Measured in dollars, Willow Financial Bancorp Inc.'s restated earnings for fiscal years 2006 and 2007 do not amount to much.
Unable to resolve an accounting discrepancy, the $1.6 billion-asset Wayne, Pa., company said it would write off $8.3 million.
But the impact could be more significant than mere numbers indicate.
The financial control problems have diminished management's credibility, calling into question whether Willow can survive in the long term, according to the only analyst who actively covers the company.
"It's not a good environment to sell, but given the circumstances, I think it makes it very hard to remain independent," said David Darst, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp.
Willow did not return phone calls.
The restatement, which Willow filed Monday with the Securities and Exchange Commission, also encompassed some unexpected changes in line items such as net interest income and salary expenses, Mr. Darst said.
"The accounting firm that did this review went through every account, and they found a lot of other items that were not properly accounted for the first time," he said.
Asset quality is not at issue — nonperforming assets, plus loans past due 90 days, are 0.94% of loans, he said. "It appears the core banking operation is stable to improving."
But Mr. Darst said Willow has struggled for years to expand assets and earnings, and its accounting problems in recent quarters created uncertainty.
In the SEC filing, Willow said it had to restate its earnings because "material weaknesses" in its financial controls caused an unreconciled difference of $6.2 million.
The company could not determine the cause of the imbalance despite five months of "exhaustive efforts" and $2 million in fees paid to advisers and an accounting firm, the filing said.
Willow revised its fiscal year 2006 net income to $6.7 million, or $4.4 million less than previously reported, and revised fiscal year 2007 net income to $7.3 million, or $1.1 million less than reported.
In a separate SEC filing, Willow also said it had reassigned Joseph T. Crowley, who was the chief financial officer, to a senior vice president post.
Neil Kalani, its chief accounting officer, took on interim CFO duties.
Richard D. Weiss, an analyst at Janney Montgomery Scott LLC who does not cover Willow but is familiar with the company, said it could survive the accounting crisis by scooping up a tested CFO.
"If a seasoned CFO were to come in, they could get instant credibility," he said.
Though Willow is an attractive acquisition candidate, he said, "rather than sell from a position of weakness, they might want to turn it around."
Willow has not reported results for its fiscal 2008 second quarter, which ended Dec. 31, or its third quarter, which ended March 31.
It previously warned that in the Dec. 31 quarter it would take a writedown of $25 million to $40 million on goodwill from its 2005 purchase of Chester Valley Bancorp Inc.
Willow's shares were trading around $18 when the deal was announced; its stock price was down 3% this week, to $7.41 late Thursday afternoon.
