry current interest
rates if converted to loans. Because commitments to extend credit are generally
not assignable by the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts.
177
The
carrying amounts and estimated fair values of the Companys financial
instruments, including off-balance sheet financial instruments, at June 30, 2007
and 2006, are as follows (as restated):
|
June
30, 2
007
|
|
June
30, 2
006
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
(Dollars in thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
60,277
|
|
$
|
60,277
|
|
$
|
30,955
|
|
$
|
30,955
|
Trading securities
|
|
1,176
|
|
|
1,176
|
|
|
902
|
|
|
902
|
Securities
available for sale
|
|
188,339
|
|
|
188,339
|
|
|
196,925
|
|
|
196,925
|
Securities held to maturity
|
|
88,363
|
|
|
86,488
|
|
|
105,561
|
|
|
102,087
|
Loans available
for sale
|
|
8,075
|
|
|
8,075
|
|
|
2,635
|
|
|
2,635
|
Loans, net
|
|
1,035,293
|
|
|
1,020,289
|
|
|
1,063,601
|
|
|
1,056,425
|
Accrued interest
receivable
|
|
6,654
|
|
|
6,654
|
|
|
6,647
|
|
|
6,647
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no
stated maturities
|
|
758,058
|
|
|
758,058
|
|
|
714,873
|
|
|
714,873
|
Certificates of deposit
|
|
334,672
|
|
|
315,561
|
|
|
301,627
|
|
|
297,959
|
FHLB
Advances
|
|
189,764
|
|
|
183,429
|
|
|
282,555
|
|
|
275,970
|
Trust preferred securities
|
|
25,774
|
|
|
24,537
|
|
|
36,198
|
|
|
36,198
|
Accrued interest
payable
|
|
2,303
|
|
|
2,303
|
|
|
2,285
|
|
|
2,285
|
21. Comprehensive Income
(Loss)
The tax effects allocated to each
component of other comprehensive income (loss) are as follows:
|
Ye
ar ended June 30, 20
07
|
|
Before tax
|
|
Tax
|
|
After tax
|
|
amount
|
|
Effect
|
|
Amoun
t
|
|
(Dollars in thousands)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains during the period
|
$
|
1,638
|
|
|
$
|
(587
|
)
|
|
$
|
1,051
|
|
Reclassification adjustment for gains included in
net income
|
|
(228
|
)
|
|
|
80
|
|
|
|
(148
|
)
|
Gain on termination of interest rate
corridor
|
|
(804
|
)
|
|
|
281
|
|
|
|
(523
|
)
|
Net unrealized loss on cash flow hedge
|
|
(376
|
)
|
|
|
133
|
|
|
|
(243
|
)
|
Total other
comprehensive income
|
$
|
230
|
|
|
$
|
(93
|
)
|
|
$
|
137
|
|
|
|
Ye
ar ended June 30, 20
06
|
|
Before tax
|
|
Tax
|
|
After tax
|
|
amount
|
|
Effect
|
|
Amount
|
|
(Dollars in thousands)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses during the period
|
$
|
(4,549
|
)
|
|
$
|
1,612
|
|
|
$
|
(2,937
|
)
|
Reclassification adjustment for losses included in
net income
|
|
919
|
|
|
|
(322
|
)
|
|
|
597
|
|
Net unrealized loss on cash flow hedge
|
|
579
|
|
|
|
(203
|
)
|
|
|
376
|
|
Total other comprehensive loss
|
$
|
(3,051
|
)
|
|
$
|
1,087
|
|
|
$
|
(1964
|
)
|
|
|
Yea
r ended June 30, 20
05
|
|
Before tax
|
|
Tax
|
|
After tax
|
|
a
mount
|
|
Effect
|
|
Amount
|
|
(Dollars in thousands)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on securities available for
sale:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains during the period
|
$
|
1,749
|
|
|
$
|
(688
|
)
|
|
$
|
1,061
|
|
Reclassification adjustment for gains included in net
income
|
|
73
|
|
|
|
(24
|
)
|
|
|
49
|
|
Total other comprehensive income
|
$
|
1,822
|
|
|
$
|
(712
|
)
|
|
$
|
1,110
|
|
178
22. Segment
Information
Under the
definition of SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, the Company has two operating segments at June 30, 2007
and 2006; Willow Financial Bank and WIS. The Willow Financial Bank segment
primarily provides loan and deposit services to commercial and retail customers
through its network of 29 branch locations. The WIS segment, which was acquired
on August 31, 2005 in connection with the Merger, operates a full service
investment advisory and securities brokerage firm.
Segment information for the twelve
months ended June 30, 2007 and 2006 is as follows (as restated):
|
Year en
ded J
une
30
|
|
2007
|
|
2006
|
|
Bank
|
|
WIS
|
|
Total
|
|
Bank
|
|
WIS
|
|
Total
|
|
(Dollars in thousands)
|
Interest income
|
$
|
86,050
|
|
$
|
|
|
$
|
86,050
|
|
$
|
81,530
|
|
$
|
|
|
$
|
81,530
|
Interest
expense
|
|
41,062
|
|
|
|
|
|
41,062
|
|
|
32,205
|
|
|
|
|
|
32,205
|
Net interest income
|
|
44,988
|
|
|
|
|
|
44,988
|
|
|
49,325
|
|
|
|
|
|
49,325
|
Non-interest
income
|
|
9,958
|
|
|
2,309
|
|
|
12,267
|
|
|
6,025
|
|
|
2,089
|
|
|
8,114
|
Depreciation expense
|
|
2,598
|
|
|
|
|
|
2,598
|
|
|
1,837
|
|
|
|
|
|
1,837
|
Income tax
expense
|
|
2,752
|
|
|
134
|
|
|
2,886
|
|
|
2,840
|
|
|
170
|
|
|
3,010
|
Total net income
|
|
6,988
|
|
|
279
|
|
|
7,267
|
|
|
6,352
|
|
|
315
|
|
|
6,667
|
Total
assets
|
|
1,550,343
|
|
|
953
|
|
|
1,551,296
|
|
|
1,568,820
|
|
|
1,914
|
|
|
1,570,734
|
23. Parent Company Financial
Information (Willow Financial Bancorp, Inc.)
Condensed Statements of Financial
Condition
|
At
June 30, 2007
|
|
At
June 30, 2006
|
|
(
As restated
)
|
|
(
As restated
)
|
|
(Dollars in thousands)
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
440
|
|
|
|
$
|
3,883
|
|
Note receivable from subsidiary
|
|
|
4,770
|
|
|
|
5,182
|
|
Investment in subsidiaries
|
|
|
213,742
|
|
|
|
202,772
|
|
Investment securities
|
|
|
|
|
|
|
|
|
Trading
|
|
|
1,176
|
|
|
|
902
|
|
Available for sale (amortized cost of $789
and
|
|
|
|
|
|
|
|
|
$10,967 respectively)
|
|
|
827
|
|
|
|
10,881
|
|
Goodwill
|
|
|
6,526
|
|
|
|
6,526
|
|
Other assets
|
|
|
1,963
|
|
|
|
|
4,835
|
|
Total
assets
|
|
$
|
229,444
|
|
|
|
$
|
234,981
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
|
$
|
25,744
|
|
|
|
$
|
36,198
|
|
Other liabilities
|
|
|
4,267
|
|
|
|
|
159
|
|
Total
liabilities
|
|
|
30,011
|
|
|
|
36,357
|
|
Total stockholders equity
|
|
|
199,433
|
|
|
|
|
198,624
|
|
Total
liabilities and stockholders equity
|
|
$
|
229,444
|
|
|
|
$
|
234,981
|
|
179
Condensed Statements of
Income
|
Fo
r the year ended June 30
,
|
|
2007
|
|
2006
|
|
|
|
|
|
|
(As restated)
|
|
(As restated)
|
|
2005
|
|
|
(Dollars in thousands)
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
542
|
|
|
|
$
|
401
|
|
|
|
$
|
182
|
|
Total interest and dividend income
|
|
|
542
|
|
|
|
|
401
|
|
|
|
|
182
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) on investments
|
|
|
49
|
|
|
|
|
51
|
|
|
|
|
(57
|
)
|
Other income
|
|
|
2
|
|
|
|
|
48
|
|
|
|
|
|
|
Total non-interest income (loss)
|
|
|
51
|
|
|
|
|
99
|
|
|
|
|
(57
|
)
|
Total
income
|
|
|
593
|
|
|
|
|
500
|
|
|
|
|
125
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
14
|
|
|
|
|
281
|
|
|
|
|
452
|
|
Stationery and printing
|
|
|
|
|
|
|
|
27
|
|
|
|
|
28
|
|
Consulting services
|
|
|
|
|
|
|
|
38
|
|
|
|
|
744
|
|
Interest expense on subordinated
debentures
|
|
|
2,434
|
|
|
|
|
1,109
|
|
|
|
|
|
|
Investor relations
|
|
|
14
|
|
|
|
|
70
|
|
|
|
|
134
|
|
Other expense
|
|
|
600
|
|
|
|
|
425
|
|
|
|
|
208
|
|
Total
expense
|
|
|
3,062
|
|
|
|
|
1,950
|
|
|
|
|
1,566
|
|
Loss before taxes
|
|
|
(2,469
|
)
|
|
|
|
(1,450
|
)
|
|
|
|
(1,441
|
)
|
Income tax
benefit
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
(491
|
)
|
Loss before equity in income of subsidiary
|
|
|
(2,340
|
)
|
|
|
|
(1,450
|
)
|
|
|
|
(950
|
)
|
Equity in income
of subsidiary
|
|
|
9,607
|
|
|
|
|
8,117
|
|
|
|
|
7,676
|
|
Net income
|
|
$
|
7,267
|
|
|
|
$
|
6,667
|
|
|
|
$
|
6,726
|
|
180
Condensed Statements of Cash
Flows
|
Fo
r the year ended June 30
,
|
|
2007
|
|
2006
|
|
|
|
|
|
(As restated)
|
|
(As restated)
|
|
2005
|
|
(Dollars in thousands)
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income:
|
|
$
|
7,267
|
|
|
|
$
|
6,667
|
|
|
$
|
6,726
|
|
Adjustments to reconcile net income to net cash provided
by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of
subsidiary
|
|
|
(9,607
|
)
|
|
|
|
(8,117
|
)
|
|
|
(7,676
|
)
|
Realized (gain) loss on investments
|
|
|
(49
|
)
|
|
|
|
(51
|
)
|
|
|
57
|
|
Increase in other assets
|
|
|
(2,872
|
)
|
|
|
|
(2,644
|
)
|
|
|
(1,353
|
)
|
Purchase of trading account
securities
|
|
|
(274
|
)
|
|
|
|
(849
|
)
|
|
|
(53
|
)
|
Net tax payments received from subsidiary
|
|
|
8,438
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in other
liabilities
|
|
|
4,108
|
|
|
|
|
(191
|
)
|
|
|
(60
|
)
|
Net cash
provided by (used in) operating activities
|
|
|
7,011
|
|
|
|
|
(5,185
|
)
|
|
|
(2,359
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of securities available for sale
|
|
|
|
|
|
|
|
(10,054
|
)
|
|
|
(5,036
|
)
|
Proceeds from sales and calls of securities
available for sale
|
|
|
10,054
|
|
|
|
|
4,476
|
|
|
|
|
|
Net (funding) repayment of notes receivable
|
|
|
(1,284
|
)
|
|
|
|
1,367
|
|
|
|
13,655
|
|
Net cash used for acquisition
|
|
|
|
|
|
|
|
(35,032
|
)
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
8,770
|
|
|
|
|
(39,243
|
)
|
|
|
8,619
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution to subsidiaries
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
|
|
Dividends received from subsidiary
|
|
|
|
|
|
|
|
43,806
|
|
|
|
|
|
Proceeds from stock issuance
|
|
|
1,392
|
|
|
|
|
1,275
|
|
|
|
285
|
|
Proceeds from issuance of subordinated
debentures
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
Repayment of trust preferred securities
|
|
|
(10,454
|
)
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases
|
|
|
(3,242
|
)
|
|
|
|
(179
|
)
|
|
|
(2,595
|
)
|
Dividends paid
|
|
|
(6,920
|
)
|
|
|
|
(6,718
|
)
|
|
|
(4,196
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(19,224
|
)
|
|
|
|
48,184
|
|
|
|
(6,506
|
)
|
Net (decrease)
increase in cash and cash equivalents
|
|
|
(3,443
|
)
|
|
|
|
3,756
|
|
|
|
(246
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
3,883
|
|
|
|
|
127
|
|
|
|
373
|
|
Cash and cash
equivalents at end of period
|
|
$
|
440
|
|
|
|
$
|
3,883
|
|
|
$
|
127
|
|
24. Related Party
Transactions
The Bank
routinely enters into transactions with its directors and officers. Such
transactions are made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and do not, in the opinion of management, involve more than the normal credit
risk or present other unfavorable features. The aggregate amount of loans to
such related parties was $137 thousand and $283 thousand at June 30, 2007 and
2006, respectively, and all such loans were performing in accordance with their
terms at such dates.
25. Dividend Policy
The
Companys ability to pay dividends is dependent, in part, upon its ability to
obtain dividends from the Bank. The future dividend policy of the Company is
subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, financial conditions, cash needs,
and general business conditions. Holders of common stock will be entitled to
receive dividends as and when declared by the Board of Directors of the Company
out of funds legally available for that purpose. Such payment, however, will be
subject to the regulatory restrictions set forth by the OTS. In addition, OTS
regulations provides that, as a general rule, a financial institution may not
make a capital distribution if it would be undercapitalized after making the
capital distribution. During fiscal 2007, the Company paid cash dividends of
$6.9 million, or $0.46 per share.
181
26. Subsequent Event Goodwill
Impairment
The
Company follows the provisions of SFAS No. 142, Goodwill and Other
Intangibles, and performs an annual impairment test of goodwill. However, when
circumstances indicate that an event has occurred during an interim period, the
Company will perform an impairment test at that time. The Company has determined
that such an event occurred during the quarter ended December 31,
2007.
During
this period, conditions in the housing market continued to deteriorate resulting
in a tightening of available credit in the marketplace. Additionally, several
companies that specialized in sub-prime lending declared bankruptcy. These
market conditions and related concerns surrounding credit caused valuations for
thrifts and other financial institutions to decrease significantly during this
quarter. The market price of our stock declined from $12.11 on October 1, 2007
to $8.27 at December 31, 2007. Additionally, during this period, the Company was
delinquent in the filing of its Form 10-Q for the quarter ended September 30,
2007 and received notice from NASDAQ of a potential de-listing of the stock on
the NASDAQ Global Select Stock Market.
As a
result of the above conditions, the Company is in the process of completing an
interim impairment test of Goodwill. The review encompasses a two-step process.
The first step requires the Company to identify the reporting units and compare
the fair value of each reporting unit, which we compute using earnings multiple
approach and various transaction market approaches. The Company has two
reporting units: a.) Banking operations and b.) Willow Investment Services,
which includes BeneServ Corporate Benefit Services and Carnegie Wealth
Management, and therefore valuations were done for each unit. The Companys
completion of Step 1 indicated that impairment may exist in the Banking unit and
therefore the Company began the process of completing the second step. In the
second step, the implied fair value of Goodwill is calculated as the excess of
the fair value of the reporting unit over the fair values assigned to its
assets and liabilities. In a Current Report on Form 8-K filed with the SEC on
April 10, 2008, the management of the Company concluded that the Company would
be required to record an impairment charge to the goodwill recorded as a result
of its acquisition of Chester Valley Bancorp Inc. in August 2005. As a result of
changes in market and economic conditions and other factors, the Company has
recorded a goodwill impairment charge of $40.0 million in the consolidated
statement of operations for the three-month period ended December 31, 2007. The
Company does not believe that any material amount of the goodwill impairment
charge will result in future cash expenditures and the charge will not impact
the Companys tangible capital.
Item 9A. CONTROLS AND
PROCEDURES
9Aa. Disclosure Controls and
Procedures
Disclosure controls and procedures (as defined in Rules 13a 15(e) or
15d-15(e) under the Exchange Act) are designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. This information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. Our management, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered under this report. Based on the
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were not effective as of June 30,
2007 because of the material weaknesses discussed below.
9Ab. Internal Control over Financial
Reporting (as restated)
MANAGEMENT REPORT ON
EFFECTIVENESS
OF INTERNAL CONTROL OVER
FINANCIAL REPORTING (as restated)
Management of the Company and the Bank is responsible for establishing
and maintaining adequate internal control over financial reporting as such term
is defined in the Exchange Act. Under the supervision and with the participation
of management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO Framework).
182
In
connection with the completion of our testing of the internal controls and a
review of our financial statements for the year ended June 30, 2007 under the
COSO Framework, in our Form 10-K filed for the year ended June 30, 2007,
management identified material weaknesses in our internal control over financial
reporting as described below:
-
inadequate review and analysis of financial
statement account reconciliations related to the support for the manual
posting of accounting entries and the clearing of reconciling items in a
timely manner; and
-
improper application of accounting resources to
effectively evaluate the financial reporting impact of significant matters
including, but not limited to, interest rate swap transactions.
In
connection with the restatement of the Companys consolidated financial
statements described in Note 2 to the consolidated financial statements,
management has determined that an additional material weakness existed as of
June 30, 2007 and should be disclosed. Accordingly, management has included the
following additional material weakness:
-
policies and procedures to ensure journal entries
are accompanied by sufficient supporting documentation and are adequately
reviewed and approved for validity, completeness and accuracy prior to being
recorded were not operating as designed.
As a
result, certain controls and reconciliations associated with financial statement
account balances were not performed on a timely basis, journal entries were
recorded without sufficient supporting documentation, and review and approval
procedures relative to the material weaknesses described above were not
operating effectively. This resulted in errors that were material to interest
income, interest expense, non-interest income, non-interest expense, additional
paid-in capital and retained earnings, including the related income tax expense
effect, in each of the annual and quarterly financial statements for fiscal
years 2007 and 2006, which have been restated and corrected prior to issuance of
the financial statements included herein.
Based on
our evaluation under the COSO Framework, management concluded that our internal
control over financial reporting was not effective as of June 30,
2007.
Our
independent auditor, KPMG LLP, the independent registered public accounting firm
that audited the financial statements included in this report on Form 10-K, has
issued a report on of the Companys internal control over financial reporting.
Their report appears in Item 8.
9Ac. Changes in Internal Control
Over Financial Reporting
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
under the Exchange Act) occurred during the last fiscal quarter in the fiscal
year ended June 30, 2007 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
9Ad. Remediation of Material
Weaknesses in Process
In
response to the material weaknesses noted above, the Company has commenced the
following corrective actions to remediate the material weaknesses on an ongoing
basis:
-
The Company has conducted a thorough
assessment of the design of the reconciliation process as it relates to the
posting of manual journal entries. The Company has revised its reconciliation
process to require that all significant manual journal entries contain the
appropriate detailed support, and the processing of such entries be approved
by the Chief Accounting Officer, Corporate Controller and/or the Chief
Financial Officer. The approval of certain reconciliations in which the errors
occurred will require the review and approval of the Chief Accounting Officer,
Corporate Controller and/or Chief Financial Officer. Additionally, all
reconciling items are required to be cleared within a 90-day period. The
Company believes that, once fully implemented and tested, these procedures as
well as certain other process enhancements will ensure accurate and timely
completion of general ledger reconciliations with a level of precision to
detect errors that, in the future, would be material to the Companys
financial statements if not so detected.
-
Management has developed procedures that we believe, once fully
implemented and tested, will ensure that significant accounting transactions
are sufficiently researched and documented and appropriately
recorded.
-
The
Company has hired a new Corporate Controller as well as additional qualified
personnel within the accounting and finance departments. We will continue to
review our staffing needs in the finance and accounting area to ensure
adequate resources.
183
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this amended report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
WILLOW FINANCIAL BANCORP, INC.
|
|
Date: May 2,
2008
|
By:
|
/s/ DONNA M. COUGHEY
|
|
|
D
ONNA
M. C
OUGHEY
|
|
|
President and Chief
Executive Officer
|
|
Date: May 2,
2008
|
By:
|
/s/ JOSEPH T. CROWLEY
|
|
|
J
OSEPH
T. C
ROWLEY
|
|
|
Chief Financial
Officer
|
184
INFORMATION FOR THE THREE AND NINE
MONTH PERIOD ENDING MARCH 31, 2008
Managements Discussion and Analysis
of Financial Condition and Results of Operations for the Three and Nine Month
Period Ending March 31, 2008
The
following discussion is intended to assist in understanding the financial
condition and the results of operations for Willow Financial and its subsidiary
Willow Financial Bank, for the three and nine month periods ended March 31, 2008
and 2007. The information in this section should be read in conjunction with the
financial statements and the accompanying notes for the respective periods
included herein beginning on page 195 of this joint proxy statement/prospectus,
as well as Critical Accounting Policies beginning on page 116 of this joint
proxy statement/prospectus. This section contains certain forward-looking
statements (as defined in the Securities Exchange Act of 1934 and the
regulations thereunder) which are not historical facts or which indicate the
intentions, plans, beliefs, expectations or opinions of Willow Financials
management. Willow Financial urges you to read A Warning about Forward-Looking
Information, beginning on page 23 of this joint proxy statement/prospectus for
a discussion of the risks related to placing undue reliance on such forward
looking statements.
RESULTS OF OPERATIONS
General
For the
three-month period ended March 31, 2008, Willow Financial recorded a net loss of
$1.7 million or $0.11 diluted loss per share as compared to net income of $1.5
million or $0.10 diluted earnings per share for the comparable quarter in the
prior year. This decrease was primarily due to a $1.9 million increase in
professional fees as a result of Willow Financials out of balance condition
previously disclosed on page 87 of this joint proxy statement/prospectus as well
as an additional provision for loan losses of $824 thousand. For the nine-month
period ended March 31, 2008, the net loss was $40.1 million or $2.65 diluted
loss per share as compared to $6.5 million or $0.42 diluted earnings per share
for the comparable period in the prior year. The most significant cause for
these declines was a goodwill impairment charge of $40.0 million recorded in the
three-month period ended December 31, 2007. Willow Financials net interest
margin on a tax-equivalent basis decreased 21 basis points to 3.02% for the
three months ended March 31, 2008 from 3.23% for the three months ended March
31, 2007. The net interest margin on a tax-equivalent basis decreased 38 basis
points to 2.96% for the nine months ended March 31, 2008 from 3.34% for the nine
months ended March 31, 2007.
Goodwill Impairment
Willow
Financial follows the provisions of SFAS No. 142, Goodwill and Other
Intangibles, and performs an annual impairment test of goodwill. However, when
circumstances indicate that an event has occurred during an interim period,
Willow Financial will perform an impairment test at that time. Willow Financial
determined that such an event occurred during the quarter ended December 31,
2007. During this period, conditions in the housing market continued to
deteriorate resulting in a tightening of available credit in the marketplace.
Additionally, several companies that specialized in sub-prime lending declared
bankruptcy. These market conditions and related concerns surrounding credit
caused valuations for thrifts and other financial institutions to decrease
significantly during this quarter. As a result of the above conditions, Willow
Financial completed an interim impairment test of goodwill. The review
encompasses a two-step process. The first step requires Willow Financial to
identify the reporting units and compare the fair value of each reporting unit,
which we compute using an earnings multiple approach and various transaction
market approaches. Valuations were performed for each of Willow Financials
three reporting units. Willow Financials completion of Step 1 indicated that
impairment may exist in Willow Financials Banking unit and, therefore, Willow
Financial completed the second step. In the second step, the implied fair value
of goodwill is calculated as the excess of the fair value of the reporting unit
over the fair values assigned to its assets and liabilities. As a result of
this impairment test, Willow Financial recorded an impairment charge of $40.0
million related to its Banking unit for the quarter ended December 31, 2007.
This impairment charge had no impact on Willow Financials or Willow Financial
Banks tangible capital nor did it impact Willow Financials tangible book value
per share. Additionally, this impairment charge did not result from a
deterioration in Willow Financials core deposit intangible.
185
Net Interest Income
Net
interest income is determined primarily from the average interest rate spread
(i.e. the difference between the average yields on interest-earning assets and
the average rates paid on interest-costing liabilities) as well as the relative
amounts of average interest-earning assets compared to interest-bearing
liabilities. For the three months ended March 31, 2008 and 2007, our interest
rate spread was 2.60% and 2.66%, respectively. For the nine months ended March
31, 2008 and 2007, our interest rate spread was 2.48% and 2.85%,
respectively.
Net
interest income for the three-month periods ended March 31, 2008 and 2007 was
$10.8 million and $10.7 million, respectively, an increase of approximately $36
thousand. This increase was due primarily to an increase in average interest
earning assets of $103.9 million. This was partially offset by a decline in the
yield on interest earning assets of 33 basis points from 6.30% to 5.97%.
Additionally, the mix of interest earning assets changed as average loans
increased $119.7 million while average investment securities declined by $15.9
million at March 31, 2008 compared to March 31, 2007. For the quarter ended
March 31, 2008 compared to the similar period ended March 31, 2007,
interest-bearing liabilities increased $128.2 million while the cost of these
liabilities declined by 27 basis points from 3.64% to 3.37%. Net interest income
for the nine-month periods ended March 31, 2008 and 2007 was $31.0 million and
$34.1 million, respectively, a decrease of $3.0 million. Net interest income
decreased during this period primarily as a result of a 24 basis point increase
in the average cost of interest-bearing liabilities to 3.65% for the nine-month
period ended March 31, 2008 as compared to 3.41% for the nine-month period ended
March 31, 2007. Additionally, during this period, the yield on interest earning
assets declined by 13 basis points to 6.13% at March 31, 2008 as compared to
6.26% at March 31, 2007. During the nine months ended March 31, 2008, pressures
existed in the market place that maintained deposit rates at a high level.
Additionally, Willow Financial increased its commercial loan portfolio, which
tends to pay interest on a floating basis. With the declining interest rate
market, Willow Financials commercial loan yields declined from the prior
year.
The
following tables present the average daily balances for various categories of
assets and liabilities, and income and expense related to those assets and
liabilities for the three and nine-month periods ended March 31, 2008 and 2007.
Loans receivable include non-accrual loans. To adjust nontaxable securities to a
taxable equivalent, a 34.0% effective rate has been used for the three and
nine-month periods ended March 31, 2008 and 2007. The adjustment of tax-exempt
loans and securities to a tax equivalent yield in the table below may be
considered to include non-GAAP financial information. Willow Financials
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, Willow Financials management believes,
these measures provide useful information to investors by allowing them to make
peer comparisons. A GAAP reconciliation also is included below.
186
|
|
T
hree months Ended March 31
,
|
|
|
20
08
|
|
20
07
|
|
|
Average
|
|
|
|
|
Yield/
|
|
Average
|
|
|
|
|
Yield/
|
(Dollars in
Thousands)
|
|
Balance
|
|
I
nterest
|
|
Rate
|
|
Balance
|
|
I
nterest
|
|
Rate
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family residential
|
|
$
|
278,379
|
|
$
|
3,931
|
|
5.65
|
%
|
|
$
|
291,444
|
|
$
|
4,091
|
|
5.61
|
%
|
Construction and land
|
|
|
84,205
|
|
|
1,271
|
|
5.97
|
|
|
|
75,624
|
|
|
1,620
|
|
8.57
|
|
Commercial real estate
|
|
|
307,863
|
|
|
5,056
|
|
6.57
|
|
|
|
283,721
|
|
|
5,001
|
|
7.05
|
|
Commercial business
|
|
|
163,037
|
|
|
2,625
|
|
6.44
|
|
|
|
125,060
|
|
|
2,331
|
|
7.46
|
|
Consumer
|
|
|
332,032
|
|
|
4,937
|
|
5.88
|
|
|
|
269,948
|
|
|
4,150
|
|
6.15
|
|
Total loans
|
|
$
|
1,165,516
|
|
$
|
17,820
|
|
6.08
|
|
|
$
|
1,045,797
|
|
$
|
17,193
|
|
6.58
|
|
Securities and other investments
|
|
|
290,592
|
|
|
4,043
|
|
5.50
|
|
|
|
306,444
|
|
|
4,109
|
|
5.36
|
|
Total interest-earning assets
|
|
|
1,456,108
|
|
$
|
21,863
|
|
5.97
|
%
|
|
|
1,352,241
|
|
$
|
21,302
|
|
6.30
|
%
|
Non-interest
earning assets
|
|
|
125,058
|
|
|
|
|
|
|
|
|
162,503
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,581,166
|
|
|
|
|
|
|
|
$
|
1,514,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
887,721
|
|
$
|
6,751
|
|
3.05
|
|
|
$
|
882,953
|
|
$
|
7,215
|
|
3.31
|
|
FHLB borrowings
|
|
|
297,179
|
|
|
2,945
|
|
3.97
|
|
|
|
218,312
|
|
|
2,317
|
|
4.30
|
|
Repurchase agreements
|
|
|
75,000
|
|
|
721
|
|
3.86
|
|
|
|
21,333
|
|
|
269
|
|
5.11
|
|
Trust preferred securities
|
|
|
25,774
|
|
|
385
|
|
5.99
|
|
|
|
34,875
|
|
|
580
|
|
6.74
|
|
Total interest-bearing liabilities
|
|
|
1,285,674
|
|
|
10,802
|
|
3.37
|
%
|
|
|
1,157,473
|
|
|
10,381
|
|
3.64
|
%
|
Non-interest bearing deposits
|
|
|
124,830
|
|
|
|
|
|
|
|
|
138,895
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
9,784
|
|
|
|
|
|
|
|
|
13,941
|
|
|
|
|
|
|
Stockholders equity
|
|
|
160,878
|
|
|
|
|
|
|
|
|
204,435
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,581,166
|
|
|
|
|
|
|
|
$
|
1,514,744
|
|
|
|
|
|
|
Net interest income/interest rate spread
|
|
|
|
|
$
|
11,061
|
|
2.60
|
%
|
|
|
|
|
$
|
10,921
|
|
2.66
|
%
|
Net interest-earning assets/net interest margin
|
|
$
|
170,434
|
|
|
|
|
3.02
|
%
|
|
$
|
194,768
|
|
|
|
|
3.23
|
%
|
Ratio of average interest-earning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets to interest-bearing liabilities
|
|
|
|
|
|
|
|
113
|
%
|
|
|
|
|
|
|
|
117
|
%
|
187
|
|
Ni
ne months Ended March 31
,
|
|
|
2
008
|
|
2
007
|
|
|
Average
|
|
|
|
|
Yield/
|
|
Average
|
|
|
|
|
Yield/
|
(Dollars in
Thousands)
|
|
Balance
|
|
I
nterest
|
|
Rate
|
|
Balance
|
|
I
nterest
|
|
Rate
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family residential
|
|
$
|
278,693
|
|
$
|
11,314
|
|
5.41
|
%
|
|
$
|
294,064
|
|
$
|
12,752
|
|
5.78
|
%
|
Construction and land
|
|
|
79,193
|
|
|
4,288
|
|
7.09
|
|
|
|
75,034
|
|
|
4,913
|
|
8.60
|
|
Commercial real estate
|
|
|
292,328
|
|
|
15,011
|
|
6.85
|
|
|
|
285,779
|
|
|
14,821
|
|
6.92
|
|
Commercial business
|
|
|
152,785
|
|
|
8,035
|
|
7.01
|
|
|
|
127,681
|
|
|
7,149
|
|
7.47
|
|
Consumer
|
|
|
317,161
|
|
|
14,735
|
|
6.08
|
|
|
|
268,805
|
|
|
12,586
|
|
6.15
|
|
Total loans
|
|
$
|
1,120,160
|
|
$
|
53,383
|
|
6.30
|
|
|
$
|
1,051,363
|
|
$
|
52,221
|
|
6.58
|
|
Securities and other investments
|
|
|
299,698
|
|
|
12,600
|
|
5.50
|
|
|
|
319,461
|
|
|
12,730
|
|
5.24
|
|
Total interest-earning assets
|
|
|
1,419,858
|
|
$
|
65,983
|
|
6.13
|
%
|
|
|
1,370,824
|
|
$
|
64,951
|
|
6.26
|
%
|
Non-interest
earning assets
|
|
|
149,488
|
|
|
|
|
|
|
|
|
160,481
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,569,346
|
|
|
|
|
|
|
|
$
|
1,531,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
909,032
|
|
$
|
23,220
|
|
3.39
|
|
|
$
|
891,733
|
|
$
|
20,823
|
|
3.11
|
|
FHLB borrowings
|
|
|
245,745
|
|
|
7,858
|
|
4.24
|
|
|
|
236,690
|
|
|
7,042
|
|
3.96
|
|
Repurchase agreements
|
|
|
58,655
|
|
|
1,748
|
|
3.96
|
|
|
|
20,438
|
|
|
777
|
|
5.06
|
|
Trust preferred securities
|
|
|
25,774
|
|
|
1,237
|
|
6.37
|
|
|
|
35,743
|
|
|
1,686
|
|
6.28
|
|
Total interest-bearing liabilities
|
|
|
1,239,206
|
|
|
34,063
|
|
3.65
|
%
|
|
|
1,184,604
|
|
|
30,328
|
|
3.41
|
%
|
Non-interest bearing deposits
|
|
|
130,027
|
|
|
|
|
|
|
|
|
129,872
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
13,335
|
|
|
|
|
|
|
|
|
13,598
|
|
|
|
|
|
|
Stockholders equity
|
|
|
186,778
|
|
|
|
|
|
|
|
|
203,231
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,569,346
|
|
|
|
|
|
|
|
$
|
1,531,305
|
|
|
|
|
|
|
Net interest income/interest rate spread
|
|
|
|
|
$
|
31,920
|
|
2.48
|
%
|
|
|
|
|
$
|
34,623
|
|
2.85
|
%
|
Net interest-earning assets/net interest margin
|
|
$
|
180,652
|
|
|
|
|
2.96
|
%
|
|
$
|
186,220
|
|
|
|
|
3.34
|
%
|
Ratio of average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to interest-bearing liabilities
|
|
|
|
|
|
|
|
115
|
%
|
|
|
|
|
|
|
|
116
|
%
|
Although
Willow Financials management believes that the above-mentioned non-GAAP
financial measures enhance investors understanding of Willow Financials
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.
|
|
Three months Ended March
31
,
|
|
|
2008
|
|
2007
|
|
|
Interest
|
|
Tax
|
|
Adjusted
|
|
Interest
|
|
Tax
|
|
Adjusted
|
|
|
Income
|
|
Adjustment
|
|
Income
|
|
Income
|
|
Adjustment
|
|
Income
|
|
|
(Dollars in thousands)
|
Loans
|
|
$
|
17,738
|
|
|
$
|
82
|
|
|
$
|
17,820
|
|
$
|
17,068
|
|
|
$
|
125
|
|
|
$
|
17,193
|
Investments
|
|
|
3,841
|
|
|
|
202
|
|
|
|
4,043
|
|
|
4,054
|
|
|
|
55
|
|
|
|
4,109
|
Total
|
|
$
|
21,579
|
|
|
$
|
284
|
|
|
$
|
21,863
|
|
$
|
21,122
|
|
|
$
|
180
|
|
|
$
|
21,302
|
188
The net
interest margin on a GAAP basis was 2.97% and 3.31%, respectively, for the three
months ended March 31, 2008 and 2007.
|
Nine months Ended March
31
,
|
|
2008
|
|
2007
|
|
Interest
|
|
Tax
|
|
Adjusted
|
|
Interest
|
|
Tax
|
|
Adjusted
|
|
Income
|
|
Adjustment
|
|
Income
|
|
Income
|
|
Adjustment
|
|
Income
|
|
(Dollars in thousands)
|
Loans
|
$
|
53,104
|
|
|
$
|
279
|
|
|
$
|
53,383
|
|
$
|
51,861
|
|
|
$
|
360
|
|
|
$
|
52,221
|
Investments
|
|
12,007
|
|
|
|
593
|
|
|
|
12,600
|
|
|
12,535
|
|
|
|
195
|
|
|
|
12,730
|
Total
|
$
|
65,111
|
|
|
$
|
872
|
|
|
$
|
65,983
|
|
$
|
64,396
|
|
|
$
|
555
|
|
|
$
|
64,951
|
The net
interest margin on a GAAP basis was 2.92 % and 3.40 %, respectively, for the
nine months ended March 31, 2008 and 2007.
Interest Income
Interest
income on loans increased $670 thousand, or 3.9%, for the three-month period
ended March 31, 2008 compared to the three-month period ended March 31, 2007.
This increase resulted primarily from a $119.7 million, or 11.4%, increase in
average balance of loans over the period, which was partially offset by a 50
basis point, or 7.6% decrease in the average yield on the loan portfolio.
Interest income on loans increased $1.2 million, or 2.4%, for the nine-month
period ended March 31, 2008 compared to the similar prior year period. This
resulted primarily from an increase in average loan balances of $68.8 million,
or 6.5% in the nine months ended March 31, 2008 compared to the nine months
ended March 31, 2007. This increase was offset by a decrease in the average
yields earned on loans for the nine-month period ended March 31, 2008 of 28
basis points to 6.30%. The decrease in average yields on loans for the
three-month and nine-month periods ended March 31, 2008 resulted primarily from
the decrease in short-term interest rates that occurred between June 30, 2007
and March 31, 2008. Specifically, the Federal Reserve target rate decreased from
5.25% at June 30, 2007 to 4.00% at March 31, 2008. Willow Financial Bank has a
significant portfolio of variable rate loans, including commercial, residential
mortgage, and consumer home equity loans whose rates reset with changes in
Federal Reserve target rates. In addition, the yield on construction and land
loans declined due to an internally originated $6.7 million collateralized
commercial construction and land development loan with a long-term client of
Willow Financial Bank entering non-accrual status during the three months ended
December 31, 2007. Also, the increase in loan balances was due primarily to new
loans originated after market loan rates had decreased and during a period of
intense competition for high-quality commercial, residential mortgage, and
consumer loans. Willow Financial does not invest in sub-prime loans or related
assets and, accordingly, did not incur any significant impact to its loan yields
from disruptions in the credit markets for sub-prime assets during the
nine-month period ended March 31, 2008. Interest income on securities decreased
$213 thousand and $528 thousand, or 5.3% and 4.2%, respectively, for the
three-month and nine-month periods ended March 31, 2008 compared to the
three-month and nine-month periods ended March 31, 2007. The declines are due to
the decrease of $15.9 million, or 5.2%, and $19.8 million, or 6.2%,
respectively, in the average balance of investment securities for the three and
nine-month periods ended March 31, 2008 as compared to the comparable prior year
periods. These decreases were partially offset by increases in the average
tax-equivalent yields earned on securities of 14 basis points and 26 basis
points for the three-month and nine-month periods ended March 31, 2008 as
compared to the same periods ended March 31, 2007. Willow Financials investment
security yields were enhanced during the three-month and nine-month periods
ended March 31, 2008 as Willow Financial was able to reinvest significant cash
inflows from lower-yielding investments into higher-yielding
investments.
Interest Expense
Interest
expense on deposit accounts decreased $464 thousand, or 6.4%, for the
three-month period ended March 31, 2008 as compared to the three-month period
ended March 31, 2007. This decrease resulted primarily from a decrease in the
average cost of deposits of 26 basis points, or 7.9% and an increase in the
average balance of interest-bearing deposits of $4.8 million, or 0.5%. Interest
expense on deposit accounts increased $2.4 million, or 11.5%, for the nine-month
period ended March 31, 2008 compared to the comparable prior year period. This
increase resulted from a 28 basis point increase in the cost of deposits coupled
with an increase of $17.3 million in interest-bearing deposits. During the
six-month period ended December 31, 2007, Willow Financial experienced a lag in
rate
189
decreases on its variable rate
deposits. This lag in deposit rate decreases was due to the competitive market,
which kept deposit rates higher during the immediate periods following Federal
Reserve rate reductions. This lag appears to have subsided in the quarter ended
March 31, 2008 as the deposit rates have gradually declined. With the objective
of maintaining competitive core deposit pricing, Willow Financials variable
deposit rate decreases occurred at a slower pace than the decreases experienced
in the loan portfolio as floating rate loans contractually require adjustments
in rates consistent with the Federal Funds rate adjustments. During the quarter
ended March 31, 2008, Willow Financial successfully lowered its core deposit
interest rates while maintaining relatively stable balances. Throughout the
year, Willow Financial executed a strategy in which it did not compete heavily
for single-service certificates of deposit, thereby avoiding unprofitable rates
on new certificates of deposit during the nine-month period ended March 31,
2008. During the three-month period ended March 31, 2008, interest expense on
borrowings increased by $885 thousand, or 28.0%, as compared to the prior
comparable period. This increase was due primarily to a $123.4 million, or
45.0%, increase in average borrowings during that period. During the nine-month
period ended March 31, 2008, interest expense on borrowings increased by $1.3
million, or 14.1%, as compared to the nine-months ended March 31, 2007. This
increase was due primarily to an increase of $37.3 million, or 12.7%, in the
average outstanding balance of borrowings.
Provision for Loan
Losses
Willow
Financials provision for loan losses increased $824 thousand for the three
months ended March 31, 2008 compared to the corresponding prior three-month
period as no provision was deemed necessary during that period. For the nine
months ended March 31, 2008 compared to the comparable period ended March 31,
2007, the provision for loan losses increased by $1.6 million. The increase in
the provision expense is a result of the reduction of residential mortgage loans
as a percentage of total loans as Willow Financial now sells primarily all of
its residential mortgage production and the corresponding increase in commercial
loans, which carry a higher level of risk, as a percentage of total loans. In
addition, total non-performing loans increased from $3.9 million at June 30,
2007 to $10.1 million at March 31, 2008 due primarily to an internally
originated $6.7 million collateralized commercial construction and land
development loan with a long term client of Willow Financial Bank. Willow
Financials management believes, to the best of its knowledge, that the
allowance for loan losses was adequate at March 31, 2008 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 Willow Financials non-performing loans in
the remainder of Willow Financials loan portfolio.
Non-Interest Income
Non-interest income increased $1.6 million and $3.4 million, or 55.3% and
40.1%, respectively, for the three-month and nine-month periods ended March 31,
2008 as compared to the comparable periods ended March 31, 2007. The increase
during the three-month period was due primarily to an increase of $1.0 million
in gains on the sale of loans, and $631 thousand in income recorded from the
insurance operations of BeneServ. These were partially offset by a reduction in
gains on securities available for sale of $161 thousand due primarily to an
other than temporary impairment write-down of three equity securities
aggregating $256 thousand in the three months ended March 31, 2008. The increase
for the nine-month period was due primarily to an increase of $2.1 million in
gains on the sale of loans, $652 thousand in increased investment services
income resulting from growth in trust and retail investment sales and the
Carnegie acquisition as well as $1.8 million in income recorded from the
insurance operations of BeneServ. These increases were offset when compared to
the nine months ended March 31, 2007 by an $804 thousand one-time gain realized
upon the unwinding of an interest rate corridor as well as a reduction in gains
on securities available for sale of $250 thousand due primarily to the
previously discussed other than temporary impairment charge.
Non-Interest Expense
Non-interest expense increased $4.8 million and $49.3 million, or 41.9%
and 148.1%, respectively, for the three-month and nine-month periods ended March
31, 2008 as compared to the comparable periods ended March 31, 2007. The most
significant cause for this increase was the previously discussed goodwill
impairment charge of $40.0 million recorded in the three-month period ended
December 31, 2007. In addition, compensation and benefits increased $1.9 million
and $4.4 million, respectively, for the three-month and nine-month periods ended
March 31, 2008 as
190
compared to the comparable prior year
periods due primarily to the acquisition of BeneServ and Carnegie, which
occurred on March 30, 2007 and December 21, 2007, respectively as well as
increased commissions paid to loan officers due to the expansion of the mortgage
operations. Occupancy and equipment increased $313 thousand and $931 thousand,
respectively, during these same periods due primarily to rental and other
occupancy costs associated with the opening of the Oxford branch and the
aforementioned BeneServ and Carnegie acquisitions. Data processing costs
increased $144 thousand and $388 thousand, respectively, for the three-month and
nine-month periods ended March 31, 2008 as compared to the similar prior year
periods due principally to rate increases of third party providers as well as
increased account volumes. Professional fees increased $1.9 million and $2.5
million during these same periods due primarily to consulting and legal costs
incurred in investigating Willow Financials out of balance condition previously
disclosed herein as well as increased costs for Willow Financials independent
registered public accounting firm along with costs associated with due diligence
related to the merger.
Income Tax
Benefit/Expense
For the
three-month period ended March 31, 2008 the income tax benefit was $92 thousand
compared to an income tax provision of $704 thousand for the comparable prior
year period. The effective rate for the three-month period ended March 31, 2008
was 5.2% as compared to 31.9% for the comparable prior year period. For the
nine-month period ended March 31, 2008, the income tax benefit was $878 thousand
compared to a provision of $2.9 million for the comparable prior year period.
The effective tax rate for the nine-month period ended March 31, 2008 was 2.1%
compared to 31.1% for the nine-month period ended March 31, 2007. These
decreases are due primarily to an increase during the three and nine-months
ended March 31, 2008 in the balance of tax-exempt securities and related income
as well as credits received on low income housing partnerships representing a
larger portion of pre-tax book earnings, exclusive of the goodwill impairment
charge which is not deductible for tax purposes. For the nine-month period, this
was partially offset by a change in the federal statutory tax rate used in
calculating Willow Financials net deferred tax assets from 35% to 34%, which
increased income tax expense by approximately $108 thousand during the
nine-months ended March 31, 2008.
CHANGES IN FINANCIAL
CONDITION
General
Total
assets of Willow Financial increased by $33.2 million, or 2.1%, from June 30,
2007 to March 31, 2008 due primarily to a $92.8 million increase in the net loan
portfolio. Additionally, loans held for sale increased $16.1 million and FHLB
stock increased $4.1 million. Goodwill decreased by $38.8 million due primarily
to the aforementioned impairment charge of $40.0 million. Securities available
for sale and held to maturity decreased a combined $42.9 million. Cash and cash
equivalents decreased by approximately $5.3 million. Total liabilities amounted
to $1.4 billion at March 31, 2008, an increase of $75.2 million, or 5.6% from
June 30, 2007. FHLB advances increased $102.3 million, or 53.9%, from June 30,
2007. Securities sold under agreements to repurchase increased $55.0 million, or
275.0%, from June 30, 2007. Total deposits decreased $75.5 million, or 6.9%, to
$1.02 billion. Total stockholders equity decreased $41.9 million to $157.6
million at March 31, 2008 primarily due to the goodwill impairment
charge.
Cash and Cash
Equivalents
Cash and
cash equivalents amounted to $55.0 million and $60.3 million at March 31, 2008
and June 30, 2007, respectively. Cash and cash equivalents decreased during the
period due primarily to the increase in loan fundings and decrease in deposits,
offset by proceeds from FHLB advances and repayments of investment
securities.
Assets Available or Held for
Sale
Securities classified as available for sale decreased $33.7 million from
$188.3 million at June 30, 2007 to $154.7 million at March 31, 2008. Loans
classified as held for sale increased by $16.1 million, or 199.1%, to $24.2
million at March 31, 2008 from $8.1 million at June 30, 2007 due to an increase
in origination and sale commitment volumes during that period.
191
Investment Securities Held to
Maturity
At March
31, 2008, securities classified as held to maturity totaled $79.1 million as
compared to $88.4 million at June 30, 2007. The approximate $9.2 million decline
was primarily the result of calls and principal repayments within the
portfolio.
Loans
The net
loan portfolio of Willow Financial increased $92.8 million, or 9,0% to $1.13
billion at March 31, 2008. The increase was due to growth experienced in the
commercial real estate and construction portfolios as well as the acquisition of
$34.9 million in home equity loans during the three-month period ended September
30, 2007. These purchased loans continue to perform substantially in accordance
with their terms.
The
following table sets forth information with respect to non-performing assets
identified by Willow Financial, including non-accrual loans and other real
estate owned.
|
March 31,
|
|
June 30,
|
(Dollars in
thousands)
|
2008
|
|
2007
|
Non-accrual loans:
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
Single-family residential
|
$
|
1,176
|
|
|
$
|
845
|
|
Construction
|
|
7,213
|
|
|
|
463
|
|
Commercial real estate and multi-family
residential
|
|
843
|
|
|
|
697
|
|
Home Equity
|
|
368
|
|
|
|
601
|
|
Consumer loans
|
|
24
|
|
|
|
56
|
|
Commercial business loans
|
|
519
|
|
|
|
1,188
|
|
Total
|
|
10,143
|
|
|
|
3,850
|
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings
|
|
1
|
|
|
|
1
|
|
Total non-performing loans
|
|
10,144
|
|
|
|
3,851
|
|
Other real estate owned, net
|
|
232
|
|
|
|
|
|
Total non-performing assets
|
$
|
10,376
|
|
|
$
|
3,851
|
|
Non-performing loans to total loans
|
|
0.89
|
%
|
|
|
0.37
|
%
|
Non-performing assets to total assets
|
|
0.65
|
%
|
|
|
0.25
|
%
|
Total
non-performing assets increased $6.5 million, or 169.4%, to $10.4 million at
March 31, 2008 compared to $3.9 million at June 30, 2007. Non-performing loans
to total loans and non-performing loans to total assets were 0.89% and 0.65%,
respectively, at March 31, 2008 as compared to 0.37% and 0.25%, respectively at
June 30, 2007. This increase during the nine-month period ended March 31, 2008
resulted primarily from an internally originated $6.7 million collateralized
commercial construction and land development loan with a long-term client of
Willow Financial Bank. Also, the real estate owned portfolio at March 31, 2008
included one residential property located within Willow Financials market area
with an aggregate carrying value of $232 thousand as compared to no real estate
owned as of June 30, 2007. The allowance to gross loans decreased to 1.16% at
March 31, 2008 from 1.17% at June 30, 2007.
Intangible Assets
The
amount of Willow Financials intangible assets totaled $71.9 million at March
31, 2008 compared to $109.9 million at June 30, 2007. The decrease resulted
primarily from the goodwill impairment charge of $40.0 million and normal
intangible asset amortization offset by intangible assets of $3.2 million
recorded from the acquisition of Carnegie Wealth Management.
Other Assets
Other
assets increased by approximately $5.8 million from June 30, 2007 to March 31,
2008 due primarily to the settlement of the sale of two investment securities
which had a trade date prior to March 31, 2008, but settled in early April
2008.
192
Deposits
Willow
Financials total deposits decreased by $75.5 million, or 6.9 %, to $1.02
billion at March 31, 2008. The decrease resulted from the maturity of higher
costing certificates of deposit, which did not renew with Willow Financial
Bank.
Borrowings
Advances
from the FHLB of Pittsburgh are an additional source of funds used to supplement
the funding of loan demand as well as for liquidity and other asset/liability
management purposes. At March 31, 2008, the total amount of these borrowings
outstanding was $292.1 million, which is a $102.3 million, or a 53.9 %, increase
from the $189.8 million outstanding at June 30, 2007. Willow Financial Bank
determined that it was beneficial to utilize these borrowings to fund its loan
growth rather than pay higher rates for certificates of deposit.
Securities Sold Under Agreements to
Repurchase
Willow
Financials repurchase liability increased by $55.0 million from June 30, 2007
to March 31, 2008 due to six new agreements that were entered into by Willow
Financial during that period due to the opportunity to obtain lower cost funding
rates than through FHLB borrowings, and maturing certificates of
deposit.
Other Liabilities
Other
liabilities decreased by approximately $5.7 million from June 30, 2007 to March
31, 2008 due primarily to the settlement of the purchase of an investment
security which had a trade date prior to June 30, 2007, but settled in early
July 2007.
Stockholders Equity
Total
stockholders equity of Willow Financial amounted to $157.6 million at March 31,
2008 compared to $199.4 million at June 30, 2007, a decrease of $41.9 million.
This decrease was primarily the result of the goodwill impairment charge of
$40.0 million. The impairment charge had no impact on Willow Financials or
Willow Financial Banks tangible capital nor did it impact Willow Financials
tangible book value per share. For the nine-months ended March 31, 2008, the net
loss, excluding the goodwill impairment charge was $138 thousand. In addition,
accumulated other comprehensive income increased by $1.5 million during the
nine-months ended March 31, 2008 as a result of $1.5 million in unrealized
investment security gains, net of tax, during that period. Treasury stock
decreased by $788 thousand primarily due to the release of $1.1 million in
shares for the purchase of Carnegie Wealth Management offset by $299 thousand in
stock repurchases. Cash dividends paid for the nine-months ended March 31, 2008
were $5.2 million.
LIQUIDITY AND
COMMITMENTS
Willow
Financials liquidity, represented by cash and cash equivalents, is a product of
its operating, investing, and financing activities. Willow Financials primary
sources of funds are deposits, sales, amortization, prepayments and maturities
of outstanding loans and mortgage-backed securities, sales and maturities of
investment securities and other short-term investments and funds provided from
operations. Willow Financial 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, Willow
Financial invests excess funds in short-term interest-earning assets, which
provide liquidity to meet lending requirements. Additionally, Willow Financials
portfolio of securities available for sale provides Willow Financial with
additional tools in managing its liquidity.
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. Willow Financial 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. Certificates of
deposit scheduled to mature in one year or less at March 31, 2008 totaled $198.6
million.
193
Based on historical experience, Willow
Financials management believes, over the longer term, that a significant
portion of maturing certificates of deposit will remain with Willow Financial.
Willow Financial 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 Willow Financial from the FHLB was $581.5 million as of March 31,
2008, based on qualifying collateral, of which $292.9 million was available to
draw upon at March 31, 2008. Willow Financial is required to maintain sufficient
liquidity to ensure its safe and sound operation. Willow Financial anticipates
that it will continue to have sufficient funds, together with borrowings, to
meet its current commitments.
CAPITAL
At March
31, 2008 and June 30, 2007, Willow Financial Bank had regulatory capital, which
was well in excess of regulatory limits set by the Office of Thrift Supervision.
For additional information and Willow Financial Banks specific levels of
regulatory capital at March 31, 2008 and June 30, 2007, see note 14 of the Notes
to the Unaudited Consolidated Financial Statements for the Period Ending March
31, 2008 found elsewhere in this joint proxy statement/prospectus.
194
Unaudited Consolidated Financial
Statements of Willow Financial
For Three and Nine Months Ended March 31,
2008
Willow Financial Bancorp, Inc. and
Subsidiaries
Consolidated Statements of Financial
Condition
(Dollars in Thousands, Except
for Share Amounts)
|
(Unaudited)
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
2008
|
|
2007
|
Assets
|
|
|
|
|
|
|
|
Cash in banks
|
$
|
33,099
|
|
|
$
|
21,124
|
|
Interest-earning deposits
|
|
21,907
|
|
|
|
39,153
|
|
Total cash and cash
equivalents
|
|
55,006
|
|
|
|
60,277
|
|
Investment securities trading
|
|
1,262
|
|
|
|
1,176
|
|
Federal Home Loan Bank stock
|
|
15,523
|
|
|
|
11,394
|
|
Investment securities available for sale
(amortized cost of $157,285 and $193,232,
|
|
|
|
|
|
|
|
respectively)
|
|
154,661
|
|
|
|
188,339
|
|
Investment securities held to maturity (fair value of
$77,505 and $86,488, respectively)
|
|
79,146
|
|
|
|
88,363
|
|
Loans held for sale
|
|
24,155
|
|
|
|
8,075
|
|
Loans receivable
|
|
1,140,282
|
|
|
|
1,047,012
|
|
Deferred fees and costs, net
|
|
990
|
|
|
|
491
|
|
Allowance for loan losses
|
|
(13,224
|
)
|
|
|
(12,210
|
)
|
Loans receivable, net
|
|
1,128,048
|
|
|
|
1,035,293
|
|
Accrued interest receivable
|
|
6,631
|
|
|
|
6,654
|
|
Property and equipment, net
|
|
11,251
|
|
|
|
11,307
|
|
Bank owned life insurance
|
|
12,289
|
|
|
|
11,930
|
|
Real estate owned
|
|
232
|
|
|
|
|
|
Other intangible assets, net
|
|
15,174
|
|
|
|
14,345
|
|
Goodwill
|
|
56,774
|
|
|
|
95,597
|
|
Other assets
|
|
24,317
|
|
|
|
18,546
|
|
Total Assets
|
$
|
1,584,469
|
|
|
$
|
1,551,296
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
$
|
894,976
|
|
|
$
|
951,629
|
|
Non-interest bearing deposits
|
|
122,245
|
|
|
|
141,101
|
|
Securities sold under agreements to
repurchase
|
|
75,000
|
|
|
|
20,000
|
|
Advance payments by borrowers for taxes and
insurance
|
|
3,564
|
|
|
|
4,254
|
|
Federal Home Loan Bank advances
|
|
292,094
|
|
|
|
189,764
|
|
Trust preferred securities
|
|
25,774
|
|
|
|
25,774
|
|
Accrued interest payable
|
|
1,882
|
|
|
|
2,303
|
|
Other liabilities
|
|
11,375
|
|
|
|
17,038
|
|
Total Liabilities
|
|
1,426,910
|
|
|
|
1,351,863
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
Common stock - $0.01 par value; 40,000,000 shares authorized;
17,490,474 and 17,487,770
|
|
|
|
|
|
|
|
shares issued at March 31, 2008 and June 30, 2007,
respectively
|
|
175
|
|
|
|
175
|
|
Additional paid-in capital
|
|
191,072
|
|
|
|
190,776
|
|
Retained earnings substantially restricted
|
|
698
|
|
|
|
46,030
|
|
Treasury stock (1,822,606 and 1,920,025 shares at March 31, 2008
and June 30, 2007
|
|
|
|
|
|
|
|
respectively, at cost)
|
|
(30,258
|
)
|
|
|
(31,046
|
)
|
Accumulated other comprehensive loss
|
|
(1,730
|
)
|
|
|
(3,180
|
)
|
Obligation of deferred compensation plan
|
|
1,287
|
|
|
|
1,277
|
|
Unallocated common stock held by:
|
|
|
|
|
|
|
|
Employee Stock Ownership Plan
(ESOP)
|
|
(2,437
|
)
|
|
|
(2,958
|
)
|
Recognition and Retention Plan Trust
(RRP)
|
|
(1,248
|
)
|
|
|
(1,641
|
)
|
Total Stockholders Equity
|
|
157,559
|
|
|
|
199,433
|
|
Total Liabilities and Stockholders
Equity
|
$
|
1,584,469
|
|
|
$
|
1,551,296
|
|
See accompanying notes to consolidated
financial statements.
195
Willow Financial Bancorp, Inc. and
Subsidiaries
Consolidated Statements of Operations
Three Months Ended
March 31, 2008 and 2007
(Dollars in
Thousands, Except for Per Share Amounts, Unaudited)
|
Three months Ende
d March 31,
|
|
2008
|
|
2007
|
INTEREST INCOME:
|
|
|
|
|
|
|
Loans
|
$
|
17,738
|
|
|
$
|
17,068
|
Mortgage-backed and investment
securities
|
|
3,841
|
|
|
|
4,054
|
Total interest income
|
|
21,579
|
|
|
|
21,122
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
Deposits
|
|
6,751
|
|
|
|
7,215
|
Securities sold under agreements to
repurchase
|
|
721
|
|
|
|
269
|
Borrowings
|
|
3,330
|
|
|
|
2,897
|
Total interest expense
|
|
10,802
|
|
|
|
10,381
|
NET INTEREST
INCOME
|
|
10,777
|
|
|
|
10,741
|
Provision for loan losses
|
|
824
|
|
|
|
|
Net interest income after provision for loan
losses
|
|
9,953
|
|
|
|
10,741
|
NON-INTEREST INCOME:
|
|
|
|
|
|
|
Investment services income, net
|
|
1,209
|
|
|
|
946
|
Income from insurance operations
|
|
631
|
|
|
|
|
Service charges and fees
|
|
1,372
|
|
|
|
1,374
|
Gain (loss) on:
|
|
|
|
|
|
|
Sale of loans
|
|
1,238
|
|
|
|
192
|
Securities available for sale
|
|
(61
|
)
|
|
|
100
|
Other
|
|
112
|
|
|
|
286
|
Total non-interest income
|
|
4,501
|
|
|
|
2,898
|
NON-INTEREST
EXPENSES:
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
8,032
|
|
|
|
6,176
|
Occupancy and equipment
|
|
2,394
|
|
|
|
2,081
|
Data processing
|
|
502
|
|
|
|
358
|
Advertising
|
|
521
|
|
|
|
557
|
Deposit insurance premiums
|
|
30
|
|
|
|
30
|
Amortization of intangible assets
|
|
621
|
|
|
|
543
|
Professional fees
|
|
2,473
|
|
|
|
593
|
Other
|
|
1,650
|
|
|
|
1,095
|
Total non-interest expenses
|
|
16,223
|
|
|
|
11,433
|
(Loss) income
before income taxes
|
|
(1,769
|
)
|
|
|
2,206
|
Income tax (benefit) expense
|
|
(92
|
)
|
|
|
704
|
NET (LOSS) INCOME
|
$
|
(1,677
|
)
|
|
$
|
1,502
|
(LOSS) EARNINGS PER SHARE
|
|
|
|
|
|
|
Basic
|
$
|
(0.11
|
)
|
|
$
|
0.10
|
Diluted
|
$
|
(0.11
|
)
|
|
$
|
0.10
|
DIVIDENDS PER
SHARE PAID DURING PERIOD
|
$
|
0.12
|
|
|
$
|
0.12
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
Basic
|
|
15,257,712
|
|
|
|
15,146,910
|
Diluted
|
|
15,305,581
|
|
|
|
15,353,248
|
See accompanying notes to consolidated
financial statements.
196
Willow Financial Bancorp, Inc. and
Subsidiaries
Consolidated Statements of Operations
Nine Months Ended March
31, 2008 and 2007
(Dollars in Thousands,
Except for Per Share Amounts, Unaudited)
|
Nine month
s Ende
d March
31,
|
|
2008
|
|
2007
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
Loans
|
$
|
53,104
|
|
|
$
|
51,861
|
|
Mortgage-backed and investment
securities
|
|
12,007
|
|
|
|
12,535
|
|
Total interest
income
|
|
65,111
|
|
|
|
64,396
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
Deposits
|
|
23,220
|
|
|
|
20,823
|
|
Securities sold under agreements to
repurchase
|
|
1,748
|
|
|
|
777
|
|
Borrowings
|
|
9,095
|
|
|
|
8,728
|
|
Total
interest expense
|
|
34,063
|
|
|
|
30,328
|
|
NET INTEREST
INCOME
|
|
31,048
|
|
|
|
34,068
|
|
Provision (recovery) for loan
losses
|
|
1,485
|
|
|
|
(100
|
)
|
Net interest income after
provision for loan losses
|
|
29,563
|
|
|
|
34,168
|
|
NON-INTEREST INCOME:
|
|
|
|
|
|
|
|
Investment services income, net
|
|
3,204
|
|
|
|
2,552
|
|
Income from insurance
operations
|
|
1,776
|
|
|
|
|
|
Service charges and fees
|
|
4,006
|
|
|
|
4,116
|
|
Gain (loss) on:
|
|
|
|
|
|
|
|
Sale of loans
|
|
2,552
|
|
|
|
439
|
|
Securities
available for sale
|
|
(36
|
)
|
|
|
214
|
|
Gain on termination of interest rate
corridor
|
|
|
|
|
|
804
|
|
Other
|
|
464
|
|
|
|
415
|
|
Total non-interest
income
|
|
11,966
|
|
|
|
8,540
|
|
NON-INTEREST EXPENSES:
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
22,271
|
|
|
|
17,826
|
|
Occupancy and equipment
|
|
6,899
|
|
|
|
5,968
|
|
Data processing
|
|
1,464
|
|
|
|
1,076
|
|
Advertising
|
|
1,393
|
|
|
|
1,519
|
|
Deposit insurance premiums
|
|
91
|
|
|
|
90
|
|
Goodwill impairment
|
|
40,000
|
|
|
|
|
|
Amortization of intangible assets
|
|
1,670
|
|
|
|
1,661
|
|
Professional fees
|
|
4,136
|
|
|
|
1,674
|
|
Other
|
|
4,621
|
|
|
|
3,462
|
|
Total
non-interest expenses
|
|
82,545
|
|
|
|
33,276
|
|
(Loss) income
before income taxes
|
|
(41,016
|
)
|
|
|
9,432
|
|
Income tax (benefit) expense
|
|
(878
|
)
|
|
|
2,929
|
|
NET (LOSS) INCOME
|
$
|
(40,138
|
)
|
|
$
|
6,503
|
|
(LOSS) EARNINGS PER SHARE
|
|
|
|
|
|
|
|
Basic
|
$
|
(2.65
|
)
|
|
$
|
0.43
|
|
Diluted
|
$
|
(2.65
|
)
|
|
$
|
0.42
|
|
DIVIDENDS PER
SHARE PAID DURING PERIOD
|
$
|
0.35
|
|
|
$
|
0.36
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
Basic
|
|
15,143,893
|
|
|
|
15,090,108
|
|
Diluted
|
|
15,235,970
|
|
|
|
15,347,025
|
|
See accompanying notes to consolidated
financial statements.
197
Willow
Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Other
Comprehensive Income
Three and Nine Months Ended March 31, 2008 and
2007
(Dollars in Thousands,
Unaudited)
|
Three months Ended
|
|
Ma
rch 31,
|
|
2008
|
|
2007
|
Net (loss) income
|
$
|
(1,677
|
)
|
|
$
|
1,502
|
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
Net unrealized holding (losses) gains on securities
available for sale
|
|
|
|
|
|
|
|
during
the period
|
|
(7
|
)
|
|
|
371
|
|
Reclassification adjustment for losses
(gains) included in net income
|
|
40
|
|
|
|
(65
|
)
|
Comprehensive
(loss) income
|
$
|
(1,644
|
)
|
|
$
|
1,808
|
|
|
|
Nine months Ended
|
|
Ma
rch 31,
|
|
2008
|
|
2007
|
Net (loss) income
|
$
|
(40,138
|
)
|
|
$
|
6,503
|
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
Net unrealized holding gains on securities available for
sale during the period
|
|
1,464
|
|
|
|
2,813
|
|
Change in tax rate
|
|
(38
|
)
|
|
|
|
|
Gain on termination of interest rate
corridor
|
|
|
|
|
|
(523
|
)
|
Reclassification adjustment for losses
(gains) included in net income
|
|
24
|
|
|
|
(139
|
)
|
Net unrealized loss on cash flow hedge
|
|
|
|
|
|
(243
|
)
|
Comprehensive (loss) income
|
$
|
(38,688
|
)
|
|
$
|
8,411
|
|
See accompanying notes to consolidated
financial statements.
198
Willow Financial Bancorp, Inc. and
Subsidiaries
Consolidated Statements of Cash Flow
Nine Months Ended March
31, 2008 and 2007
(Dollars in Thousands,
Unaudited)
|
Nine months Ended
|
|
March 31,
|
|
2008
|
|
2007
|
Net (loss) income
|
$
|
(40,138
|
)
|
|
$
|
6,503
|
|
Add (deduct)
items not affecting cash flows from operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
2,274
|
|
|
|
1,896
|
|
Amortization of premiums and accretion of discounts,
net
|
|
83
|
|
|
|
(643
|
)
|
Impairment on goodwill
|
|
40,000
|
|
|
|
|
|
Amortization of intangible assets
|
|
1,670
|
|
|
|
1,661
|
|
Provision (reduction) for loan losses
|
|
1,485
|
|
|
|
(100
|
)
|
Gain on sale of loans held for sale
|
|
(2,552
|
)
|
|
|
(439
|
)
|
Gain on sale of investment securities
|
|
(220
|
)
|
|
|
(214
|
)
|
Gain on termination of interest rate corridor
|
|
|
|
|
|
804
|
|
Investment impairment
|
|
256
|
|
|
|
|
|
Origination of loans held for sale
|
|
(169,938
|
)
|
|
|
(29,411
|
)
|
Proceeds from the sale of loans held for sale
|
|
156,410
|
|
|
|
26,559
|
|
Increase in trading account securities
|
|
(86
|
)
|
|
|
(214
|
)
|
Amortization of deferred loan fees, discounts and
premiums
|
|
355
|
|
|
|
(926
|
)
|
Decrease in accrued interest receivable
|
|
23
|
|
|
|
48
|
|
Increase in value of bank owned life insurance
|
|
(359
|
)
|
|
|
(331
|
)
|
Increase in other assets
|
|
(7,031
|
)
|
|
|
(2,370
|
)
|
Decrease in other liabilities
|
|
(5,691
|
)
|
|
|
(1,198
|
)
|
Stock based compensation
|
|
1,313
|
|
|
|
1,449
|
|
Excess tax benefits from stock-based compensation
|
|
(9
|
)
|
|
|
(118
|
)
|
(Decrease) increase in accrued interest payable
|
|
(421
|
)
|
|
|
111
|
|
Net cash flows (used in) provided by operating
activities
|
|
(22,576
|
)
|
|
|
1,459
|
|
Cash flows from
investment activities:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(1,980
|
)
|
|
|
(3,249
|
)
|
Proceeds from the sale of office buildings
|
|
|
|
|
|
717
|
|
Net (increase) decrease in loans
|
|
(95,042
|
)
|
|
|
34,183
|
|
Proceeds from maturities, sales, payments and calls of investment
securities held to maturity
|
|
9,220
|
|
|
|
12,460
|
|
Purchase of securities available for sale
|
|
(21,506
|
)
|
|
|
(20,831
|
)
|
(Increase) decrease in FHLB stock
|
|
(4,129
|
)
|
|
|
3,558
|
|
Proceeds from sales and calls of securities available for
sale
|
|
57,621
|
|
|
|
55,482
|
|
Net cash used for acquisitions
|
|
(2,300
|
)
|
|
|
(4,433
|
)
|
Net cash flows (used in) provided by investment
activities
|
|
(58,116
|
)
|
|
|
77,887
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
(75,509
|
)
|
|
|
41,506
|
|
Increase in securities sold under agreements to
repurchase
|
|
55,000
|
|
|
|
10,000
|
|
Proceeds from FHLB advances
|
|
557,042
|
|
|
|
107,400
|
|
Repayments of FHLB advances
|
|
(454,905
|
)
|
|
|
(195,044
|
)
|
Repayment of trust preferred securities
|
|
|
|
|
|
(10,000
|
)
|
Decrease in advance payments by borrowers for taxes and
insurance
|
|
(690
|
)
|
|
|
(1,568
|
)
|
Cash dividends on common stock
|
|
(5,253
|
)
|
|
|
(5,177
|
)
|
Common stock repurchased
|
|
(299
|
)
|
|
|
(809
|
)
|
Cash in lieu of fractional shares
|
|
|
|
|
|
(10
|
)
|
Stock options exercised
|
|
26
|
|
|
|
893
|
|
Excess tax benefits from stock-based compensation
|
|
9
|
|
|
|
118
|
|
Net cash flows
provided by (used in) financing activities
|
|
75,421
|
|
|
|
(52,691
|
)
|
Net (decrease) increase in cash and cash
equivalents
|
|
(5,271
|
)
|
|
|
26,655
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
Beginning of period
|
|
60,277
|
|
|
|
30,955
|
|
End of period
|
|
55,006
|
|
|
$
|
57,610
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
Cash payments during the year for:
|
|
|
|
|
|
|
|
Taxes
|
$
|
51
|
|
|
$
|
1,150
|
|
Interest
|
$
|
34,484
|
|
|
$
|
30,512
|
|
Non-cash items:
|
|
|
|
|
|
|
|
Net unrealized
gain on investment securities available for sale, net of
tax
|
$
|
1,464
|
|
|
$
|
2,813
|
|
Net unrealized loss on cash flow hedge, net of tax
|
$
|
|
|
|
$
|
(243
|
)
|
See accompanying notes to consolidated
financial statements.
199
WILLOW FINANCIAL BANCORP,
INC.
NOTES TO THE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting
Policies
Description of Business
Effective
on September 21, 2006, Willow Grove Bancorp, Inc. and Willow Grove Bank changed
their names to Willow Financial Bancorp, Inc. and Willow Financial Bank,
respectively. As contained herein, references to Willow Financial include both
Willow Financial Bancorp, Inc. and Willow Grove Bancorp, Inc. and references to
Willow Financial Bank include both Willow Financial Bank and Willow Grove Bank.
Coincident with the name change, Willow Financials trading symbol on the NASDAQ
Global Select Market was changed from WGBC to WFBC.
Willow
Financial, is a Pennsylvania corporation and parent holding company for Willow
Financial Bank (the Bank). Willow Financial Bank, which was originally
organized in 1909, is a federally chartered savings bank and wholly owned
subsidiary of Willow Financial. Willow Financial Banks business consists
primarily of making commercial business loans and consumer loans as well as real
estate loans, both commercial and residential, funded primarily by retail and
business deposits along with borrowings obtained from the Federal Home Loan Bank
(FHLB) of Pittsburgh.
After the
close of business on August 31, 2005, Willow Financial completed its acquisition
of Chester Valley Bancorp Inc. (Chester Valley), a registered bank holding
company headquartered in Downingtown, Pennsylvania, with over $654 million in
assets. Chester Valley had two wholly owned subsidiaries, First Financial Bank,
a Pennsylvania chartered commercial bank (FFB) with 13 full-service banking
offices, and Philadelphia Corporation for Investment Services, a registered
investment advisor and broker dealer (PCIS). Pursuant to the Agreement and
Plan of Merger, dated as of January 20, 2005 (the Chester Valley Merger
Agreement), Chester Valley was merged with and into Willow Financial, with
Willow Financial as the surviving corporation (the Chester Valley Merger), and
FFB was merged with and into Willow Financial Bank with Willow Financial Bank as
the surviving bank (the Chester Valley Bank Merger). PCIS became a wholly
owned subsidiary of Willow Financial. As a result of the Chester Valley Merger,
each outstanding share of Chester Valley common stock, par value $1.00 per share
(the Chester Valley Common Stock), was converted into the right to receive, at
the election of the shareholder, either $27.90 in cash or 1.4823 shares of
Willow Financial common stock, par value $0.01 per share (the Company Common
Stock), subject to the allocation and pro ration provisions set forth in the
Chester Valley Merger Agreement. The acquisition resulted in Willow Financials
issuance of an aggregate of 4,977,256 shares of Company Common Stock and $51.0
million in cash. The total merger consideration paid for the Chester Valley
Common Stock was $145.3 million. This included capitalized acquisition costs and
the value of Chester Valley vested stock options converted to options of Willow
Financial at the average stock price of Willow Financial on the four days
surrounding the announcement of the acquisition. Willow Financial used general
corporate funds to pay the aggregate cash consideration of approximately $51.0
million for the shares of Chester Valley Common Stock acquired in the Chester
Valley Merger for cash, as well as the approximate $3.2 million in acquisition
costs.
Effective
February 28, 2006, Willow Financial Bank completed the sale of all outstanding
shares of capital stock of PCIS to Uvest BD-A, Inc., a North Carolina
corporation and registered broker-dealer (Uvest) for consideration of $100 but
providing that such shares may be repurchased for $100 at any time after the
closing date of the stock sale. Concurrently with the execution of the sale of
PCIS, the parties entered into a related Sub-Clearing and Brokerage Services
Agreement, which provides that an affiliate of Uvest will provide securities
clearing and certain supervisory and compliance services for Willow Financial
Bank, and a Financial Services Agreement between PCIS and Willow Financial Bank
which provides that Willow Financial Bank will be entitled to 90% of the revenue
generated by the securities brokerage activities conducted at the PCIS office
and will bear substantially all operational and overhead expenses. Since March
2007, PCIS has been doing business as Willow Investment Services (WIS). Upon
consummation of the sale of PCIS stock to Uvest, WIS is no longer a subsidiary
of Willow Financial. However, under the provisions of FIN 46R (Consolidation of
Variable Interest Entities), the results of WIS continue to be consolidated in
Willow Financials financial statements. The affiliation agreement with Uvest
has the primary effect of relieving WIS of direct responsibility for securities
clearing and certain back-office and oversight obligations.
200
On March
30, 2007, Willow Financial completed its acquisition of BeneServ, Inc.
(BeneServ) for a purchase price of up to $5.5 million. The purchase price
includes a payment of $4.2 million at closing plus an additional amount up to
$1.3 million in payments through the three-year anniversary date of the
acquisition, subject to the achievement of certain performance thresholds. As of
March 31, 2008, approximately $550 thousand of the additional payments were
earned based on BeneServ achieving the established performance thresholds and
are included in other liabilities on the consolidated statement of financial
condition. BeneServ is an insurance agency serving the corporate employee
benefit market segment. BeneServ and Willow Financial share a target market in
small businesses located in Chester, Montgomery, Bucks, Delaware, and
Philadelphia counties, Pennsylvania, thereby providing a number of cross selling
opportunities for both companies. Willow Financial recorded goodwill and other
intangibles of $4.6 million as a result of this acquisition.
On
December 21, 2007, Willow Financial completed its acquisition of Carnegie Wealth
Management (Carnegie) for a purchase price of up to $4.8 million in cash plus
approximately $1.1 million in Willow Financials common stock. The purchase
price includes a payment of $2.3 million at closing plus an amount up to an
additional $2.5 million in payments through the three-year anniversary date of
the acquisition, subject to the achievement of certain performance thresholds.
Carnegie is a $200 million wealth management firm that provides professional
investment consulting services to retirement plan administrators, foundations,
corporations and high net worth investors. Willow Financial recorded goodwill
and other intangibles of $3.2 million as a result of this acquisition based on
the preliminary purchase price allocation.
References to Willow Financial include its three business segments,
Willow Financial Bank, Willow Investment Services, and BeneServ, unless the
context of the reference indicates otherwise. See Note 13 to the unaudited
financial statements included in this section. For periods after December 21,
2007, the WIS segment includes the operations of Carnegie Wealth
Management.
Net gains
or losses resulting from the termination of derivative instruments are recorded
on the statement of operations as a component of non-interest income.
Willow
Financial Banks customer deposits are insured to the maximum extent provided by
law, by the Federal Deposit Insurance Corporation (FDIC), through the Deposit
Insurance Fund (DIF). Willow Financial Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision (OTS) and is also
regulated by the FDIC. Willow Financial Bank is also subject to reserve
requirements established by the Board of Governors of the Federal Reserve System
(the Federal Reserve Board or FRB), and is a member of the FHLB of
Pittsburgh, one of the regional banks comprising the Federal Home Loan Bank
System.
2. Basis of Financial Statement
Presentation
The
accompanying unaudited consolidated financial statements for the three and nine
months ended March 31, 2008 and 2007 included herein were prepared in accordance
with instructions to Form S-4, and therefore, do not include information or
footnotes necessary for a complete presentation of financial condition, results
of operations and cash flows in conformity with U.S. generally accepted
accounting principles (GAAP). However, all normal, recurring adjustments,
which, in the opinion of Willow Financials 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 in this joint proxy statement/prospectus on page 128 for
the year ended June 30, 2007, as restated. The results for the interim periods
presented are not necessarily indicative of the results that may be expected for
the year ending June 30, 2008.
The
consolidated financial statements include the balances of Willow Financial and
its wholly owned subsidiaries and business segments. All material inter-company
balances and transactions have been eliminated in consolidation.
In
preparing the consolidated financial statements, Willow Financial is required to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the statement of financial condition
and statement of operations 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, income taxes and intangible asset
impairment.
201
Willow
Financial follows the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangibles, and performs an annual
impairment test of goodwill. However, when circumstances indicate that an event
has occurred during an interim period, Willow Financial will perform an
impairment test at that time. Willow Financial has determined that such an event
occurred during the quarter ended December 31, 2007. Based upon an interim
impairment test, Willow Financial recorded a goodwill impairment charge of $40.0
million in the consolidated statement of operations for the three-month period
ended December 31, 2007. The impairment charge had no impact on Willow
Financials or Willow Financial Banks tangible capital nor did it impact Willow
Financials tangible book value per share. See note 17 in this section for
additional information on the goodwill impairment.
As
described in this joint proxy statement/prospectus on page 87, Willow Financial
restated its consolidated financial statements for the four quarters of fiscal
2007 and fiscal 2006 to reflect the impact of various adjustments. Quarterly
information for the three and nine-month periods ended March 31, 2007 as well as
the June 30, 2007 balance sheet, reported herein reflects the restated
amounts.
3. Recent Accounting
Pronouncements
FASB Statement No, 159, The Fair
Value Option for Financial Assets and Financial Liabilities
In
February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (SFAS 159). This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. SFAS 159 provides entities with the
opportunity to reduce volatility in reported earnings caused by measuring
related assets and liabilities differently. SFAS 159 is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of FASB Statement No. 157, Fair Value Measurements. Willow
Financial did not elect early adoption and is currently assessing the
implications of this Statement on its financial statements.
FASB Statement No, 157, Fair Value
Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 establishes a framework for measuring fair value in accordance
with U.S. generally accepted accounting principles, and enhances disclosures
about fair value measurements. SFAS 157 applies when other accounting
pronouncement require fair value measurements; it does not require new fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and for interim periods within
those years. Willow Financial did not elect early adoption and is currently
assessing the implications of this Statement on its financial
statements.
FASB Statement No, 155, Accounting
for Certain Hybrid Financial Instruments
In
February 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 155,
Accounting for Certain Hybrid Financial
Instruments
. Under this new statement, an
entity may re-measure at fair value a hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation from the host,
if the holder irrevocably elects to account for the whole instrument on a fair
value basis. Subsequent changes in the fair value of the instrument would be
recognized in earnings. This statement is effective for all financial
instruments that Willow Financial acquires or issues after July 1, 2007. This
Statement had no impact on Willow Financials financial position or results of
operations as of March 31, 2008.
FASB Interpretation 48, Accounting
for Uncertainty in Income Tax Positions
Effective
July 1, 2007, Willow Financial adopted Financial Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 provides guidance on financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
According to FIN 48, a tax position is recognized if it is more-likely-than-not
that the tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of
the position. If the tax position meets the more-likely-than-not recognition
threshold, the position is measured to determine the amount of benefit to
recognize and should be measured at the largest amount of benefit that is
greater
202
than 50 percent likely of being
realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. As of March 31, 2008, Willow Financial had
no material unrecognized tax benefits, accrued interest or penalties. Penalties
are recorded in non-interest expense in the year they are assessed and are
treated as a non-deductible expense for tax purposes. Interest is recorded in
non-interest expense in the year it is assessed and is treated as a deductible
expense for tax purposes. As of March 31, 2008, tax years 2005 through 2007
remain subject to Federal examination as well as examination by state taxing
jurisdictions.
EITF 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements
The Task
Force reached a consensus that, for endorsement split-dollar life insurance
arrangements, an employer should recognize the liability for future benefits
based on the substantive agreement with the employee, since the postretirement
benefit obligation is not effectively settled. An entity is permitted to apply
the consensus by retrospective application to all prior periods in accordance
with FASB Statement No. 154, including its required disclosures. The consensus
is effective for fiscal years beginning after December 15, 2007, with early
adoption permitted as of the beginning of an entitys fiscal year. Willow
Financial Bank has recorded a liability of $266 thousand at March 31, 2008
within other liabilities on the consolidated statement of financial condition to
account for the settlement of the future benefit obligation.
4. Stock Compensation
Plans
Willow
Financial periodically grants stock option and restricted stock awards to its
employees, which vest over three to five year periods. The following table
presents compensation expense and the related tax impacts for option and
restricted stock awards recognized in the consolidated statements of
operations:
|
Nine months Ended
|
|
March 3
1,
|
|
(In
thousand
s)
|
|
2008
|
|
2007
|
Compensation expense
|
$
|
828
|
|
|
$
|
754
|
|
Tax
benefit
|
|
(263
|
)
|
|
|
(235
|
)
|
Net income effect
|
$
|
565
|
|
|
$
|
519
|
|
5. (Loss) Earnings Per
Share
(Loss)/earnings per share, basic and diluted, were ($0.11), ($0.11), and
($2.65), ($2.65), respectively, for the three and nine months ended March 31,
2008, compared to $0.10, $0.10, and $0.43, $0.42, respectively, for the three
and nine months ended March 31, 2007. Willow Financial Bank remains well
capitalized under Office of Thrift Supervision guidelines, as discussed further
in note 14 in this section.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share calculations:
|
|
Three months Ended
March 31
,
|
|
|
2008
|
|
2007
|
(Dollars in thousands, except per
share data)
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net (loss) income
|
|
$
|
(1,677
|
)
|
|
$
|
(1,677
|
)
|
|
$
|
1,502
|
|
|
$
|
1,502
|
|
Dividends on
unvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Net income available to common stockholders
|
|
$
|
(1,677
|
)
|
|
$
|
(1,677
|
)
|
|
$
|
1,490
|
|
|
$
|
1,490
|
|
Weighted average
shares outstanding
|
|
|
15,257,712
|
|
|
|
15,257,712
|
|
|
|
15,146,910
|
|
|
|
15,146,910
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents
|
|
|
|
|
|
|
47,869
|
|
|
|
|
|
|
|
206,338
|
|
Adjusted weighted average shares used
in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
per share computation
|
|
|
15,257,712
|
|
|
|
15,305,581
|
|
|
|
15,146,910
|
|
|
|
15,353,248
|
|
(Loss) earnings
per share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
203
|
|
Nine months Ended March
31,
|
|
|
2008
|
|
2007
|
(Dollars in thousands, except per
share data)
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net (loss) income
|
|
$
|
(40,138
|
)
|
|
$
|
(40,138
|
)
|
|
$
|
6,503
|
|
|
$
|
6,503
|
|
Dividends on
unvested common stock awards
|
|
|
(24
|
)
|
|
|
(24
|
)
|
|
|
(44
|
)
|
|
|
(44
|
)
|
Net (loss) income available to common stockholders
|
|
$
|
(40,162
|
)
|
|
$
|
(40,162
|
)
|
|
$
|
6,459
|
|
|
$
|
6,459
|
|
Weighted average
shares outstanding
|
|
|
15,143,893
|
|
|
|
15,143,893
|
|
|
|
15,090,108
|
|
|
|
15,090,108
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents
|
|
|
|
|
|
|
92,077
|
|
|
|
|
|
|
|
256,917
|
|
Adjusted weighted average shares used
in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
per share computation
|
|
|
15,143,893
|
|
|
|
15,235,970
|
|
|
|
15,090,108
|
|
|
|
15,347,025
|
|
(Loss) earnings
per share
|
|
$
|
(2.65
|
)
|
|
$
|
(2.65
|
)
|
|
$
|
0.43
|
|
|
$
|
0.42
|
|
6. Securities
The
amortized cost and estimated fair value of held to maturity and available for
sale securities at March 31, 2008 and June 30, 2007 are as follows:
|
Marc
h 31, 2
008
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
cost
|
|
gains
|
|
losses
|
|
fair value
|
|
(Dollars in thousands)
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
$
|
14,408
|
|
$
|
185
|
|
$
|
(3
|
)
|
|
$
|
14,590
|
FHLMC
|
|
10,129
|
|
|
79
|
|
|
|
|
|
|
10,208
|
CMOs
|
|
54,609
|
|
|
|
|
|
(1,902
|
)
|
|
|
52,707
|
Total held to
maturity
|
$
|
79,146
|
|
$
|
264
|
|
$
|
(1,905
|
)
|
|
$
|
77,505
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
US government agency securities
|
$
|
24,838
|
|
$
|
127
|
|
$
|
(153
|
)
|
|
$
|
24,812
|
Municipal bonds
|
|
27,200
|
|
|
151
|
|
|
(323
|
)
|
|
|
27,028
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
29,414
|
|
|
179
|
|
|
(63
|
)
|
|
|
29,530
|
FHLMC
|
|
29,912
|
|
|
180
|
|
|
(28
|
)
|
|
|
30,064
|
CMOs
|
|
13,470
|
|
|
193
|
|
|
(259
|
)
|
|
|
13,404
|
Corporate debt securities
|
|
21,243
|
|
|
|
|
|
(2,270
|
)
|
|
|
18,973
|
Equity securities
|
|
11,20
8
|
|
|
55
|
|
|
(413
|
)
|
|
|
10,850
|
Total available
for sale
|
$
|
157,285
|
|
$
|
885
|
|
$
|
(3,509
|
)
|
|
$
|
154,661
|
Total securities
|
$
|
236,431
|
|
$
|
1,149
|
|
$
|
(5,414
|
)
|
|
$
|
232,166
|
204
|
June
30, 2
007
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Estimated
|
|
cost
|
|
gains
|
|
losses
|
|
fair
value
|
|
(Dollars in thousands)
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
$
|
16,253
|
|
$
|
4
|
|
$
|
(414
|
)
|
|
$
|
15,843
|
FHLMC
|
|
11,839
|
|
|
|
|
|
(455
|
)
|
|
|
11,384
|
CMOs
|
|
60,27
1
|
|
|
|
|
|
(1,010
|
)
|
|
|
59,261
|
Total held to
maturity
|
$
|
88,36
3
|
|
$
|
4
|
|
$
|
(1,879
|
)
|
|
$
|
86,488
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
US government agency securities
|
$
|
35,285
|
|
$
|
|
|
$
|
(1,077
|
)
|
|
$
|
34,208
|
Municipal bonds
|
|
30,585
|
|
|
55
|
|
|
(635
|
)
|
|
|
30,005
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
38,007
|
|
|
5
|
|
|
(1,050
|
)
|
|
|
36,962
|
FHLMC
|
|
35,833
|
|
|
2
|
|
|
(1,028
|
)
|
|
|
34,807
|
CMOs
|
|
22,080
|
|
|
20
|
|
|
(331
|
)
|
|
|
21,769
|
Corporate debt securities
|
|
19,978
|
|
|
73
|
|
|
(625
|
)
|
|
|
19,426
|
Equity securities
|
|
11,46
4
|
|
|
69
|
|
|
(371
|
)
|
|
|
11,162
|
Total available
for sale
|
$
|
193,232
|
|
$
|
224
|
|
$
|
(5,117
|
)
|
|
$
|
188,339
|
Total securities
|
$
|
281,595
|
|
$
|
228
|
|
$
|
(6,996
|
)
|
|
$
|
274,827
|
Securities are evaluated periodically to determine whether a decline in
their fair value is other than temporary. Willow Financials management utilizes
criteria such as the magnitude and duration of the decline, in addition to the
reasons underlying the decline, to determine whether the loss in value is other
than temporary. The term other-than-temporary is not intended to indicate that
the decline is permanent, but indicates that the prospects for a near-term
recovery of value is not necessarily favorable, or that there is a lack of
evidence to support realizable value equal to or greater than carrying value of
the investment. Once a decline in fair value is determined to be other than
temporary, the fair value of the security is reduced through a charge to
earnings in the statement of operations. Based upon an evaluation performed as
of March 31, 2008, Willow Financial recorded an impairment charge of
approximately $256 thousand related to the holding of common stock on two
Pennsylvania financial institutions and another financial services related
equity security. Approximately $10.4 million of Willow Financials investment in
equity securities is an investment in a mutual fund, which is comprised of
adjustable rate mortgage securities and thus the fair values are directly
correlated to movements in interest rates.
Willow
Financial has both the ability and intent to hold fixed income securities until
such time as the value recovers or the security matures and for the equity
securities Willow Financials management believes that, other than the
aforementioned impairment charge, the unrealized losses are temporary and
overall not significant to the value of equity securities and therefore believes
that the above individual unrealized losses at March 31, 2008 are not
other-than-temporary impairments.
205
7. Loan Portfolio
Information about Willow Financial Banks loans receivable portfolio is
presented below as of and for the periods indicated:
|
|
As of
|
|
As of
|
|
|
Marc
h 31, 2
008
|
|
June
30, 2
007
|
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
(Dollars in
thousands)
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family residential
|
|
$
|
241,929
|
|
|
21.22
|
%
|
|
$
|
273,247
|
|
|
26.10
|
%
|
Commercial real estate and multi-family
residential
|
|
|
330,182
|
|
|
28.95
|
|
|
|
316,099
|
|
|
30.19
|
|
Construction
|
|
|
109,649
|
|
|
9.61
|
|
|
|
93,180
|
|
|
8.90
|
|
Home equity
|
|
|
329,258
|
|
|
28.88
|
|
|
|
272,295
|
|
|
26.01
|
|
Total
real estate loans
|
|
|
1,011,018
|
|
|
88.66
|
|
|
|
954,821
|
|
|
91.20
|
|
Consumer loans
|
|
|
4,309
|
|
|
0.38
|
|
|
|
3,917
|
|
|
0.37
|
|
Commercial business loans
|
|
|
124,955
|
|
|
10.96
|
|
|
|
88,274
|
|
|
8.43
|
|
Total loans receivable
|
|
|
1,140,282
|
|
|
100.00
|
%
|
|
|
1,047,012
|
|
|
100.00
|
%
|
|
Allowance for loan losses
|
|
|
(13,224
|
)
|
|
|
|
|
|
(12,210
|
)
|
|
|
|
Deferred net
loan origination fees and other discounts
|
|
|
990
|
|
|
|
|
|
|
491
|
|
|
|
|
Loans receivable, net
|
|
$
|
1,128,048
|
|
|
|
|
|
$
|
1,035,293
|
|
|
|
|
The
following is a summary of the activity in the allowance for loan losses for the
nine months ended March 31, 2008 and 2007:
(Dollars in
thousands)
|
|
2008
|
|
2007
|
Balance at the beginning of period
|
|
$
|
12,210
|
|
|
$
|
16,737
|
|
Plus: Provisions (reductions) for loan
losses
|
|
|
1,485
|
|
|
|
(100
|
)
|
Less charge-offs for:
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
(125
|
)
|
|
|
(76
|
)
|
Consumer
loans
|
|
|
(391
|
)
|
|
|
(190
|
)
|
Commercial business
loans
|
|
|
(30
|
)
|
|
|
(3,185
|
)
|
Total charge-offs
|
|
|
(546
|
)
|
|
|
(3,451
|
)
|
Plus: Recoveries
|
|
|
75
|
|
|
|
173
|
|
Balance at the end of the period
|
|
$
|
13,224
|
|
|
$
|
13,359
|
|
8. Deposits
Deposit balances consisted of the
following at March 31, 2008 and June 30, 2007:
|
|
As of
|
|
As of
|
|
|
Marc
h 31, 20
08
|
|
June
30, 20
07
|
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
(Dollars in
thousands)
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
Savings accounts
|
|
$
|
78,974
|
|
7.76
|
%
|
|
$
|
87,565
|
|
8.01
|
%
|
Money market deposit accounts
|
|
|
419,112
|
|
41.20
|
|
|
|
403,487
|
|
36.93
|
|
Certificates less than $100,000
|
|
|
207,842
|
|
20.43
|
|
|
|
239,967
|
|
21.96
|
|
Certificates $100,000 and greater
|
|
|
62,343
|
|
6.13
|
|
|
|
94,705
|
|
8.67
|
|
Interest-bearing checking
accounts
|
|
|
126,705
|
|
12.46
|
|
|
|
125,905
|
|
11.52
|
|
Non-interest bearing accounts
|
|
|
122,245
|
|
12.02
|
|
|
|
141,101
|
|
12.91
|
|
Total deposits
|
|
$
|
1,017,221
|
|
100.0
|
%
|
|
$
|
1,092,730
|
|
100.0
|
%
|
206
9. Trust Preferred Securities and
Other Borrowings
On March
31, 2006, Willow Financial issued $25.8 million of Junior Subordinated
Debentures to Willow Financial Statutory Trust I, a Connecticut Statutory Trust,
in which Willow Financial owns all of the common equity. The Trust then issued
$25.0 million of Trust Preferred Securities, which pay interest quarterly at
three-month Libor plus 1.31% to investors, which are secured by the Junior
Subordinated Debentures and the guarantee of Willow Financial. The Junior
Subordinated Debentures are treated as debt of Willow Financial but qualify as
Tier I capital of Willow Financial Bank to the extent of the amount of the
proceeds, which are invested in Willow Financial Bank. The Trust Preferred
Securities are callable by Willow Financial on or after September 30, 2011. The
Trust Preferred Securities must be redeemed by Willow Financial upon their
maturity in the year 2036.
Willow
Financial Bank utilizes outside borrowings to supplement its funding needs. At
March 31, 2008, Willow Financial Bank had $75.0 million outstanding in
repurchase agreements with a weighted average interest rate of 4.01%. The
underlying securities collateralizing these repurchase agreements had a market
value of $84.6 million at March 31, 2008.
10. Capital Stock
On July
24, 2007, Willow Financial declared a cash dividend on its common stock of
$0.115 per share, paid on August 24, 2007 to owners of record on August 10,
2007. On October 23, 2007, Willow Financial declared a cash dividend on its
common stock of $0.115 per share, paid on November 23, 2007 to owners of record
on November 9, 2007. On February 11, 2008, Willow Financial declared a cash
dividend on its common stock of $0.115 per share, paid on February 29, 2008 to
owners of record on February 22, 2008. On May 21, 2008, Willow Financial
declared a cash dividend on its common stock of $0.115 per share, paid on May
29, 2008 to shareholders of record on May 22, 2008.
11. Guarantees
In the
normal course of business, Willow Financial sells loans in the secondary market.
As is customary in such sales, Willow Financial provides indemnification to the
buyer under certain circumstances. This indemnification may include the
obligation to repurchase loans by Willow Financial, under certain circumstances.
In most cases repurchases and losses are rare, and no provision is made for
losses at the time of sale. When repurchases and losses are probable and
reasonably estimable, a provision is made in the financial statements for such
estimated losses.
On May
12, 2003, Willow Financial entered into a sales and servicing master agreement
with the FHLB. The agreement allows Willow Financial to sell loans to the FHLB
while retaining servicing and providing for a credit enhancement. Under the
terms of the agreement, Willow Financial 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 $605 thousand. Willow Financial has sold $16.6
million in loans under this agreement and had a maximum credit risk exposure of
$461 thousand at March 31, 2008. The fair value of these guarantees was
determined to be insignificant at March 31, 2008.
12. Accounting for Derivative
Instruments and Hedging
Willow
Financial may from time to time utilize derivative instruments such as interest
rate swaps, interest rate collars, interest rate floors, interest rate swaptions
or combinations thereof to assist in its asset/liability management. In
accordance with SFAS No. 133, Accounting for Derivative Instruments, Willow
Financial documents its hedge relationships, including identification of the
hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge. Willow Financial also
assesses, both at inception and at least quarterly thereafter, whether the
derivative instruments that are used in hedging transactions are highly
effective in offsetting the changes in either the fair value or cash flows of
the hedged item. For fair value hedges, both the effective and ineffective
portions of the changes in the fair value of the derivative, along with the gain
or loss on the hedged item that is attributable to the hedged risk, are recorded
in the statement of operations within interest income or interest expense. For
cash flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in accumulated other comprehensive income. When the
hedged item impacts the statement of operations, the gain or loss included in
accumulated other comprehensive income is reported on the same line in the
statement of operations as the hedged item. In addition, the ineffective portion
of the changes in the fair value of derivatives used as cash flow hedges is
reported in the statement of operations.
207
At March
31, 2008, Willow Financial had three interest rate swap arrangements tied to
specific loans originated by Willow Financial Bank. The swaps effectively
convert the rates from a fixed rate to a floating rate based on Libor throughout
the life of the underlying loans. At March 31, 2008, the total outstanding
notional amount on these swaps was $4.0 million. The weighted average floating
and fixed rates on these transactions were 3.0% and 4.6%, respectively, at March
31, 2008. Based on the decrease in the market value of the interest rate swaps
from June 30, 2007 to March 31, 2008, Willow Financial recognized a loss of $171
thousand and $433 thousand in other income in the consolidated statement of
operations for the three and nine months ended March 31, 2008, respectively,
with respect to these three swap arrangements.
In August
2003, Chester Valley purchased a $30.0 million notional amount 3.50% six-month
LIBOR interest rate cap while simultaneously selling a $30.0 million notional
amount 6.00% six-month LIBOR interest rate cap (Interest Rate Corridor) which
expires in August 2008. Chester Valley paid a net premium, which entitled it to
receive the difference between six-month LIBOR from 3.50% up to 6.00% applied to
the $30.0 million notional amount. Upon consummation of the Chester Valley
Merger, Willow Financial assumed the Interest Rate Corridor and designated it to
hedge certain borrowings of Willow Financial Bank, which were variable in nature
and indexed to six-month LIBOR. The Interest Rate Corridor was being used to
hedge the cash flows of this borrowing. Prior to December 31, 2006, the Interest
Rate Corridor could potentially reduce the negative impact on earnings of the
borrowings in a rising interest rate environment. The fair market value of the
Interest Rate Corridor has two components: the intrinsic value and the time
value of the option. The Interest Rate Corridor was marked-to-market quarterly,
with changes in the intrinsic value of the Interest Rate Corridor, net of tax,
included as a separate component of other comprehensive income, and the change
in the time value of the option included directly as interest expense as
required under SFAS 133. In addition, the ineffective portion, if any, would
have been expensed in the period in which ineffectiveness was
determined.
On
October 23, 2006, Willow Financial unwound the Interest Rate Corridor and
recognized a gain of $804 thousand in the statement of operations for the nine
months ended March 31, 2007 upon repayment of the $30 million FHLB
advance.
13. Segment
Information
Under the
definition of SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, Willow Financial has three operating segments at March 31,
2008; Willow Financial Bank (WFB), BeneServ, and WIS. The Willow Financial
Bank segment primarily provides loan and deposit services to commercial and
retail customers through its network of 29 branch locations as of March 31,
2008. BeneServ, which was acquired on March 30, 2007, is an insurance agency
serving the corporate employee benefit market segment. The WIS segment operates
a full service investment advisory and securities brokerage firm.
Segment information for the three
and nine months ended March 31, 2008 and 2007 is as follows:
|
For
the three months ended March
31,
|
|
2
00
8
|
|
200
7
|
|
WFB
|
|
BeneServ
|
|
WIS
|
|
Total
|
|
WFB
|
|
BeneServ
|
|
WIS
|
|
Total
|
|
(Dollars in
Thousands)
|
Interest income
|
$
|
21,579
|
|
|
$
|
|
|
$
|
|
|
$
|
21,579
|
|
$
|
21,122
|
|
$
|
|
|
$
|
|
|
$
|
21,122
|
Interest
expense
|
|
10,802
|
|
|
|
|
|
|
|
|
|
10,802
|
|
|
10,381
|
|
|
|
|
|
|
|
|
10,381
|
Net interest income
|
|
10,777
|
|
|
|
|
|
|
|
|
|
10,777
|
|
|
10,741
|
|
|
|
|
|
|
|
|
10,741
|
Non-interest
income
|
|
2,998
|
|
|
|
631
|
|
|
872
|
|
|
4,501
|
|
|
2,176
|
|
|
|
|
|
722
|
|
|
2,898
|
Depreciation expense
|
|
754
|
|
|
|
3
|
|
|
21
|
|
|
778
|
|
|
689
|
|
|
|
|
|
|
|
|
689
|
Income tax
(benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
(171
|
)
|
|
|
65
|
|
|
14
|
|
|
(92
|
)
|
|
626
|
|
|
|
|
|
78
|
|
|
704
|
Total net (loss) income
|
|
(1,830
|
)
|
|
|
125
|
|
|
28
|
|
|
(1,677
|
)
|
|
1,350
|
|
|
|
|
|
152
|
|
|
1,502
|
Total
assets
|
|
1,574,146
|
|
|
|
6,511
|
|
|
3,812
|
|
|
1,584,469
|
|
|
1,524,528
|
|
|
|
|
|
1,475
|
|
|
1,526,003
|
208
|
For
the nine months ended March
31,
|
|
2
00
8
|
|
200
7
|
|
WFB
|
|
BeneServ
|
|
WIS
|
|
Total
|
|
WFB
|
|
BeneServ
|
|
WIS
|
|
Total
|
|
(Dollars in Thousands)
|
Interest income
|
$
|
65,111
|
|
|
$
|
|
|
$
|
|
|
$
|
65,111
|
|
|
$
|
64,396
|
|
$
|
|
|
$
|
|
|
$
|
64,396
|
Interest
expense
|
|
34,063
|
|
|
|
|
|
|
|
|
|
34,063
|
|
|
|
30,328
|
|
|
|
|
|
|
|
|
30,328
|
Net interest income
|
|
31,048
|
|
|
|
|
|
|
|
|
|
31,048
|
|
|
|
34,068
|
|
|
|
|
|
|
|
|
34,068
|
Non-interest
income
|
|
8,156
|
|
|
|
1,777
|
|
|
2,033
|
|
|
11,966
|
|
|
|
6,658
|
|
|
|
|
|
1,882
|
|
|
8,540
|
Depreciation expense
|
|
2,241
|
|
|
|
9
|
|
|
24
|
|
|
2,274
|
|
|
|
1,896
|
|
|
|
|
|
|
|
|
1,896
|
Income tax
(benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
(1,139
|
)
|
|
|
234
|
|
|
27
|
|
|
(878
|
)
|
|
|
2,773
|
|
|
|
|
|
156
|
|
|
2,929
|
Total net (loss) income
|
|
(40,646
|
)
|
|
|
455
|
|
|
53
|
|
|
(40,138
|
)
|
|
|
6,199
|
|
|
|
|
|
304
|
|
|
6,503
|
Total
assets
|
|
1,574,146
|
|
|
|
6,511
|
|
|
3,812
|
|
|
1,584,469
|
|
|
|
1,524,528
|
|
|
|
|
|
1,475
|
|
|
1,526,003
|
14. Regulatory
Matters
Willow
Financial Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that if undertaken, could have a direct
material effect on Willow Financials financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Willow Financial Bank must meet specific capital guidelines that involve
quantitative measures of Willow Financial Banks assets, liabilities, and
certain off-balance sheet items as calculated under accounting practices. Willow
Financial Banks capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
At March
31, 2008, Willow Financial Bank had regulatory capital, which was well in excess
of regulatory limits set by the Office of Thrift Supervision. The current
requirements and Willow Financial Banks actual capital levels are detailed
below:
|
|
|
|
|
|
Required to Be Well
|
|
|
|
|
|
|
Capitalized under
|
|
|
|
|
Required for Capital
|
|
Prompt Corrective
|
|
|
Actual
Ca
pital
|
|
Adequacy
Purpos
es
|
|
Action
Prov
ision
|
(Dollars in
thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital
(to tangible assets)
|
|
$
|
113,630
|
|
7.5
|
%
|
|
|
22,799
|
|
1.5
|
%
|
|
$
|
30,398
|
|
2.0
|
%
|
Core capital (to adjusted tangible assets)
|
|
|
113,630
|
|
7.5
|
%
|
|
|
60,796
|
|
4.0
|
%
|
|
|
75,995
|
|
5.0
|
%
|
Tier I capital
(to risk-weighted assets)
|
|
|
113,630
|
|
11.8
|
%
|
|
|
N/A
|
|
N/A
|
|
|
|
57,805
|
|
6.0
|
%
|
Risk-based capital (to risk-weighted assets)
|
|
|
125,212
|
|
13.0
|
%
|
|
|
77,074
|
|
8.0
|
%
|
|
|
96,342
|
|
10.0
|
%
|
|
As of June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital
(to tangible assets)
|
|
$
|
117,703
|
|
8.2
|
%
|
|
$
|
21,580
|
|
1.5
|
%
|
|
$
|
28,773
|
|
2.0
|
%
|
Core capital (to adjusted tangible assets)
|
|
|
117,703
|
|
8.2
|
%
|
|
|
57,547
|
|
4.0
|
%
|
|
|
71,933
|
|
5.0
|
%
|
Tier I capital
(to risk-weighted assets)
|
|
|
117,703
|
|
12.2
|
%
|
|
|
N/A
|
|
N/A
|
|
|
|
57,682
|
|
6.0
|
%
|
Risk-based capital (to risk-weighted assets)
|
|
|
127,983
|
|
13.3
|
%
|
|
|
76,909
|
|
8.0
|
%
|
|
|
96,136
|
|
10.0
|
%
|
In its
letter approving the merger of Willow Financial Bank and First Financial Bank,
the Office of Thrift Supervision (OTS), as one of the conditions for approval,
indicated that, for the periods ending December 31, 2005, 2006, and 2007, Willow
Financial Bank needed to have tier one core capital ratios at least equal to
6.50%, 6.75%, and 7.25%, respectively, and total risk-based capital equal to
11.97%, 12.02% and 12.40%, respectively. Willow Financial Bank was required to
also submit to the Office of Thrift Supervision, quarterly status reports
detailing its compliance with the conditions on regulatory capital outlined in
its approval letter. The Office of Thrift Supervisions conditions for approval
of the Chester Valley Bank Merger also indicated that, for the periods ending
December 31, 2005, 2006, and 2007, Willow Financial needed to have consolidated
tangible capital ratios at least equal to 5.14%, 5.59% and 6.12%, respectively.
Both Willow Financial and Willow Financial Bank met these requirements and there
are no further requirements other than for normal reporting purposes.
209
15. Income Taxes
For the
three-month period ended March 31, 2008, the income tax benefit was $92 thousand
compared to an income tax provision of $704 thousand for the comparable prior
year period. The effective tax rate for the three-month period ended March 31,
2008 was 5.2% compared to 31.9% for the three-month period ended March 31, 2007.
For the nine-month period ended March 31, 2008, the income tax benefit was $878
thousand compared to a provision of $2.9 million for the comparable prior year
period. The effective tax rate for the nine-month period ended March 31, 2008
was 2.1% compared to 31.1% for the nine-month period ended March 31, 2007. The
balance of tax-exempt securities and related income increased during that period
and credits received on low-income housing partnerships represented a larger
portion of pre-tax book earnings. The goodwill impairment charge is not
deductible for tax purposes. The federal statutory tax rate used in calculating
Willow Financials net deferred tax assets decreased from 35% to 34%, during the
three months ended September 30, 2007, which increased income tax expense by
approximately $108 thousand during the nine-months ended March 31,
2008.
16. Commitments and
Contingencies
See page
172 of this joint proxy statement/prospectus for a summary of existing
commitments and contingencies for the year ended June 30, 2007. There have been
no material changes in Willow Financials commitments and contingencies since
June 30, 2007.
17. Goodwill
Impairment
Willow
Financial follows the provisions of SFAS No. 142, Goodwill and Other
Intangibles, and performs an annual impairment test of goodwill. However, when
circumstances indicate that an event has occurred during an interim period,
Willow Financial will perform an impairment test at that time. Willow Financial
determined that such an event occurred during the quarter ended December 31,
2007.
During
this period, conditions in the housing market continued to deteriorate resulting
in a tightening of available credit in the marketplace. Additionally, several
companies that specialized in sub-prime lending declared bankruptcy. These
market conditions and related concerns surrounding credit caused valuations for
thrifts and other financial institutions to decrease significantly during the
quarter ended December 31, 2007. The market price of Willow Financials stock
declined from $12.43 on October 1, 2007 to $8.39 at December 31,
2007.
As a
result of the above conditions, Willow Financial completed an interim impairment
test of goodwill. The review encompasses a two-step process. The first step
requires Willow Financial to identify the reporting units and compare the fair
value of each reporting unit, which we compute using an earnings multiple
approach and various transaction market approaches. Valuations were performed
for each of Willow Financials three reporting units. Willow Financials
completion of Step 1 indicated that impairment may exist in Willow Financials
Banking unit and therefore Willow Financial completed the second step. In the
second step, the implied fair value of goodwill is calculated as the excess of
the fair value of the reporting unit over the fair values assigned to its
assets and liabilities. As a result of this impairment test, Willow Financial
recorded an impairment charge of $40.0 million related to its Banking unit for
the quarter ended December 31, 2007. The impairment charge had no impact on
Willow Financials or Willow Financial Banks tangible capital nor did it impact
Willow Financials tangible book value per share. Additionally, this impairment
charge did not result from a deterioration in Willow Financials core deposit
intangible.
18. Subsequent Event Pending
Acquisition
On May
21, 2008, Willow Financial and Harleysville National announced that they had
entered into an Agreement and Plan of Merger (HNC Merger Agreement), dated May
20, 2008, which sets forth the terms and conditions pursuant to which Willow
Financial will be merged with and into Harleysville National (the HNC Merger).
The HNC Merger Agreement provides, among other things, that as a result of the
HNC Merger each outstanding share of common stock of Willow Financial, par value
$0.01 per share, will be converted into a right to receive 0.73 share of common
stock of Harleysville National, par value $1.00 per share (HNC Common Stock),
plus cash in lieu of any fractional share interest.
210
Consummation of the HNC Merger is subject to a number of customary
conditions, including but not limited to (i) the approval of the HNC Merger
Agreement by both the shareholders of Willow Financial and Harleysville and (ii)
the requisite regulatory approvals of the HNC Merger and the proposed merger of
Willow Financials banking subsidiary, Willow Financial Bank, with and into
Harleysville Nationals banking subsidiary Harleysville National Bank, following
consummation of the HNC Merger. The HNC Merger is intended to qualify as
reorganization for federal income tax purposes, such that the shares of Willow
Financial exchanged for shares of HNC Common Stock will be issued to Willow
Financials shareholders on a tax-free basis.
The HNC
Merger Agreement contains certain termination rights for each of Willow
Financial and Harleysville and further provides that, upon termination of the
HNC Merger Agreement under specified circumstances, Willow Financial may be
required to pay to Harleysville a termination fee of $7.0 million.
The
Boards of Directors of Willow Financial and Harleysville approved the HNC Merger
Agreement on May 20, 2008. The transaction is expected to close in the fourth
calendar quarter of 2008.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE OF MARKET RISK OF WILLOW FINANCIAL
Asset/Liability Management and
Interest Rate Risk
The
market value of assets and liabilities, as well as future earnings, can be
affected by interest rate risk. Market values of certain financial assets have
an inverse relationship to rates, i.e., when interest rates rise, the market
value of many of Willow Financials assets decline and when rates fall, the
market value of many of Willow Financials assets rise. The primary assets of
Willow Financial are loans to borrowers who often have the ability to prepay
their loan. Therefore, in a falling rate environment, the increase in the market
value of Willow Financials assets is limited by this option for the borrower to
prepay the loan.
The
ability to maximize net interest income is largely dependent upon the
achievement of a positive interest spread that can be maintained during
fluctuations in prevailing interest rates. Interest rate sensitivity gap (gap)
is a measure of the difference between interest-earning assets and
interest-bearing liabilities that either mature or reprice within a specified
time period. A gap is considered positive when the amount of interest-earning
assets exceeds the amount of interest-bearing liabilities, and is considered
negative when interest-bearing liabilities exceed interest-earning assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would generally result in an increase in net interest income, and a
positive gap would result in a decrease in net interest income. This is usually
the case; however, interest rates on differing financial instruments will not
always change at the same time or to the same extent.
211
The
following gap table shows the amount as of June 30, 2007 of Willow Financial
Banks assets and liabilities projected to mature or re-price within various
time periods. This table includes certain assumptions management has made that
affect the rate at which loans will prepay as well as the duration of core
deposits. Changes in interest rates may affect these assumptions, which would
impact Willow Financial Banks gap position.
|
0
to 3
|
|
3
to 12
|
|
1
to 3
|
|
3
to 5
|
|
over 5
|
|
|
|
months
|
|
months
|
|
years
|
|
years
|
|
years
|
|
Total
|
|
(Dollars in thousands)
|
Securities and interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits
|
$
|
101,675
|
|
|
$
|
58,249
|
|
|
$
|
58,980
|
|
|
$
|
15,899
|
|
|
$
|
93,622
|
|
|
$
|
328,425
|
|
Loans
receivable
|
|
252,366
|
|
|
|
159,469
|
|
|
|
315,875
|
|
|
|
94,500
|
|
|
|
232,877
|
|
|
|
1,055,087
|
|
Total interest-earning assets
|
|
354,041
|
|
|
|
217,718
|
|
|
|
374,855
|
|
|
|
110,399
|
|
|
|
326,499
|
|
|
|
1,383,512
|
|
Certificates of
deposit
|
|
93,765
|
|
|
|
179,794
|
|
|
|
53,144
|
|
|
|
3,242
|
|
|
|
4,727
|
|
|
|
334,672
|
|
Other interest-bearing deposits
|
|
205,391
|
|
|
|
115,770
|
|
|
|
202,456
|
|
|
|
5,784
|
|
|
|
80,989
|
|
|
|
610,390
|
|
Borrowings
|
|
102,873
|
|
|
|
30,114
|
|
|
|
64,229
|
|
|
|
10,799
|
|
|
|
27,523
|
|
|
|
235,538
|
|
Total interest-bearing
liabilities
|
|
402,029
|
|
|
|
325,678
|
|
|
|
319,829
|
|
|
|
19,825
|
|
|
|
113,239
|
|
|
|
1,180,600
|
|
Excess
(deficiency) of interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
earning assets over interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing liabilities
|
$
|
(47,988
|
)
|
|
$
|
(107,960
|
)
|
|
$
|
55,026
|
|
|
$
|
90,574
|
|
|
$
|
213,260
|
|
|
$
|
202,912
|
|
Cumulative excess (deficiency) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-earning assets over
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
$
|
(47,988
|
)
|
|
$
|
(155,948
|
)
|
|
$
|
(100,922
|
)
|
|
$
|
(10,348
|
)
|
|
$
|
202,912
|
|
|
$
|
405,824
|
|
Cumulative
excess (deficiency) of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities as a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total assets
|
|
(3.1
|
)%
|
|
|
(10.1
|
)%
|
|
|
(6.5
|
)%
|
|
|
(0.7
|
)%
|
|
|
13.1
|
%
|
|
|
26.2
|
%
|
Ratio of interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
|
88.1
|
%
|
|
|
66.9
|
%
|
|
|
117.2
|
%
|
|
|
556.9
|
%
|
|
|
288.3
|
%
|
|
|
117.2
|
%
|
Cumulative ratio
of interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets to assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to Interest-bearing liabilities
|
|
88.1
|
%
|
|
|
78.6
|
%
|
|
|
90.4
|
%
|
|
|
99.0
|
%
|
|
|
117.2
|
%
|
|
|
|
|
At June
30, 2007, the ratio of the cumulative interest-earning assets maturing or
re-pricing in one-year or less to interest-bearing liabilities maturing or
re-pricing in one-year or less was 78.6%, which results in a cumulative one-year
gap to total assets ratio of negative 10.1%, indicating that Willow Financial
Banks net interest income could decline depending upon the degree to which
interest rates change and the change in the relationship between interest rates
used to re-price assets and interest rates used in the re-pricing of
liabilities.
Willow
Financial has adopted asset/liability management policies designed to quantify
the interest rate risk caused by mismatches in the maturities and re-pricing of
Willow Financials interest-earning assets and interest-bearing liabilities.
These interest rate risk and asset/liability management actions are taken under
the guidance of the Finance Committee of Willow Financial (the Finance
Committee). The Finance Committees purpose is to communicate, coordinate and
control asset/liability management consistent with Willow Financials business
plan and approved policies by the Willow Financial board of directors. The
objective of the Finance Committee is to manage asset and funding sources to
produce results that are consistent with liquidity, capital adequacy, growth,
risk and profitability goals. The Finance Committee meets at least quarterly and
monitors the volume and mix of assets and funding sources taking into account
the relative costs and spreads, the interest rate sensitivity gap and liquidity
needs. The Finance Committee also reviews economic conditions and interest rate
projections, current and projected liquidity needs and capital positions,
anticipated changes in the mix of assets and liabilities, and interest rate
exposure limits versus current projections pursuant to gap analysis and interest
income simulations. At each meeting, the Finance Committee recommends changes in
strategy as appropriate. Interest rate risk issues are also discussed by the
Willow Financial board of directors on a regular basis. Management meets
periodically to monitor progress in achieving asset/liability targets approved
by the Willow Financial board of directors, particularly the type and rate on
asset generation and sources of funding.
212
In order
to manage Willow Financials assets and liabilities and improve Willow
Financials interest rate risk position, emphasis has been placed on the
origination of assets with shorter maturities or adjustable rates such as
commercial and multi-family real estate loans, construction loans, home equity
loans and to a lesser extent commercial business loans. At the same time, other
actions include attempts to increase Willow Financials core deposits and the
use of FHLB advances as additional sources of funds. Additionally, longer term
fixed rate single-family residential mortgage loans are originated and held for
sale.
The
Finance Committee regularly reviews interest rate risk by, among other things,
examining the impact of alternative interest rate environments on net interest
income and net portfolio value (NPV), and the change in NPV. NPV is the
difference between the market value of assets and the market value of
liabilities and off-balance sheet items under various interest rate scenarios.
Sensitivity is the difference (measured in basis points) between the NPV to
assets ratio at market rate and the NPV to assets ratio determined under each
rate scenario. The Finance Committee monitors both the NPV and sensitivity
according to guidelines established by the Office of Thrift Supervision in
Thrift Bulletin 13A Management of Interest Rate Risk, Investment Securities and
Derivative Activities, and board approved limitations.
Presented
below, as of June 30, 2007 and 2006, is an analysis of the interest rate risk
position as measured by NPV and sensitivity based upon various rate scenarios.
These values were obtained from an internal model produced by Willow Financial
Bank as required by the Office of Thrift Supervision regulations as total assets
now exceed $1.0 billion. Due to the level of interest rates, no values are
calculated for hypothetical rate scenarios of down 300 basis points at June 30,
2007. It only provides an estimate of economic value at a point in time and the
economic value of the same portfolio under the above referenced interest rate
scenarios.
Estimated change in NPV and
Sensitivity
At June 30, 2007
|
N
et Portfolio Val
ue
|
|
Amount of
|
|
Percent of
|
|
Total
|
|
Change
|
|
change
|
|
Assets
|
|
(in thousands)
|
|
|
|
|
|
|
Hypothetical change in interest rates
|
|
|
|
|
|
|
|
|
|
up 300 basis points
|
$
|
(53,648
|
)
|
|
(35.1
|
)%
|
|
7.26
|
%
|
up 200 basis points
|
|
(35,035
|
)
|
|
(22.9
|
)
|
|
8.62
|
|
up 100 basis points
|
|
(16,798
|
)
|
|
(11.0
|
)
|
|
9.96
|
|
no changebase case
|
|
|
|
|
|
|
|
11.19
|
|
down 100 basis points
|
|
13,757
|
|
|
9.0
|
|
|
12.20
|
|
down 200 basis points
|
|
21,829
|
|
|
14.3
|
|
|
12.79
|
|
Estimated change in NPV and
Sensitivity
At June 30, 2006
|
N
et Portfolio Val
ue
|
|
Amount of
|
|
Percent of
|
|
Total
|
|
Change
|
|
change
|
|
Assets
|
|
(in thousands)
|
|
|
|
|
|
|
Hypothetical change in interest rates
|
|
|
|
|
|
|
|
|
|
up 300 basis points
|
$
|
(56,211
|
)
|
|
(28.4
|
)%
|
|
9.20
|
%
|
up 200 basis points
|
|
(33,116
|
)
|
|
(16.7
|
)
|
|
10.70
|
|
up 100 basis points
|
|
(14,395
|
)
|
|
(7.3
|
)
|
|
11.92
|
|
no changebase case
|
|
|
|
|
|
|
|
12.85
|
|
down 100 basis points
|
|
8,812
|
|
|
4.5
|
|
|
13.42
|
|
down 200 basis points
|
|
1,726
|
|
|
0.9
|
|
|
12.96
|
|
down 300 basis points
|
|
(15,299
|
)
|
|
(7.7
|
)
|
|
11.86
|
|
Willow
Financial Banks sensitivity remained relatively stable for fiscal 2007 as
compared to fiscal 2006 due primarily to interest sensitive assets acquired in
the Chester Valley Merger, which was partially offset, by the intangible assets
recorded with the acquisition.
213
NPV is
more sensitive and may be more negatively impacted by rising interest rates than
by declining rates. This occurs primarily because as rates rise, the market
value of long-term fixed rate assets, like fixed rate mortgage loans, declines
due to both the rate increase and slowing prepayments. When rates decline, these
assets do not experience similar appreciation in value. This is due to the
decrease in the duration of the asset resulting from the increase in
prepayments.
INFORMATION ABOUT WILLOW FINANCIALS
DIRECTORS AND OFFICERS
The
following tables, as of June 20, 2008, present information concerning two
current directors of Willow Financial that will be appointed as directors of
Harleysville National upon consummation of the merger. Neither director listed
below is related to any other director or executive officer of Willow Financial
or Harleysville National by blood, marriage or adoption.
|
|
|
|
Position
with Willow Financial Bancorp and
|
|
Director
|
Name
|
|
Age
|
|
Principal Occupation During the
Past Five Years
|
|
Since
|
John J. Cunningham, III
|
|
65
|
|
Director. Vice Chairman of the
law firm of Cozen OConnor, Philadelphia, Pennsylvania and prior thereto
Managing Partner and Chairman of the Business Law Department of Cozen
OConnor since March 2000. Mr. Cunningham previously served as a director
of Chester Valley Bancorp and First Financial Bank from 1998 to
2005.
|
|
2005
|
James E. McErlane
|
|
64
|
|
Director. Attorney and Principal
of the law firm of Lamb McErlane, West Chester, Pennsylvania, since 1971.
Interim President of Chester Valley Bancorp and First Financial Bank from
June to November 2000. Mr. McErlane previously served as a director of
Chester Valley Bancorp and First Financial Bank from 1991 to 2005 and
Chairman from 2000 to 2005.
|
|
2005
|
Executive Officers
Set forth
below is certain information with respect to the current executive officer of
Willow Financial and/or Willow Financial Bank who will serve as executive vice
president of Harleysville National and Harleysville National Bank upon
consummation of the merger.
|
|
|
|
Position
with Willow Financial Bancorp and
|
|
Director
|
Name
|
|
Age
|
|
Principal Occupation During the
Past Five Years
|
|
Since
|
Donna M. Coughey
|
|
58
|
|
Director. President and Chief
Executive Officer of
Willow Financial and
Willow Financial Bank since
August 31,
2005. Director of Philadelphia Corporation for Investment Services, a
registered investment advisor and broker dealer. From November 2000
through
August 2005, Director, President
and Chief Executive
Officer of Chester
Valley Bancorp Inc. and First
Financial
Bank. Previously, Chairman, President, and Chief Executive Officer of
Mellon Bank of Delaware from October 1996 to November 2000. Pursuant to
the Employment
Agreement, dated May 20,
2008, by and between
Harleysville
Management Services LLC and Donna
M.
Coughey, Ms. Coughey will serve as executive vice
president of Harleysville National and Harleysville
National Bank for a period of one year commencing
on the effective date of the merger by and
between
Willow Financial and Harleysville
National.
|
|
2005
|
214
EXECUTIVE
COMPENSATION
Compensation Discussion and
Analysis
The
following information has been taken from the Definitive Proxy Statement filed
with the Securities and Exchange Commission on October 10, 2007. Where relevant,
this information has been supplemented to describe the effect of the merger with
Harleysville National. Please see the section entitled Interests of Management
and Others in the Merger, above in this joint proxy statement/prospectus for a
description of the benefits that each individual described below is entitled to
receive in connection with the merger with Harleysville National.
General
Willow
Financials compensation philosophy is developed by the Compensation Committee
of its board of directors. The duties and responsibilities of the Compensation
Committee, which consists entirely of independent directors of the board of
directors, include the following evaluations and recommendations that are made
to the full board of directors for approval:
-
Evaluate competitive compensation practices for
the executive team based on peer group companies;
-
Review overall compensation and benefits
budgets;
-
In conjunction with the Chief
Executive Officer, recommend the compensation and benefits philosophy
and strategy for Willow Financial;
-
In consultation with the Chief
Executive Officer, determine performance measures and goals for
corporate,
departmental and individual
performance as they relate to compensation;
-
Recommend compensation awards for the
Chief Executive Officer, including salary, bonus, stock awards,
and, if applicable, contracts and supplemental compensation
and benefits arrangements;
-
Review and make recommendations for
revision or approval of compensation programs and individual
compensation awards recommended by the Chief Executive
Officer for other members of the executive
team; and
-
Review and recommend implementation
or revision of any major compensation or benefit programs.
Donna
Coughey, Willow Financials Chief Executive Officer, participates in discussions
regarding the total compensation programs for all employees, including Willow
Financials other executive officers. However, the Compensation Committee
recommends, and the board of directors determines, Ms. Cougheys
compensation.
Willow Financials Philosophy
Regarding Executive Pay
Willow
Financial compensates Ms. Coughey primarily through a mix of salary, bonus and
equity compensation as well as retirement benefits. Willow Financials
compensation program is designed to be competitive with comparable companies so
that Willow Financial may (a) attract and retain talented, qualified executives
to lead Willow Financials organization, and (b) align the executive teams
incentives with the long-term interests of Willow Financials shareholders. When
Willow Financial sets compensation amounts and selects compensation components
for Ms. Coughey, Willow Financial strives to reward the achievement of both
short-term and long-term results that will promote earnings growth and stock
appreciation. Overall, Willow Financials compensation philosophy is intended to
provide fair base pay levels with meaningful upside for strong
performance.
Determination of Willow
Financials Compensation Levels
The
Compensation Committee of the board of directors is responsible for assessing
appropriate compensation arrangements and recommending the final level and forms
of compensation for Ms. Coughey. Willow Financial targets its compensation
levels with the following goals in mind: (a) fair base pay and benefits; (b)
short-term and long-term incentives that reward performance and share value
appreciation; and (c) appropriate levels of job security and benefits that are
needed to attract and retain talented and qualified executives.
215
In order
to compare Willow Financials pay standards with other comparable companies, it
periodically reviews pay levels of other peer and competitor firms. Willow
Financials last study was conducted at the end of 2005 and updated in 2006.
This study assessed pay described within proxy reports for 2005 as well as the
following three general compensation surveys including banks of similar
size:
-
Watson Wyatt Data Services 2004/2005
ECS Data Survey for commercial banks within the US that have
approximately $1.6 billion in assets;
-
Economic Research Institute July 2006
Salary Assessor for commercial banks with approximately $1.6
billion in assets; and
-
SNL Executive Compensation Review for
Banks in Pennsylvania and New Jersey with assets between
$800 million and $3.2 billion.
The
Compensation Committee used this information as a starting point for analyzing
the individual compensation of Ms. Coughey and set her compensation at a level
that was deemed appropriate considering Willow Financials philosophy,
recruiting needs and growth expectations. Specifically, the Compensation
Committee utilized this data to compensate Ms. Coughey at a level that is
comparable to that offered within similarly sized banks. The results of this
analysis continue to serve as the foundation for determining competitive
compensation levels for Ms. Coughey.
Willow
Financial plans to update its competitive pay analysis every two to three years
to stay abreast of industry and marketplace trends. Willow Financial intends to
benchmark this information and other information obtained by the members of its
Compensation Committee against the compensation it offers to ensure that its
compensation program is competitive. Willow Financials benchmarking process
involves careful analysis of the executive pay levels identified in (a) proxy
studies of up to twenty-two banks of similar asset size in its geographic region
and in (b) the general bank national surveys described above.
The pay
arrangements for Ms. Coughey are analyzed and reviewed by the Compensation
Committee. The Compensation Committee then makes recommendations to the board of
directors for Ms. Coughey. The board of directors ultimately establishes the
compensation for Ms. Coughey. These processes are utilized for all forms of
compensation unless noted otherwise below.
Role of Compensation Consultants
in Determining or Recommending Executive Compensation
Under its
Charter, the Compensation Committee has authority to retain counsel,
consultants, or other experts, as it deems appropriate. In 2005, the Committee
engaged The VisionLink Advisory Group, an independent national executive
compensation consulting firm, to review Willow Financials compensation,
incentive and equity programs. The timing of this analysis coincided with the
merger of Chester Valley Bank with and into Willow Grove Bank. VisionLinks
review included benchmarking Willow Financials compensation practices against
the peer institutions as described above. This study was considered by Ms.
Coughey and the Compensation Committee as they made recommendations for
compensation programs for Willow Financial.
Components of
Compensation
The four
primary components of compensation for Ms. Coughey are: (1) base salary; (2)
bonuses; (3) other non-equity incentive pay; and (4) equity incentives,
consisting of restricted stock and stock options.
To a
lesser extent, Willow Financial also compensates Ms. Coughey through matching
contributions and allocations of Willow Financial common stock in its
401(k)/Employee Stock Ownership Plan and certain other benefits available to all
employees. Each of these components of compensation are described in more detail
below.
Salary
Willow
Financial provides Ms. Coughey with a level of base salary that it believes is
appropriate given her professional status and accomplishments relative to
individuals in similar positions in the industry in which Willow Financial
operates. Historically, Willow Financial has assessed salary levels at or near
the 50th percentile of the pay range for its industry and size. Willow Financial
adjusts from this range in consideration of the range and scope of job
responsibilities, individual experience and capabilities, and its strategic
goals.
216
Ms.
Cougheys salary is negotiated and set forth in an employment contract between
Ms. Coughey and Willow Financial. Willow Financials Compensation Committee
reviews Ms. Cougheys salary annually. Willow Financials policy has been that,
due to her higher visibility and in light of Ms. Cougheys oversight of all
aspects of Willow Financials operations, she should receive significantly
greater compensation and benefits than its other executive officers. This is
consistent with the practices of other financial institutions. Although the
compensation of Ms. Coughey is higher than that of the other executive officers,
the processes used to determine her compensation are the same as the other
officers. Ms. Cougheys salary is established by (a) reviewing relevant market
data, (b) adjusting to reflect individual qualifications and job uniqueness, and
(c) engaging in discussions among the members of the Compensation Committee in
order to make revisions as needed.
Bonuses
As a
general rule Willow Financial structures all of its annual cash awards in the
form of incentive awards, as described below. Periodically, Willow Financial may
determine it is necessary to award a bonus to Ms. Coughey for fulfillment of
responsibilities that are not directly related to measurable performance
factors. No such awards were paid in fiscal 2007.
Non-Equity Incentive
Awards
Ms.
Coughey is eligible to receive non-equity incentive awards pursuant to Willow
Financials Executive Bonus Program. These awards are determined based upon a
matrix of performance criteria established at or near the beginning of each
fiscal year. Bonus amounts for fiscal 2007 were determined by the Compensation
Committee and the board of directors after consideration of various corporate
and individual performance factors, including base amounts related to Willow
Financials annual budget. The criteria may be adjusted from year to year. For
fiscal 2007, Ms. Coughey did not receive a bonus upon consideration of the
following matrix:
Name
|
|
Components
|
|
Weighting
|
|
Base
Threshold
|
|
Stretch
Threshol
d
|
Donna M. Coughey
|
|
Earnings per share
|
|
50
%
|
|
$
|
1.10
|
|
|
$
|
1.15
|
|
|
|
Average core
deposits
|
|
25
%
|
|
$
|
695.8
million
|
|
|
$
|
765.4
million
|
|
|
|
Fee, investment services and other income
|
|
25
%
|
|
$
|
13.3 million
|
|
|
$
|
14.6 million
|
|
|
|
Bonus payouts as
percent of base salary
|
|
|
|
|
|
35
|
%
|
|
|
45
|
%
|
Under the
Executive Bonus Program, Ms. Cougheys bonus may be awarded if at least some of
the threshold criteria are met. If none of the thresholds are achieved, then no
incentive bonus pay is awarded, as was the case for fiscal year 2007. Bonuses of
up to 35% of Ms. Cougheys base salary may be earned if she satisfies all of the
base performance thresholds and up to 45% of base salary if the stretch
performance thresholds are achieved.
Incentive
awards are not paid until the beginning of the following fiscal year. The
Compensation Committee and the board of directors ultimately sign off on final
incentive awards for Ms. Coughey.
Equity
Compensation
Willow
Financial believes that equity ownership by Ms. Coughey is important in order to
align its long-term rewards program with the interests of its shareholders.
Additionally, long-term awards are needed to attract and retain talented and
motivated employees. Due to recent changes in accounting rules that made the
treatment of stock options less attractive, Willow Financial has diminished the
use of stock options in favor of restricted stock awards. However, Willow
Financial believes both types of awards have their place. Options require
appreciation in share value before they result in gain for the employees.
Restricted stock awards encourage employees to preserve existing value as well
as grow the value of the stock. Willow Financial has used, and expects to
continue to use, both forms of equity compensation as part of its overall
rewards program.
Willow
Financial provided restricted stock awards to Ms. Coughey in the last fiscal
year under its 2005 Recognition and Retention Plan that was approved by the
board of directors on September 27, 2005. The restricted stock awards vest at a
rate of 1/3 per year commencing on the first anniversary of the date of grant.
Accelerated vesting is permitted on death, disability, retirement and change in
control. Additional information on the restricted stock awards is set forth
below under Grants of Plan-Based Awards. Upon the consummation of the merger
with Harleysville National, all of Ms. Cougheys unvested shares of restricted
stock will vest in full.
217
Willow
Financials Compensation Committee recommends, and its board of directors
grants, restricted stock awards to retain its executives and reward the
achievement of corporate goals and strong individual performance. Restricted
stock awards are based on a combination of individual contributions to Willow
Financial, market standards and competitive recruiting needs. On an annual
basis, Willow Financials Compensation Committee assesses the appropriate
individual and corporate goals for Ms. Coughey and considers additional
restricted stock awards based upon the achievement of both individual and
corporate goals.
Additionally, employees, including Ms. Coughey, receive matching
contributions and are eligible for discretionary contributions under the 401(k)
provisions of the 401(k)/Employee Stock Ownership Plan. No discretionary
contributions were made in fiscal 2007. Employer and matching contributions
under the plan are fully vested at all times. In addition, Willow Financial
allocates shares of its common stock to its employees pursuant to the employee
stock ownership plan provisions. Participants become vested in the employee
stock ownership plan shares at a rate of 20% per year commencing after two full
years of service.
Life Insurance
Benefits
Willow
Financial has assumed a life insurance policy on Ms. Coughey pursuant to the
First Financial Bank Executive Survivor Income Plan. Under this arrangement
Willow Financial owns the policy and makes premium payments to the insurance
companies. In the event of the death of Ms. Coughey during her employment with
Willow Financial, her designated beneficiary would receive a $500,000 death
benefit. Her beneficiary would also be eligible to receive the death benefit
under the Executive Survivor Income plan after Ms. Cougheys employment with
Willow Financial ends if (a) she becomes disabled, (b) retires from employment
with Willow Financial, or (c) she is involuntarily terminated within twelve
months of the change in control of Willow Financial.
Other Elements of
Compensation
In order
to attract and retain qualified executive officers, Willow Financial provides
executives with a variety of benefits and perquisites, including certain
benefits available generally to all of its full time employees. Benefits are
determined by the same criteria applicable to Willow Financials other
employees. In general, benefits are designed to provide protection against
financial catastrophes that can result from illness, disability or death, and to
provide a reasonable level of retirement income. The benefits package enables
Willow Financial to be competitive in attracting and retaining talented
employees, and keeping employees focused on their responsibilities and not
distracted with concerns about health care insurance or adequate savings for
retirement.
Additionally Willow Financial provides Ms. Coughey with life insurance
and an automobile allowance. Details on the values of these personal benefits
and perquisites may be found in the Summary Compensation Table and related
footnotes.
In 2006
Willow Financial approved a Supplemental Executive Retirement Plan for a select
group of executives. The Supplemental Executive Retirement Plan is designed to
provide an enhanced level of financial security for participants. The board of
directors also believes that the Supplemental Executive Retirement Plan can
assist in the attraction and retention of strong executive talent. However, at
the recommendation of management, the board of directors determined that no
contributions would be made under the Supplemental Executive Retirement Plan
during fiscal years 2006 or 2007. Willow Financial adopted an amendment to the
Supplemental Executive Retirement Plan in the first quarter of fiscal 2008 to
commence contributions under the plan.
Employment
Agreement
Willow
Financial maintains an employment agreement with Ms. Coughey. The terms of the
agreement for Ms. Coughey are described later in this joint proxy
statement/prospectus in the section entitled Employment Agreements. In
connection with the merger with Harleysville National and in exchange for the
termination of Ms. Cougheys employment agreement and executing a release in
favor of Willow Financial and Harleysville National, Ms. Coughey will receive a
lump sum payment of $1,540,960 under a termination agreement which becomes
effective upon the consummation of the merger with Harleysville National. In
addition, Ms. Coughey has entered into a new employment agreement with a
subsidiary of Harleysville National for a one year term, effective on the
effective date of the merger with Harleysville National. The terms of these
agreements are described below in the section entitled Employment Agreements.
218
Compliance with Section 162(m)
and 409A of the Internal Revenue Code
In
accordance with Section 162(m) of the Internal Revenue Code, a public company
generally may not deduct most forms of compensation in excess of $1,000,000 for
a covered employee, such as Ms. Coughey. Since none of Willow Financials
executive officers had compensation in excess of $1,000,000 for the past fiscal
year, Section 162(m) was not applicable.
Willow
Financial maintains its executive compensation arrangements in conformity with
the requirements of Section 409A of the Internal Revenue Code, which imposes
certain restrictions on deferred compensation arrangements. In the past year,
Willow Financial amended, as necessary, its deferred compensation arrangements,
including its employment and change in control severance agreements, and its
Supplemental Executive Retirement Plan, in order to comply with the requirements
of Section 409A.
Summary Compensation
Table
The
following table summarizes the total compensation paid or earned for the fiscal
year ended June 30, 2007 by Ms. Coughey. No stock options were granted to Ms.
Coughey during the last fiscal year. The amount of Ms. Cougheys bonus was based
on the terms of her employment agreement with Willow Financial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
Nonquali-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
fied
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Deferred
|
|
All
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Compen-
|
|
Other
|
|
|
|
|
Fiscal
|
|
|
|
|
|
Stock
|
|
Option
|
|
Compen-
|
|
sation
|
|
Compen-
|
|
|
Name and Principal
Position
|
|
Year
|
|
Salary
(1)
|
|
Bonus
|
|
Awards
(3)
|
|
Awards
(3)
|
|
sation
|
|
Earnings
(4)
|
|
sation
(5)
|
|
Total
|
Donna M. Coughey
|
|
2007
|
|
$
336,539
|
|
$150,000
|
(2)
|
|
$
98,500
|
|
$4,567
|
|
$
|
|
$
|
|
$50,285
|
|
$639,891
|
President and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________
(1)
|
|
In addition to salary, the
amounts disclosed in this column include amounts contributed by Ms.
Coughey to the 401(k)/Employee Stock Ownership Plan of Willow Financial
Bank. Willow Financial periodically reviews, and may increase, Ms.
Cougheys annual base salary in accordance with the terms of her
employment agreement and its annual compensation review of Ms.
Coughey.
|
|
(2)
|
|
Retention bonus paid to Ms.
Coughey under her employment agreement upon the one-year anniversary of
the acquisition of Chester Valley Bancorp and First Financial
Bank.
|
|
(3)
|
|
Reflects the dollar value of the
awards of restricted stock and/or stock options recognized by Willow
Financial for financial statement purposes in accordance with Statement of
Financial Accounting Standards No. 123(R), which is an accounting
pronouncement that governs the manner in which it accounts for equity
based compensation. The values of stock awards were calculated based on
the fair market value of Willow Financial common stock on the dates of
grant, $15.57 and $14.59, for grants made on January 6, 2006 and January
5, 2007, respectively. For a discussion of the assumptions used to
establish the valuation of the restricted stock awards and stock options,
reference is made to Note 5 of the Notes to Consolidated Financial
Statements of Willow Financial included elsewhere in this joint proxy
statement/prospectus. Additional information is also included in the table
below entitled Grants of Plan-Based Awards. Willow Financial uses the
Black-Scholes option valuation model to establish the values of options.
In calculating the value of stock awards Willow Financial has disregarded
any estimate of forfeitures relating to service-based vesting conditions.
There were no forfeitures for the 2007 fiscal year.
|
|
(4)
|
|
Ms. Coughey was a participant in
First Financial Banks terminated supplemental pension plan. During fiscal
2007 Willow Financial purchased an annuity to fund the accrued benefits
for all participants, including Ms. Coughey, under the pension plan, which
removes any future cash liability for, and expense to, Willow Financial
under such plan. The annual benefits payable upon retirement at age 65 to
Ms. Coughey will be $10,825. The benefit amounts to be paid to
participants in this plan have been frozen. There are no above-market or
preferential earnings paid on Ms. Cougheys account under the deferred
compensation plan.
|
219
(5)
|
|
Includes employer matching
contributions of $13,750 allocated in 2007 to Ms. Cougheys account, under
the Willow Grove Bank 401(k)/Employee Stock Ownership Plan. Also includes
the fair market value at December 31, 2006, the date of allocation to Ms.
Coughey of the shares of common stock pursuant to the 401(k)/Employee
Stock Ownership Plan, representing $21,534. Includes amounts paid during
the fiscal year for premiums with respect to group term life insurance for
Ms. Coughey. Includes Ms. Cougheys an automobile allowance of
$14,400.
|
Grants of Plan-Based
Awards
During
fiscal 2007, Ms. Coughey received restricted stock grants under the 2005
Recognition and Retention Plan that are vesting at a rate of 1/3 per year
commencing on the first anniversary of the date of grant. Ms. Coughey did not
receive an award under the Executive Bonus Program. Willow Financial did not
grant any stock options to Ms. Coughey during fiscal 2007. Willow Financial does
not currently maintain an equity incentive plan.
|
|
|
|
Estimated Possible Payouts
|
|
All Other Stock
|
|
Grant Date
|
|
|
|
|
Under Non-Equity Incentive
|
|
Awards:
|
|
Fair Value of
|
|
|
Grant
|
|
Plan
Awar
ds
(1)
|
|
Number of Shares
|
|
Stock and Option
|
Name
|
|
Date
|
|
Target
|
|
Maximum
|
|
of Stock or
Units
(2)
|
|
Awards
(3)
|
Donna M. Coughey
|
|
10/24/06
|
|
$
122,500
|
|
$
|
157,500
|
|
|
|
$
|
|
|
|
1/05/07
|
|
|
|
|
|
|
12,447
|
|
|
172,964
|
____________________
(1)
|
|
The Estimated Possible Payouts
Under Non-Equity Incentive Plan Awards represent potential amounts payable
under Willow Financials Executive Bonus Program for fiscal 2007. The
Executive Bonus Program did not provide for threshold amounts of awards.
Actual amounts earned in the last fiscal year are reported as Non- Equity
Incentive Plan Compensation in the Summary Compensation Table. For a more
detailed description of the annual cash awards, see Compensation
Discussion and Analysis Components of Compensation.
|
|
(2)
|
|
Represents the restricted stock
awards granted to Ms. Coughey on January 5, 2007 and as adjusted to
reflect a 5% stock dividend on February 23, 2007. The shares of restricted
stock vest in three equal annual installments beginning one year after the
date of grant. Restricted stock awards become vested on death, disability
or retirement, or a change in control of Willow Financial. The shares of
restricted stock are issued to Ms. Coughey upon vesting and no dividends
are paid on unearned shares.
|
|
(3)
|
|
Represents the fair value of each
stock award calculated as of the applicable grant date in accordance with
Statement of Financial Accounting Standards No.
123(R).
|
Employment Agreement
Willow
Financial and Willow Financial Bank entered into an employment agreement with
Ms. Coughey, effective August 31, 2005, in connection with the merger of Chester
Valley Bancorp with and into Willow Financial. Under the terms of her employment
agreement, Ms. Coughey serves as President and Chief Executive Officer for a
three-year term that renews annually for one additional year each July 1 unless
notice to the contrary is given. The employment agreement also provides that Ms.
Coughey will serve as a director of Willow Financial and Willow Financial Bank.
Ms. Coughey is entitled to a minimum base salary which may be increased by the
board of directors from time to time, but not decreased without her express
consent. Under the terms of her agreement, Ms. Coughey received a retention
bonus of $150,000 on August 31, 2006, the one-year anniversary of the Chester
Valley merger. The agreement provides that, if Ms. Cougheys employment is
terminated in connection with a subsequent change in control of Willow Financial
and/or Willow Financial Bank or within twelve months thereafter, Willow
Financial will pay her three times her then current base salary and most recent
bonus. The employment agreement provides that if the payments and benefits
provided to Ms. Coughey pursuant to a subsequent change in control are deemed to
constitute a parachute payment within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended, then she would be reimbursed for any
excise tax liability pursuant to Sections 280G and 4999 of the Internal Revenue
Code and for additional taxes imposed as a result of such reimbursement. In
addition, Willow Financial, Willow Financial Bank and Ms. Coughey have generally
agreed to release each other from any and all claims of actions that may result
during the term of the employment agreement.
220
Ms.
Cougheys employment agreement is similar to the agreements for senior executive
officers of comparable financial institutions. Although the above-described
employment agreement could increase the cost of any acquisition of control of
Willow Financial, its management does not believe that the terms thereof would
have a significant anti-takeover effect. The above-described employment
agreement was amended and restated in order to comply with the provisions of
Section 409A of the Internal Revenue Code of 1986, as amended, and regulations
thereunder.
Pursuant
to the merger with Harleysville National, Ms. Cougheys existing employment
agreement with Willow Financial and Willow Financial Bank will be terminated on
the effective date of such merger. In exchange for the termination of her
employment agreement and for a release in favor of Willow Financial and
Harleysville National, Ms. Coughey will receive a lump sum payment of $1,540,960
under a termination agreement upon the effective date of the merger with
Harleysville National. In addition to this payment, Harleysville National and
Harleysville National Bank will provide Ms. Coughey, her spouse and any of her
dependents that are covered as of the effective date of the merger with
Harleysville National, at no cost to Ms. Coughey, for a period beginning on the
effective date of such merger and ending at the earlier of (i) three years
subsequent to the effective date of such merger or (ii) the date of Ms.
Cougheys full-time employment by another employer who offers similar benefits,
continued participation in the life, disability, health and dental insurance
plans and any other group insurance plans offered by Harleysville National and
Harleysville National Bank to their employees, with any insurance premiums
payable by Harleysville National and Harleysville National Bank to be payable at
such times and in such amounts as if Ms. Coughey was still an employee of
Harleysville National and Harleysville National Bank, subject to any increases
in such amounts imposed by the insurance company or COBRA. If the participation
of Ms. Coughey or other covered dependents in any such plans is barred, then
Harleysville National and Harleysville National Bank will either arrange to
provide such persons with insurance benefits substantially similar to those
which Ms. Coughey and other covered persons were otherwise entitled to receive
or, if such coverage cannot be obtained, pay a lump sum cash equivalency amount
within thirty (30) days following the date coverage ceases based on the
annualized rate of premiums being paid by Harleysville National and Harleysville
National Bank as of such date.
In
addition, Ms. Coughey has entered into a new employment agreement with a
subsidiary of Harleysville National for a one year term. This employment
agreement will become effective on the effective date of the merger with
Harleysville National. Ms. Coughey will serve as an Executive Vice President of
Harleysville National and Harleysville National Bank. Her annual salary under
this employment agreement will be $350,000 and she will also be entitled to
receive customary employee benefits. In addition, the employment agreement
contains non-competition and non-solicitation provisions which are effective
until the second anniversary of the effective date of the merger with
Harleysville National.
Outstanding Equity Awards at Fiscal
Year-End
The
following table sets forth information regarding option awards and stock awards
granted to Ms. Coughey that were outstanding as of June 30, 2007. There were no
equity incentive plan awards outstanding at fiscal year end. Upon the
consummation of the merger with Harleysville National, all unvested shares of
restricted stock and unvested stock options that have been granted to Ms.
Coughey will vest in full.
|
|
O
ption
Awards
|
|
Stock
Award
s
|
|
|
|
|
|
|
|
|
Number of Shares or
|
|
Market Value of
|
|
|
Number of Securities
|
|
|
|
|
|
Units of Stock
|
|
Shares or Units of
|
|
|
Underlying Unexercised
Options
|
|
|
|
Option
|
|
That Have
|
|
Stock That Have
|
Name
|
|
Exercisab
le
|
|
Unexercis
able
|
|
Exercise
Pr
ice
|
|
Expiration
Date
|
|
Not Vested
|
|
N
ot Vested
(3)
|
Donna M. Coughey
|
|
14,128
|
|
4,236
|
|
$
|
12.23
|
|
6/30/2013
|
(1)
|
|
|
|
$
|
|
|
|
2,702
|
|
|
|
|
8.81
|
|
6/19/2012
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,931
|
|
|
285,103
|
____________________
(1)
|
|
The option which originally
represented an option to acquire shares of Chester Valley Bancorp Inc. is
vesting at a rate of 20% per year commencing on June 30,
2004.
|
|
(2)
|
|
The option which originally
represented an option to acquire shares of Chester Valley Bancorp Inc. is
vesting at a rate of 20% per year commencing on June 19,
2003.
|
|
(3)
|
|
Calculated by multiplying the
closing market price of Willow Financials common stock on the last
trading day in June 2007, which was $13.00, by the applicable number of
shares of common stock underlying Ms. Cougheys stock
awards.
|
221
Options Exercised and Stock Awards
Vested
The
following table sets forth information regarding Ms. Cougheys stock awards that
vested during the year ended June 30, 2007. No stock options were exercised
during the 2007 fiscal year. All of Ms. Cougheys unvested stock awards will
vest upon the consummation of the merger with Harleysville National.
|
|
Stock Awards
|
|
|
Number of
Shares Acquired
|
|
Value
Realized
|
Name
|
|
on Vesting
|
|
on Vesting
(1)
|
Donna M. Coughey
|
|
4,516
|
|
$62,750
|
____________________
(1)
|
|
Represents the number of shares of common stock that
vested during the fiscal year multiplied by the market price of Willow
Financials common stock on the date on which the stock award vested. As
such, the value realized may be different from the value reported for
Statement of Financial Accounting Standards No. 123(R)
purposes.
|
Pension Benefits
The
following table sets forth information regarding Ms. Cougheys number of years
of credited service under the frozen First Financial Bank Defined Benefit Plan
which was terminated in fiscal 2007. The accrued benefits have been funded with
an annuity which removes any future cash liability for, and expenses to Willow
Financial and provides for payments following retirement. There were no payments
made during fiscal 2007 to Ms. Coughey under the terminated pension plan. The
annual benefits payable upon retirement at age 65 to Ms. Coughey will be
$10,825.
|
|
|
|
Number of
Years
|
Name
|
|
Plan Name
|
|
Credited Service
|
Donna M. Coughey
|
|
First Financial Bank Defined Benefit Plan
|
|
4 years, 8 months
|
Nonqualified Deferred
Compensation
In fiscal
2004, Willow Financial Bank adopted a Deferred Compensation Plan that provides
certain of Willow Financials senior officers with the opportunity to elect to
defer receipt of specified portions of their compensation and to have such
deferred amounts treated as if invested in specified investment vehicles. Ms.
Coughey elected to participate in this plan and is deferring a portion of her
compensation. On or before the consummation of the merger with Harleysville
National, this deferred compensation plan will terminate and Ms. Coughey will be
entitled to receive her account balance, which is approximately $153,767 as of
July 25, 2008.
In
connection with the acquisition of First Financial Bank, Willow Financial
assumed the First Financial Bank Executive Deferred Compensation Plan, as
amended and restated effective January 1, 2003, and the First Financial Bank
2005 Executive Deferred Compensation Plan. The First Financial Bank Deferred
Compensation Plans were frozen in August 2005; however, Willow Financial
maintains an account for Ms. Coughey, who previously participated in the
plans.
The
following table sets forth information regarding Ms. Cougheys account in Willow
Financials deferred compensation plans as of and for the fiscal year ended June
30, 2007. Willow Financial and Willow Financial Bank do not make any
contributions to the plans and there were no withdrawals or distributions in the
fiscal year ended June 30, 2007.
|
|
Executive
Contributions in
|
|
Aggregate
Earnings in
|
|
Aggregate
Balance at
|
Name
|
|
Last FY
|
|
Last FY
(2)
|
|
Last FYE
|
Donna M. Coughey
|
|
$64,726
(1)
|
|
$3,687
|
|
$96,861
|
____________________
(1)
|
|
Reflects deferrals of the receipt of shares of Willow
Financial common stock from Willow Financials 2005 Recognition and
Retention Plan in fiscal 2007 based upon the market value of the stock on
the date of vesting.
|
222
(2)
|
|
Aggregate earnings reflect the aggregate interest or
other earnings accrued to Ms. Cougheys account during fiscal year 2007.
Earnings for Ms. Cougheys deferrals include the cash and stock dividends
received on the shares of restricted stock.
|
Potential Payments Upon Termination
of Employment or Change in Control
The table
below reflects the amount of compensation to Ms. Coughey in the event of
termination of her employment. The amount of compensation payable to Ms. Coughey
upon voluntary termination, termination for cause, early retirement, involuntary
not-for-cause termination, termination following a change in control and in the
event of disability, death or retirement is shown below. The amounts shown
assume that such termination was effective as of June 29, 2007, and thus include
amounts earned through such time and are estimates of the amounts which would be
paid out to Ms. Coughey upon her termination. The actual amounts to be paid out
can only be determined at the time of Ms. Cougheys separation.
Ms.
Cougheys existing employment agreement with Willow Financial and Willow
Financial Bank will be terminated on the effective date of the merger with
Harleysville National. In exchange for the termination of this agreement and a
release in favor of Willow Financial and Harleysville National, Ms. Coughey will
receive a lump sum payment of $1,540,960 under a termination agreement.
Accordingly, Ms. Coughey will no longer be entitled to receive the severance
payments provided in her employment agreement with Willow Financial. In
addition, on the effective date of such merger, all of Ms. Cougheys unvested
stock options and restricted stock awards will vest in full. For a description
of the benefits Ms. Coughey will receive in connection with the merger with
Harleysville National, please see the section entitled Interests of Management
and Others in the Merger, above in this joint proxy
statement/prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination by the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive for Good
|
|
Change in Control
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
Termination
|
|
Reason Absent a
|
|
With Termination of
|
|
Death or
|
|
|
|
|
|
Payments and
Benefits
|
|
Termination
|
|
f
or
Caus
e
|
|
C
hange in Co
ntrol
|
|
Employme
nt
|
|
Disability
(n)
|
|
Retirement
(o)
|
Accrued paid time off
(a)
|
|
|
$
|
10,096
|
|
|
|
$
|
10,096
|
|
|
|
$
|
10,096
|
|
|
|
$
|
10,096
|
|
|
$
|
10,096
|
|
|
|
$
|
10,096
|
|
Severance payments and benefits:
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
severance
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712,024
|
|
|
|
|
1,500,000
|
|
|
|
356,012
|
(p)
|
|
|
|
|
|
Medical and dental benefits
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,226
|
|
|
|
|
14,287
|
|
|
|
7,226
|
(q)
|
|
|
|
|
|
Other welfare benefits
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,597
|
|
|
|
|
2,307
|
|
|
|
671
|
(q)
|
|
|
|
|
|
Automobile expenses
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,295
|
|
|
|
|
39,640
|
|
|
|
|
|
|
|
|
|
|
ESOP
allocations
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,305
|
|
|
|
|
|
|
|
|
|
|
§280G tax gross-up
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards:
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested stock options
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,262
|
|
|
|
3,262
|
|
|
|
|
|
|
Unvested restricted stock awards
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,103
|
|
|
|
285,103
|
|
|
|
|
|
|
Life insurance
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650,000
|
|
|
|
|
|
|
Total payments and
benefits
(m)
|
|
|
$
|
10,096
|
|
|
|
$
|
10,096
|
|
|
|
$
|
760,238
|
|
|
|
$
|
1,868,000
|
|
|
$
|
1,312,370
|
|
|
|
$
|
10,096
|
|
____________________
Notes to the tables:
(a)
|
|
Paid time off is granted to each employee annually based
on position and tenure. Earned but unused paid time off is paid upon
termination of employment. The amounts shown represent Ms. Cougheys
accrued but unused paid time off as of June 29, 2007.
|
|
(b)
|
|
These severance payments and benefits are payable if the
employment of Ms. Coughey is terminated prior to a change in control
either (i) by Willow Financial or Willow Financial Bank for any reason
other than cause, disability, retirement or death or (ii) by Ms. Coughey
if Willow Financial or Willow Financial Bank takes certain adverse actions
(a good reason termination). The severance payments and benefits are
also payable if Ms. Cougheys employment is terminated during the term of
her employment agreement following a change in
control.
|
223
(c)
|
|
The Involuntary Termination column
represents a lump sum amount equal to the present value of Ms. Cougheys
base salary for the remaining term of Ms. Cougheys employment agreement.
The Change in Control column represents a lump sum amount equal to three
times her current base salary and most recently paid bonus. For the amount
payable to Ms. Cougheys spouse in the event of her death, see Note (p)
below.
|
|
(d)
|
|
The Involuntary Termination column
represents the estimated cost of providing continued medical and dental
coverage for the remaining term of her employment agreement, with Ms.
Coughey continuing to pay the employee share of the premiums. The Change
in Control column represents the estimated cost of providing continued
medical and dental coverage for three years, at no cost to Ms. Coughey.
The change in control benefits will be discontinued if Ms. Coughey obtains
full-time employment with a subsequent employer which provides
substantially similar benefits. If the employment of Ms. Coughey is
terminated due to death, disability or retirement, continued insurance
coverage will be provided as discussed in Note (q) below. The estimated
costs assume the current insurance premiums or costs increase by 10% on
January 1st of each year. Because the premiums could increase faster than
assumed, they have not been discounted to present value.
|
|
(e)
|
|
The Involuntary Termination column,
represents the estimated cost of providing continued life, accidental
death and long-term disability coverage for the remaining term of Ms.
Cougheys employment agreement, with Ms. Coughey continuing to pay her
share of the premiums. The Change in Control column represents the
estimated cost of providing continued life, accidental death and long-term
disability coverage for three years at no cost to Ms. Coughey. The change
in control benefits will be discontinued if Ms. Coughey obtains full-time
employment with a subsequent employer which provides substantially similar
benefits. If Ms. Cougheys employment is terminated due to disability or
retirement, continued life insurance coverage will be provided as
discussed in Note (q) below. The estimated costs assume the current
insurance premiums or costs increase by 10% on January 1st of each year.
Because the premiums could increase faster than assumed, they have not
been discounted to present value.
|
|
(f)
|
|
Represents the estimated present value
costs of paying automobile related expenses for Ms. Coughey for the
remaining term of her employment agreement in the Involuntary Termination
column and for three years in the Change in Control column, in each case
based on the automobile allowance of $1,200 per month.
|
|
(g)
|
|
In the event of a change in control, the
Employee Stock Ownership Plan will be terminated and the unallocated
shares will first be used to repay the outstanding loan. Any remaining
unallocated shares will then be allocated among plan participants on a pro
rata basis based on account balances. Based on the June 29, 2007 closing
price of $13.00 per share, the value of the unallocated shares exceeds the
remaining principal balance of the loan by approximately $2.3 million, and
the Change in Control column reflects Ms. Cougheys proportionate share of
such amount.
|
|
(h)
|
|
If the parachute amounts associated with
the payments and benefits to Ms. Coughey in the Change in Control column
equal or exceed three times her average taxable income for the five years
ended December 31, 2006, they would be subject to a 20% excise tax. In
such event, Willow Financial has agreed in its employment agreement with
Ms. Coughey to pay the 20% excise tax and the additional federal, state
and local income taxes and excise taxes on such reimbursement in order to
place her in the same after-tax position she would have been in if the
excise tax had not been imposed.
|
|
(i)
|
|
The vested stock options held by Ms.
Coughey had a value of approximately $22,000 based on the June 29, 2007
closing price of $13.00 per share. Such value can be obtained in the event
of termination due to voluntary termination, death, disability, retirement
or cause only if Ms. Coughey actually exercises the vested options in the
manner provided for by the relevant option plan and subsequently sells the
shares received for $13.00 per share. In the event of a termination of
employment, Ms. Coughey (or her estate in the event of death) will have
the right to exercise vested stock options for the period specified in her
option grant agreement.
|
|
(j)
|
|
All unvested stock options will become
fully vested upon Ms. Cougheys death or disability, upon a change in
control, or for Ms. Cougheys options assumed in the 2005 acquisition,
upon retirement after at least 10 years of service.
|
|
(k)
|
|
If Ms. Cougheys employment is terminated
as a result of death or disability, unvested restricted stock awards are
deemed fully earned. In addition, in the event of a change in control of
Willow Financial, the unvested restricted stock awards are deemed fully
vested and, in the case of awards made under the 2005 Recognition and
Retention Plan, are deemed fully vested on retirement.
|
224
(l)
|
|
In 2005 Willow Financial Bank assumed the
executive survivor income agreement that First Financial Bank had entered
into with Ms. Coughey in July 2003. The agreement provides that if the
employment of Ms. Coughey had been terminated due to death as of June 29,
2007, her beneficiaries or estate would have received death benefits of
$500,000. This agreement also provides that if Ms. Coughey retires on or
after age 62, becomes disabled or has her employment involuntarily
terminated within 12 months after a change in control and then dies before
reaching age 85, then Willow Financial Bank will pay the above death
benefits to Ms. Cougheys beneficiary. Includes amounts payable to the
beneficiaries of Ms. Coughey pursuant to group term life insurance
policies.
|
|
(m)
|
|
Does not include the value of the vested
benefits to be paid under Willow Financials 401(k) plan, ESOP,
Supplemental Pension Plan or Deferred Compensation Plan. See the tables
under Pension Benefits and Nonqualified Deferred Compensation below.
Also does not include the value of vested stock options set forth in Note
(i) above, earned but unpaid salary and reimbursable expenses.
|
|
(n)
|
|
Does not include amounts payable if the
employment of Ms. Coughey had been terminated due to disability, in which
case, she would receive continuation of her base salary for up to 90 days
based on her tenure. If the disability continued beyond 90 days, Ms.
Coughey would be entitled to receive long-term disability benefits of 60%
of her gross monthly income, subject to a benefit cap of $5,000 per month,
for as long as Ms. Coughey remains disabled, up to age 65. Includes Ms.
Cougheys unvested equity awards that will become fully vested upon death
or disability.
|
|
(o)
|
|
In 2005, Willow Financial assumed the First
Financial Bank pension plan, a noncontributory defined benefit plan, which
was frozen effective as of July 1, 2005 and from which it withdrew
subsequent to assuming the plan. During fiscal 2007, Willow Financial
purchased an annuity to fund the vested benefits under the pension plan.
Ms. Coughey, who previously was an employee of First Financial Bank, was a
participant in the frozen First Financial Bank defined benefit pension
plan and is entitled to her vested benefits thereunder. The annual
benefits payable upon retirement at age 65 to Ms. Coughey will be $10,825.
With respect to Ms. Coughey, Willow Financial has no further obligations
with respect to, and will incur no additional costs for, the prior First
Financial Bank defined benefit pension plan. On March 28, 2006, Willow
Financial adopted the 2006 Supplemental Executive Retirement Plan,
effective as of April 1, 2006. The plan is a nonqualified, unfunded, cash
based defined contribution plan which is designed to provide deferred
compensation retirement benefits to selected members of its executive
management team. At the recommendation of management, as of the end of
fiscal 2007, no contributions had been made under the plan.
|
|
(p)
|
|
If Ms. Cougheys employment is terminated
due to death, her spouse will be entitled to receive one-half of her base
salary for the remaining term of her employment agreement. The amounts
shown are discounted to present value.
|
|
(q)
|
|
If the employment of Ms. Coughey is
terminated due to disability or retirement, Willow Financial will provide
continued medical, dental and life insurance coverage for her and any
dependents covered as of the date of termination of employment. Ms.
Coughey does not yet qualify for retirement. If Ms. Cougheys employment
is terminated due to death, then Willow Financial will provide her spouse
and any dependents covered as of the date of death with continued medical
and dental coverage. In each case, the coverage will continue for the then
remaining term of the employment agreement, with Ms. Coughey (or her
spouse or dependents in the event of death) paying the employee share of
the premium costs. The estimated costs assume the current insurance
premiums or costs increase by 10% on each January 1 and have not been
discounted to present value.
|
225
Director Compensation
The following
table summarizes the compensation of non-management directors during fiscal year
2007.
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
Fees Earned or
|
|
Stock
|
|
Option
|
|
Compensation
|
|
All Other
|
|
|
Name
|
|
Paid in
Cash
(1)
|
|
Awards
(2)
|
|
Awards
(2)
|
|
Earnings
(3)
|
|
Compensation
|
|
Total
(4)
|
John J.
Cunningham, III
|
|
28,800
|
|
14,645
|
|
|
|
25,459
|
|
|
|
68,904
|
James E. McErlane
|
|
35,450
|
|
14,645
|
|
|
|
16,346
|
|
|
|
66,441
|
____________________
(1)
|
|
Reflects committee and meeting fees that
were paid or were accrued during fiscal year 2007.
|
|
(2)
|
|
The column Stock Awards reflects expense
recognized during fiscal year 2007 in accordance with Statement of
Financial Accounting Standards No. 123(R) related to grants of restricted
stock awards to Messrs. Cunningham and McErlane pursuant to
Willow Financials 2002 Recognition and Retention Plan and 2005
Recognition and Retention Plan. Such awards pursuant to the 2002 and 2005
plans vest pro rata over five and three years, respectively, commencing on
the first anniversary of the date of grant. The column Option Awards
reflects expense recognized during fiscal year 2007 in accordance with
Statement of Financial Accounting Standards No. 123(R) related to grants
of stock options to Messrs. Cunningham and McErlane made pursuant to
Willow Financials 2002 Stock Option Plan, which shares vest pro rata over
five years commencing on the first anniversary of the date of
grant.
|
|
|
|
No stock option awards were made in fiscal
2007. Messrs. Cunningham and McErlane each received a grant of 1,935
shares of restricted stock under Willow Financials 2005 Recognition and
Retention Plan on January 5, 2007. The restricted stock awards were valued
at $28,232, which was the fair market value of Willow Financials common
stock on the date of grant.
|
|
|
|
For a discussion of the assumptions used to
establish the valuation of the restricted stock awards and stock options,
reference is made to Note 5 of the Notes to Consolidated Financial
Statements of Willow Financial included elsewhere in this joint proxy
statement/prospectus.
|
|
|
|
Messrs. Cunningham and McErlane were
awarded 1,935 shares of restricted stock on January 6, 2006 and January 5,
2007, that vest at a rate of 1/3 per year commencing on the first
anniversary of the date of grant.
|
|
(3)
|
|
The amounts represent the changes in the
actuarial present value of accumulated pension benefits, see Non-
Qualified Retirement Plan below. Messrs. Cunningham and McErlane
participate in the deferred compensation plan and have accrued benefits
under Willow Financials frozen Non-Employee Directors Retirement Plan as
described below under Deferred Compensation Plans. There are no
above-market or preferential earnings paid on the accounts under the
deferred compensation plans.
|
|
(4)
|
|
At June 30, 2007, Messrs. Cunningham
and McErlane held the following amount of unvested stock awards
and/or aggregate stock option awards:
|
Name
|
|
At June 3
0,
2007
|
|
Name
|
|
At June 3
0,
2007
|
|
|
Unvested
Stock
|
|
Option
|
|
|
|
Unvested
Stock
|
|
Option
|
|
|
Awards
|
|
Awards
|
|
|
|
Awards
|
|
Awards
|
John J.
Cunningham, III
|
|
3,386
|
|
|
|
James E.
McErlane
|
|
3,386
|
|
|
Willow
Financial does not pay separate compensation to directors for their service on
the board of directors of Willow Financial Bank. Board meetings for Willow
Financial are held jointly with or immediately following board or committee
meetings of Willow Financial Bank for which Willow Financial board members are
compensated. Board fees are subject to periodic adjustment by the board of
directors. During fiscal 2007, non-employee members of Willow Financial Banks
board of directors received $1,300 per board meeting held, including attendance
at the annual shareholders meeting and strategic planning sessions, if any. To
receive such compensation, directors could not be absent for more than two board
meetings during the fiscal year. During the first six months of fiscal 2007,
non-employee directors received $600 per committee meeting attended, except
members on the Audit Committee who received $900 per committee meeting, and the
Loan Committee, Finance Committee and Compensation Committee members who
received $750 per committee meeting.
226
Effective
July 1, 2007, each director will receive an annual retainer of $14,000 paid in
11 monthly installments and will receive $500 per meeting attended. The
recommendation of the Compensation Committee to adopt a retainer for membership
on the board of directors was made in consultation with Willow Financials
independent compensation consulting firm and based on a review of compensation
policies of comparable companies.
Deferred Compensation
Plans
In fiscal
2004, Willow Financial Bank adopted a Deferred Compensation Plan that provides
Willow Financials non-employee directors with the opportunity to elect to defer
the receipt of specified portions of their compensation and to have such
deferred amounts treated as if invested in specified investment vehicles. Willow
Financials non-employee directors who currently elected to participate in this
plan and are deferring a portion of their compensation include Messrs.
Cunningham and McErlane. This plan will terminate on or before the effective
date of the Merger with Harleysville National and Messrs. Cunningham and
McErlane will be entitled to receive their account balance of approximately
$168,367 and $229,433, respectively.
In fiscal
2006, Willow Financial Bank assumed the First Financial Bank Deferred
Compensation Plan, as amended and restated effective January 1, 2003, and the
First Financial Bank Board of Directors 2005 Deferred Compensation Plan. Both of
these plans were suspended in connection with the merger with Harleysville
National so that no further deferrals can be made thereunder. Willow Financial
maintains accounts in the director plans that are fully vested for Messrs.
Cunningham and McErlane, who elected to participate in the plans.
Non-Qualified Retirement
Plan
In 1998,
Willow Financial adopted a non-qualified retirement plan for the non-employee
members of Willow Financial Banks board of directors which was frozen following
adoption of the 2005 Recognition and Retention Plan. Participating directors
became 100% vested in the benefits accrued in such plan to the date the plan was
frozen. The retirement plan provides for fixed annual payments at retirement for
a period of ten years. The vested amounts for each of Messrs. Cunningham and
McErlane were $1,923, that each would receive for a period of 10 years following
retirement. Willow Financial does not expect any additional future expense for
such plan.
Compensation Committee Interlocks
and Insider Participation
Determinations regarding compensation of Willow Financials President and
Chief Executive Officer, senior management and employees are reviewed and
approved by Willow Financials Compensation Committee.
No person
who served as a member of the Compensation Committee during fiscal 2007 was a
current or former officer or employee of Willow Financial or Willow Financial
Bank or engaged in certain transactions with Willow Financial or Willow
Financial Bank required to be disclosed by regulations of the Securities and
Exchange Commission. Additionally, there were no Compensation Committee
interlocks during fiscal 2007, which generally means that no executive officer
of Willow Financial served as a director or member of the Compensation Committee
of another entity, one of whose executive officers served as a director or
member of the Compensation Committee.
227
BENEFICIAL OWNERSHIP OF WILLOW
FINANCIAL COMMON STOCK BY CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT
The
following tables set forth as of June 1, 2008 certain information as to the
common stock beneficially owned by (i) each person or entity, including any
group as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, who or which was known to us to be the beneficial owner of more than 5%
of the issued and outstanding common stock, (ii) the directors of Willow
Financial, (iii) certain executive officers of Willow Financial; and (iv) all
directors and executive officers of Willow Financial as a group.
|
|
Amount and Nature of
|
|
Percent of
|
Name of Beneficial Owner or Number
of Persons in Group
|
|
Beneficial
Ownership
(1)
|
|
Common Stock
|
Willow Grove Bank 401(k)/Employee Stock
|
|
|
|
|
|
|
Ownership Plan Trust
|
|
1,017,271
|
(2)
|
|
6.5
|
%
|
170
South Warner Road
|
|
|
|
|
|
|
Wayne, Pennsylvania 19087
|
|
|
|
|
|
|
Dimensional Fund
Advisors LP
|
|
1,289,417
|
(3)
|
|
8.2
|
%
|
1299 Ocean Avenue, 11
th
Floor
|
|
|
|
|
|
|
Santa Monica, California 90401
|
|
|
|
|
|
|
Private Capital Management, L.P.
|
|
1,395,299
|
(4)
|
|
8.9
|
%
|
8889
Pelican Bay Boulevard
|
|
|
|
|
|
|
Naples, Florida 34108
|
|
|
|
|
|
|
|
|
Total Amount
|
|
|
|
|
Number
|
|
Number of
|
|
|
and Nature
|
|
Percent of
|
|
of
Shares
|
|
Unvested
|
Name of
Beneficial Owner or
|
|
of
Beneficial
|
|
Common
|
|
Underlying
|
|
Recognition
|
Number of Persons in
Group
|
|
Ownership
(1)
|
|
Stock
(19)
|
|
Options
(19)
|
|
Plan Awards
(20)
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
Donna M. Coughey
|
|
124,220
|
(5)
|
|
*
|
|
|
21,067
|
|
13,040
|
|
John
J. Cunningham, III
|
|
51,901
|
|
|
*
|
|
|
39,452
|
|
2,032
|
|
Gerard F. Griesser
|
|
35,188
|
(6)
|
|
*
|
|
|
|
|
2,032
|
|
Charles F. Kremp, 3
rd
|
|
136,960
|
|
|
*
|
|
|
44,920
|
|
2,032
|
|
William W. Langan
|
|
124,514
|
(7)
|
|
*
|
|
|
74,800
|
|
2,032
|
|
Rosemary C. Loring, Esq.
|
|
98,988
|
(8)
|
|
*
|
|
|
57,306
|
|
2,032
|
|
Robert J. McCormack
|
|
5,002
|
(9)
|
|
*
|
|
|
|
|
2,032
|
|
James E. McErlane
|
|
454,946
|
(10)
|
|
2.9
|
%
|
|
39,452
|
|
2,032
|
|
A. Brent OBrien
|
|
79,105
|
(11)
|
|
*
|
|
|
49,431
|
|
2,032
|
|
Samuel H. Ramsey, III
|
|
144,865
|
(12)
|
|
*
|
|
|
48,688
|
|
2,032
|
|
Emory S. Todd, Jr., CPA
|
|
74,414
|
(13)
|
|
*
|
|
|
13,299
|
|
2,032
|
|
William B. Weihenmayer
|
|
110,486
|
(14)
|
|
*
|
|
|
33,458
|
|
2,032
|
|
Madeleine Wing Adler, Ph.D.
|
|
9,450
|
|
|
*
|
|
|
6,006
|
|
2,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
Ammon J. Baus
|
|
29,060
|
(15)
|
|
*
|
|
|
13,650
|
|
4,133
|
|
G.
Richard Bertolet
|
|
29,789
|
(16)
|
|
*
|
|
|
20,177
|
|
2,306
|
|
Thomas Saunders
|
|
10,000
|
|
|
*
|
|
|
|
|
10,000
|
|
Neil
Kalani
|
|
4,359
|
(17)
|
|
*
|
|
|
|
|
2,082
|
|
Matthew D. Kelly
|
|
32,021
|
(18)
|
|
*
|
|
|
18,542
|
|
3,702
|
|
|
|
All Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
as a
group (18 persons)
|
|
1,555,268
|
|
|
9.9
|
%
|
|
480,248
|
|
59,647
|
|
____________________
*
Represents less than 1% of our outstanding common stock.
228
(1)
|
|
Based upon filings made pursuant to the
Securities Exchange Act of 1934 and information furnished by the
respective individuals. Under regulations promulgated pursuant to the
Securities Exchange Act of 1934, shares of common stock are deemed to be
beneficially owned by a person if he or she directly or indirectly has or
shares (i) voting power, which includes the power to vote or to direct the
voting of the shares, or (ii) investment power, which includes the power
to dispose or to direct the disposition of the shares. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive
power with respect to the shares.
|
|
(2)
|
|
Information obtained from a Schedule 13G/A,
filed February 14, 2008, with the SEC with respect to common stock
beneficially owned by Willow Financial Bank 401(k) Employee Stock
Ownership Plan Trust (Willow Financial Bank 401(k)/ESOP trust). The
Schedule 13G/A states that Willow Financial Bank 401(k)/ESOP trust has
shared voting and dispositive power as to all these shares. As of December
31, 2007, 537,330 shares held in the Willow Financial Bank 401(k)/ESOP
trust had been allocated to the accounts of participating employees.
Amounts held by the plan trustees, Ms. Coughey and Allen Wagner, reflect
shares allocated to their individual accounts in the Willow Financial Bank
401(k)/ESOP trust and exclude all other shares held in the trust. Under
the terms of the Willow Financial Bank 401(k)/ESOP trust, the plan
trustees vote all allocated shares in accordance with the instructions of
the participating employees. Any unallocated shares are generally required
to be voted by the plan trustee in the same ratio on any matter as to
those shares for which instructions are given by the participants under
the employee stock ownership plan provisions.
|
|
(3)
|
|
Information obtained from a Schedule 13G/A,
filed February 6, 2008, with the SEC with respect to shares of common
stock beneficially owned by Dimensional Fund Advisors LP (Dimensional).
The Schedule 13G/A states that Dimensional has sole voting and dispositive
power as to all of these shares. Dimensional disclaims beneficial
ownership of these shares.
|
|
(4)
|
|
Based on a Schedule 13G/A, filed February
14, 2008, by Private Capital Management, L.P. (PCM), a registered
investment adviser, Bruce S. Sherman and Gregg J. Powers, chief executive
officer and president of PCM, respectively, PCM and Messrs. Sherman and
Powers exercise in these capacities shared voting power and shared
dispositive power with respect to the 1,395,299 shares of Willow Financial
common stock held by PCMs clients and managed by PCM.
|
|
(5)
|
|
Includes 37,135 shares held jointly with
Ms. Cougheys spouse, 12,088 shares held by Ms. Cougheys spouse, 15,726
shares held in Ms. Cougheys individual retirement account, 8,210 shares
held in the Willow Grove Bank 401(k)/ESOP and 2,877 shares held in the
First Financial Bank ESOP and 14,077 shares held in the Willow Financial
Deferred Compensation Plan rabbi trust, over which Ms. Coughey disclaims
beneficial ownership except to the extent of her personal pecuniary
interest therein.
|
|
(6)
|
|
Includes 179 shares held by Mr. Griessers
spouse, 23,125 shares held jointly with Mr. Griessers spouse and 2,293
shares held in Mr. Griessers retirement plan.
|
|
(7)
|
|
Includes 25,412 shares held in trust for
Mr. Langans spouse over which Mr. Langan disclaims beneficial ownership
and 22,270 shares held in revocable trust with Mr. Langan as
trustee.
|
|
(8)
|
|
Includes 5,159 shares held jointly with Ms.
Lorings spouse, 12,725 shares held by Ms. Lorings spouse and 21,105
shares held in Ms. Lorings individual retirement account.
|
|
(9)
|
|
Includes 1,821 shares held in Mr.
McCormacks individual retirement account.
|
|
(10)
|
|
Includes 211,173 shares held in a trust of
which Mr. McErlane is a co-trustee with shared voting and investment
power; 200,111 shares held by Mr. McErlane and his spouse as tenants by
the entireties with right of survivorship and 2,178 shares held in Mr.
McErlanes individual retirement account.
|
|
(11)
|
|
Includes 2,357 shares held by Mr. OBriens
spouse.
|
|
(12)
|
|
Includes 659 shares held in a trust for
which Mr. Ramsey is a beneficiary, 20,130 shares held in Mr. Ramseys
individual retirement account and 21,615 shares held in the Willow
Financial Deferred Compensation Plan rabbi trust, over which he disclaims
beneficial ownership, except to the extent of his personal pecuniary
interest therein.
|
229
(13)
|
|
Includes 21,962 shares held in Mr. Todds
individual retirement account and 2,070 shares held in the Willow
Financial Deferred Compensation Plan rabbi trust, over which Mr. Todd
disclaims beneficial ownership, except to the extent of his personal
pecuniary interest therein.
|
|
(14)
|
|
Includes 17,585 shares held by Mr.
Weihenmayers spouse and 20,028 shares held in the Willow Financial
Deferred Compensation Plan rabbi trust, over which he disclaims beneficial
ownership, except to the extent of his personal primary interest
therein.
|
|
(15)
|
|
Includes 2,695 shares held jointly with Mr.
Bauss spouse, 8,582 shares held in Mr. Bauss accounts in the Willow
Grove Bank 401(k)/ESOP.
|
|
(16)
|
|
Includes 2,696 shares held in Mr.
Bertolets account in the Willow Grove Bank 401(k)/ESOP.
|
|
(17)
|
|
Includes 1,236 shares held in Mr. Kalanis
account in the Willow Grove Bank 401(k)/ESOP.
|
|
(18)
|
|
Includes 1,615 shares held in Mr. Kellys
account in the Willow Grove Bank 401(k)/ESOP and 129 shares held in Mr.
Kellys account in the First Financial Bank ESOP.
|
|
(19)
|
|
Each beneficial owners percentage
ownership is determined by assuming that options held by such person (but
not those held by any other person) and that are exercisable within 60
days of the voting record date have been exercised.
|
|
(20)
|
|
Includes shares of awarded to directors and
executive officers pursuant to the 2002 and 2005 Recognition and Retention
Plans. Directors and executive officers do not have voting or dispositive
power with respect to restricted stock awards under the 2005 Recognition
and Retention Plan.
|
DESCRIPTION OF HARLEYSVILLE NATIONAL
CAPITAL SECURITIES
CAPITAL STOCK
The
authorized capital stock of Harleysville National consists of 75,000,000 shares
of common stock, $1.00 par value, and 8,000,000 shares of preferred stock, $1.00
par value. As of July 28, 2008, the record date for the special meetings, there
were 31,381,325 shares of Harleysville National common stock issued and
outstanding, 125,696 shares held by Harleysville National as treasury stock, and
no shares of Harleysville National preferred stock issued or outstanding. There
are no other shares of capital stock of Harleysville National authorized, issued
or outstanding. Each holder of shares of Harleysville National common stock has
one vote for each share held. Harleysville National shareholders cannot cumulate
votes in the election of directors.
Harleysville Nationals board of directors is authorized to issue shares
of Harleysville National preferred stock, without shareholder approval.
Harleysville Nationals board will determine the rights, qualifications,
limitations and restrictions of each series of Harleysville National preferred
stock at the time of issuance, including without limitation, rights as to
dividends, voting and convertibility into shares of Harleysville National common
stock. Shares of Harleysville National preferred stock may have dividend,
redemption, voting, and liquidation rights that take priority over Harleysville
National common stock, and may be convertible into Harleysville National common
stock.
Harleysville National has no options, warrants or other rights
authorized, issued or outstanding other than options and rights granted under
Harleysville Nationals various stock compensation and dividend reinvestment
plans, as described in Harleysville Nationals information filed with the SEC
and incorporated herein by reference, as described in Incorporation of Certain
Information by Reference, on page 242.
The
holders of Harleysville National common stock share ratably in dividends when
and if declared by Harleysville Nationals board of directors from legally
available funds. Declaration and payment of cash dividends by Harleysville
National depends upon cash dividend payments to it by Harleysville Nationals
subsidiaries, which are Harleysville Nationals primary source of revenue and
cash flow.
230
ANTI-TAKEOVER CHARTER AND
PENNSYLVANIA LAW PROVISIONS
Harleysville Nationals articles of incorporation and bylaws contain
certain provisions that may have the effect of deterring or discouraging an
attempt to take control of Harleysville National. Among other things these
provisions:
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Empower Harleysville Nationals board of
directors, without shareholder approval, to issue shares of Harleysville
National common and preferred stock the terms of which, including voting
power, are set by Harleysville Nationals board;
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Divide Harleysville Nationals board of directors
into four classes serving staggered four-year terms;
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Restrict the ability of shareholders to remove
directors;
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Do not permit shareholders actions without a
meeting;
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Prohibit a merger, consolidation, liquidation or
dissolution of Harleysville National, or any action that
would result in the sale or other disposition of all or substantially
all of the assets of Harleysville National
without the affirmative vote
of at least eighty percent of the outstanding shares, or at least a majority
of
the outstanding shares if the transaction has been
approved by at least seventy-five percent Harleysville
Nationals
directors. This provision cannot be amended or repealed without the
affirmative vote of at least
eighty percent of the
outstanding shares entitled to vote;
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Eliminate cumulative voting in the election of
directors; and
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Require advance notice of nominations for the
election of directors and the presentation of shareholder
proposals at meetings of shareholders.
The
Pennsylvania Business Corporation Law of 1988, as amended, also contains certain
provisions applicable to Harleysville National that may have the effect of
deterring or discouraging an attempt to take control of Harleysville National.
These provisions, among other things:
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Require that, following any acquisition by any
person or group of 20% of a public corporations voting power, the remaining
shareholders have the right to receive payment for their shares, in cash, from
such person or group in an amount equal to the fair value of the shares,
including an increment representing a
proportion of
any value payable for control of the corporation (Subchapter 25E of the
Business Corporation
Law);
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Prohibit for five years, subject to certain
exceptions, a business combination (which includes a merger or consolidation
of the corporation or a sale, lease or exchange of assets) with a person or
group beneficially owning 20% or more of a public corporations voting power
(Subchapter 25F of the Business Corporation
Law);
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Expand the factors and groups (including
shareholders) which a corporations board of directors can consider in
determining whether an action is in the best interests of the
corporation;
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Provide that a corporations board of directors
need not consider the interests of any particular group as dominant or
controlling;
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Provide that a corporations directors, in order
to satisfy the presumption that they have acted in the best interests of the
corporation, need not satisfy any greater obligation or higher burden of proof
with respect to actions relating to an acquisition or potential acquisition of
control;
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Provide that actions relating to acquisitions of
control that are approved by a majority of disinterested directors are
presumed to satisfy the directors standard, unless it is proven by clear and
convincing evidence that the directors did not assent to such action in good
faith after reasonable investigation; and
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Provide that the fiduciary duty of a corporations
directors is solely to the corporation and may be enforced by the corporation
or by a shareholder in a derivative action, but not by a shareholder
directly.
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The
Pennsylvania Business Corporation Law also explicitly provides that the
fiduciary duty of directors does not require them to:
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Redeem any rights under, or to modify or render
inapplicable, any shareholder rights plan;
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Render inapplicable, or make determinations under,
provisions of the Pennsylvania Business Corporation Law relating to control
transactions, business combinations, control-share acquisitions or
disgorgement by certain controlling shareholders following attempts to acquire
control; or
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Act as the board of directors, a committee of the
board or an individual director, solely because of the effect the action might
have on an acquisition or potential acquisition of control of the corporation
or the consideration that might be offered or paid to shareholders in such an
acquisition.
COMPARISON OF SHAREHOLDER
RIGHTS
Upon
completion of the merger, shareholders of Willow Financial will become
shareholders of Harleysville National. Accordingly, their rights as shareholders
will be governed by Harleysville Nationals articles of incorporation and
bylaws, as well as by the Pennsylvania Business Corporation Law of 1988, as
amended. Certain differences in the rights of shareholders arise from
differences between Harleysville Nationals articles of incorporation and bylaws
and Willow Financials articles of incorporation and bylaws.
The
following is a summary of material differences in the rights of Willow Financial
shareholders and Harleysville National shareholders. This discussion is not a
complete statement of all differences affecting the rights of shareholders. We
qualify this discussion in its entirety by reference to the Pennsylvania
Business Corporation Law, the articles of incorporation and bylaws of
Harleysville National and the articles of incorporation and bylaws of Willow
Financial.
BOARD OF DIRECTORS
Director Nominations
Willow
Financial
Willow
Financials bylaws provide that any shareholder of record entitled to vote in
the election of directors may make nominations for the election of directors.
Nominations other than those made by existing management must be delivered or
mailed to the Secretary of Willow Financial not less than 120 days prior to the
anniversary date of the initial mailing of proxy materials or a notice of the
meeting by Willow Financial in connection with the immediately preceding annual
meeting of shareholders of Willow Financial. Such notification must contain all
of the following information to the extent known:
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1.
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The name,
age, business address and residence address of the shareholder who intends
to make the nomination and of the person or persons to be
nominated.
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2.
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The
principal occupation or employment of the shareholder submitting the
notice and of each person being nominated.
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3.
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The class
and number of shares of Willow Financials stock which are beneficially
owned by the shareholder submitting the notice, by any person who is
acting in concert with or who is an affiliate or associate of such
shareholder, by any person who is a member of any group with such
shareholder with respect to Willow Financial stock or who is known by such
shareholder to be supporting such nominee(s) on the date the notice is
given to Willow Financial, by each person being nominated, and by each
person who is in control of, is controlled by, or is under common control
with any of the foregoing persons.
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4.
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A
representation that the shareholder is and will continue to be a holder of
record of stock of Willow Financial entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice.
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5.
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A
description of all arrangements or understandings between the shareholder
and each nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by
the shareholder.
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6.
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Such
other information regarding the shareholder submitting the notice, each
nominee proposed by such shareholder and any other person named in
paragraph three above as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, as if Willow Financials common stock was required to be
registered under the Securities Exchange Act of 1934.
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7.
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The
consent of each nominee to serve as a director of Willow Financial if so
elected.
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The board
of directors may reject any nomination by a shareholder not timely made in
accordance with the above requirements.
Harleysville
National
Harleysville Nationals bylaws permit any shareholder to make a
nomination for election to Harleysville Nationals board of directors. Any
shareholder who intends to nominate or to cause to have nominated any candidate
for election to the board of directors shall so notify the Secretary of
Harleysville National in writing not less than 45 days prior to the first
anniversary of the record date of the preceding years meeting of shareholders
called for the election of directors. Such notification shall contain the
following information to the extent known by the notifying shareholder:
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1.
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The name
and address of each proposed nominee.
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2.
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The age
of each proposed nominee.
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3.
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The
principal occupation of each proposed nominee.
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4.
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The
number of shares of Harleysville National owned by each proposed
nominee.
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5.
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The total
number of shares that to the knowledge of the notifying shareholder will
be voted for each proposed nominee.
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6.
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The name
and residence address of the notifying shareholder.
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7.
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The
number of shares of Harleysville National owned by the notifying
shareholder.
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Any
nomination for director not made in accordance with the above requirements shall
be disregarded by the chairman of the meeting, and votes cast for each such
nominee shall be disregarded by the judges of election. In the event that the
same person is nominated by more than one shareholder, if at least one
nomination for such person complies with the above requirements, the nomination
shall be honored and all votes cast for such nominee shall be counted.
Election of Directors
Willow
Financial
Willow
Financials bylaws provide that its board of directors must be comprised of
between five and 17 directors. Presently, the board of directors is comprised of
13 members. Willow Financials articles of incorporation require that its board
be divided into three classes, each serving three-year terms, so approximately
one-third of the directors are elected at each annual meeting of shareholders.
Each class should contain as nearly as possible of one-third the number of the
whole board.
Harleysville
National
Harleysville Nationals bylaws provide that its board of directors is
composed of between 5 and 25 directors. Presently, the board of directors has 11
members. Harleysville Nationals board of directors is divided into four
classes, each serving four-year terms, so that approximately one-fourth of the
directors are elected at each annual meeting of shareholders.
233
Qualifications of
Directors
Willow
Financial
Neither the articles of
incorporation nor the bylaws of Willow Financial restrict the age of its
directors.
Harleysville
National
Harleysville Nationals bylaws provide that no person who is 72 years of
age or older shall be elected, or shall serve, as a director. Any director who
attains age 72 during his term of office shall resign as a director effective as
of the date of his 72nd birthday. The board of directors shall have the right to
appoint any person who has resigned as a director by reason of attaining age 72
as a director emeritus for a term, to be determined in the discretion of the
board of directors, of one, two, or three years. No person who is 75 years of
age or older shall be elected, or shall serve, as a director
emeritus.
Removal
Willow
Financial
Except as
required by law, Willow Financials articles of incorporation provide that any
director may be removed by shareholders only for cause and by the affirmative
vote of not less than a majority of the votes eligible to be cast by
shareholders at a duly constituted meeting of shareholders called expressly for
such purpose.
Harleysville
National
Harleysville Nationals articles of incorporation and bylaws do not have
special provisions relating to removal of directors by shareholders. Under the
Pennsylvania Business Corporation Law, the entire board of directors, a class or
a director can only be removed for cause and not by less than a majority of the
votes entitled to be cast on the matter.
SHAREHOLDER MEETINGS
Call
Willow
Financial
The
Willow Financial shareholders hold their annual meeting at a time and place
fixed by the board of directors. Pursuant to Willow Financials articles of
incorporation, only the board of directors may call a special meeting of
shareholders pursuant to a majority vote of directors.
Harleysville
National
The
Harleysville National shareholders hold their annual meeting at a time and place
fixed by the board of directors. The shareholders are to hold their annual
meeting no later than May 31 each year. Harleysville Nationals special meetings
of the shareholders may be called at anytime by the Chairman of the Board, the
President, the Executive Vice President, if any, a majority of the board of
directors or of its Executive Committee, or by shareholders entitled to cast at
least one-fifth of the votes which all shareholders are entitled to cast at the
particular meeting.
Notice
Willow
Financial
Written
notice of every meeting of shareholders shall be given by, or at the direction
of, the Secretary of Willow Financial or other authorized person to each
shareholder of record entitled to vote at the meeting at least (1) ten days
prior to the day named for a meeting that will consider a fundamental change or
(2) five days prior to the day named for a meeting in any other case. A notice
of meeting shall specify the place, day, and hour of the meeting, and, in the
case of a special meeting, the general nature of the business to be transacted
thereat, as well as any other information required by law.
234
Harleysville
National
Harleysville Nationals bylaws provide that written notice of all
meetings other than adjourned meetings of shareholders, stating the place, date,
and hour, and, in case of special meetings of shareholders, the purpose thereof,
shall be served upon, or mailed, postage prepaid, or telegraphed, charges
prepaid, to each shareholder entitled to vote there at such address as appears
on Harleysville Nationals transfer books, at least five days before such
meeting, unless a greater period of notice is required by statute or by a duly
adopted bylaw.
Quorum
Willow
Financial
Willow
Financials bylaws provide that the presence of stockholders entitled to vote at
least a majority of the votes that all stockholders are entitled to cast on a
particular matter to be acted upon at a meeting of stockholders shall constitute
a quorum for the purposes of consideration and action on the matter.
Harleysville
National
Harleysville Nationals bylaws provide that the presence, in person, by
proxy or by conference telephone or similar communications equipment, of
shareholders entitled to cast at least a majority of the votes which all
shareholders are entitled to cast on the particular matter shall constitute a
quorum for purposes of considering such matter.
Required Shareholder
Vote
Willow
Financial
General
The
articles of incorporation provide that each holder of record of Willow Financial
common stock shall have the right to one vote for every share registered in his
name on the books of Willow Financial on the record date fixed for the meeting.
Shareholders are not entitled to cumulate votes in the election of
directors.
Fundamental Changes
Willow
Financials articles of incorporation provide that no actions subject to
Subchapters C (Merger, Consolidation, Share Exchange, and Sale of Assets),
Subchapter D (Division), and Subchapter F (Voluntary Dissolution and Winding Up)
of Chapter 19 of the Pennsylvania Business Corporation Law of 1988, as amended,
are valid unless first approved by the affirmative vote: (1) of the holders of
at least 75% of the shares entitled to vote generally in an election of
directors of Willow Financial, or (2) as otherwise required by law if 66 2/3% of
the entire board of directors recommends the action. Pennsylvania Business
Corporation Law of 1988, as amended, requires an affirmative vote from the
majority of shareholders entitled to vote on the matter unless a corporations
bylaws provide differently.
Amendment of Articles of
Incorporation
Generally, Willow Financials articles of incorporation may be amended
upon approval of the board of directors pursuant to a resolution adopted by an
affirmative vote of the majority of the board of directors and approved by an
affirmative vote of holders of a majority of shares of Willow Financial entitled
to vote in an election of directors. However, articles relating to directors,
meetings of stockholders, liability of directors and officers, restrictions on
offers and acquisitions of Willow Financials equity securities, stockholder
approval of certain actions, and amendment of articles of incorporation and
bylaws may only be amended upon the affirmative vote of 75% of the shares of
Willow Financial entitled to vote generally in the election of directors which
has not been approved by 80% of the board of directors.
235
Amendment of Bylaws
Willow
Financials bylaws may be amended by the board of directors upon an affirmative
vote of the majority of the directors then in office or upon an affirmative vote
of at least a majority of shares entitled to vote generally in an election of
directors. However, sections relating to stockholder proposals; the number and
powers of the board of directors; the classification and terms of the board of
directors; vacancies on the board of directors; removal of a director;
nomination of a director; and the indemnification of directors, officers, and
other persons may only be amended upon the affirmative vote of at least 75% of
the shares of Willow Financial entitled to vote generally in the election of
directors.
Harleysville
National
General
Each
holder of Harleysville National common stock is entitled to one vote per share
at a meeting. Shareholders may vote at any meeting or by proxy duly authorized
in writing. Shareholders do not have the right to cumulate their votes for the
election of directors. When a quorum is present, the voice vote of holders of a
majority of the stock having voting power, present in person, by proxy, or by
approved communications equipment, shall decide any question brought before the
meeting except as provided differently by statute or by its articles of
incorporation. Upon demand made by a shareholder entitled to vote at any
election for directors before the voting begins, the election shall be by
ballot.
Fundamental Changes
Harleysville Nationals articles of incorporation provide that no merger,
consolidation, liquidation, or dissolution of Harleysville National, nor any
action that would result in the sale or other disposition of all or
substantially all of the assets of Harleysville National shall be valid unless
first approved by the affirmative vote of either:
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1.
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The holders of at
least 80% of the outstanding shares of the voting stock of Harleysville
National, or
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2.
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The holders of at
least a majority of the outstanding shares of voting stock of Harleysville
National, provided the transaction has received the prior approval of at
least 75% of the directors.
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The
affirmative vote of the holders of at least 80% of the outstanding shares of
voting stock entitled to vote is required to amend or repeal this provision of
Harleysville Nationals articles of incorporation.
Amendment of Articles of
Incorporation
Except as
described above under Fundamental Changes, Harleysville Nationals articles of
incorporation do not set any special shareholder approval requirement to amend
its articles of incorporation. Pennsylvania law provides that the articles of
incorporation of Harleysville National may be amended by the affirmative vote of
not less than a majority of outstanding common stock. Pennsylvania law also
requires approval by the holders of any shares of preferred stock for any
amendment that would affect the preferences, limitations, or special rights of
holders of shares of preferred stock. Harleysville National does not have any
shares of preferred stock outstanding. However, under Pennsylvania law,
shareholder approval is not required to amend Harleysville Nationals articles
of incorporation to restate its provisions without change, or to change
Harleysville Nationals corporate name, reduce the number of its authorized
shares in connection with acquisition of its own stock, or add or delete a
provision relating to uncertificated shares of stock. As long as Harleysville
National continues to have only one class of stock outstanding, Harleysville
National may also amend its articles of incorporation without shareholder
approval to increase the number of authorized shares to support a stock dividend
or to increase the number of shares or change their par value in connection with
a stock split.
Amendment of Bylaws
Harleysville Nationals bylaws may be altered, amended, or repealed by
the affirmative vote of the holders of 80% percent of the outstanding shares of
common stock at any regular or special meeting duly convened after notice to the
shareholders of that purpose, or by a majority vote of the members of the board
of directors at any regular or special meeting thereof duly convened after
notice to the directors of that purpose, subject always to the power of the
shareholders to change such action of the board of directors by the affirmative
vote of the holders of 80% of the outstanding shares of common stock.
236
INSPECTION RIGHTS