EXHIBIT 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and related notes.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, and general market
conditions. Thistle Group Holdings, Co. undertakes no obligation to publicly
release the results of any revisions to those forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Overview
Thistle Group Holdings, Co. (the "Company") is a unitary thrift holding company
incorporated in the Commonwealth of Pennsylvania and headquartered in
Philadelphia, Pennsylvania. The Company's business is conducted principally
through Roxborough Manayunk Bank (the "Bank") which provides a full range of
banking services through its eleven branch offices located in the counties of
Philadelphia, Chester and Delaware in the Commonwealth of Pennsylvania and
Wilmington, Delaware, and its transactional web site RMBgo.com.
During fiscal 2000, the Company's growth was bolstered by the following branch
acquisitions (the "Branch Acquisitions"), which were accounted for under the
purchase method of accounting:
On August 7, 2000, the Company opened four Banking Offices located in Lionville,
Media, West Chester, and Westtown, Pennsylvania, which were acquired from
Wilmington Trust Company of Pennsylvania. The acquisition included the
acquisition of real property and the assumption of $54.5 million in deposit
liabilities.
On September 11, 2000, the Company opened its first Banking Office in
Wilmington, Delaware, which was acquired from Crown Bank, FSB. The acquisition
included the real property of the branch, and the assumption of $41 million in
deposit liabilities.
Additionally, the Company formed TGH Securities in February 2000 as its broker
dealer subsidiary. TGH Securities commenced business on May 26, 2000.
Unless the context indicates otherwise, all references to the Company refer
collectively to the Company and the Bank.
Market Rate Risk
Market risk is the risk of loss of income from adverse changes in prices and
interest rates that are set by the market. The Company is at risk when interest
rates affect the income the Company receives on lending and investment
activities, as well as the costs associated with its deposits and borrowings. A
sudden and substantial change in interest rates may affect the Company's
earnings if the rates of interest it earns on its loans and investments do not
change at the same speed, to the same extent or on the same basis as the
interest rates that it pays on its deposits and borrowings. The Company makes it
a high priority to actively monitor and manage its exposure to interest rate
risk.
The Company accomplishes this by first evaluating its interest rate risk that is
inherent in the makeup of its assets and liabilities. Then it considers its
business strategy, current operating environment, capital and liquidity
requirements, as well as its current performance objectives, and determines an
appropriate level of risk. The Board of Directors has adopted guidelines within
which the Company attempts to manage its interest rate risk, trying to minimize
to the extent practical its vulnerability to changes in interest rates.
The Board of Directors reviews the Company's interest rate risk exposure
quarterly and has appointed an Asset/Liability Committee made up of senior
management that is responsible for working with the Board of Directors to
establish strategies to manage interest rate risk and to evaluate the
effectiveness of these strategies. The Committee also attempts to determine the
effect that changes in interest rates will have on interest earning assets and
liabilities of the Company and whether such effects are within the limits set by
the Board of Directors.
GAP Table
Interest rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or
mature within a given period of time. The difference, or the interest rate
repricing "GAP," provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates over a period
of time. A GAP is considered positive when the amount of interest-rate sensitive
assets maturing or repricing over a specified period of time exceeds the amount
of interest-rate sensitive liabilities maturing or repricing within that period
and is considered negative when the amount of interest-rate sensitive
liabilities maturing or repricing over a specified period of time exceeds the
amount of interest-rate sensitive assets maturing or repricing within that
period. Generally, during a period of rising interest rates, a
10
negative GAP within a given period of time would adversely affect net interest
income, while a positive GAP within such period of time may result in an
increase in net interest income. During a period of falling interest rates, a
negative GAP within a given period of time may result in an increase in net
interest income while a positive GAP within such period of time may have the
opposite effect.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities and borrowings outstanding at December 31, 2000,
which are expected to reprice or mature in each of the future time periods
shown. The amount of assets or liabilities shown which reprice or mature during
a particular period were determined by the contractual terms or assumed decay
rates of the asset or liability. There has been no adjustment for the impact of
future loan commitments.
Within Six to More than More than
Six Twelve One Year to Three Years Over Five
Months Months Three Years to Five Years Years Total
--------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable $ 13,368 $ 8,425 $ 27,624 $ 46,850 $123,093 $ 219,360
Mortgage-backed securities 3,635 3,628 14,463 14,422 222,722 258,870
Investment securities 727 750 135,315 136,792
Interest-earning deposits 16,188 16,188
--------------------------------------------------------------------------------
Total interest-earning assets $ 33,918 $ 12,053 $ 42,087 $ 62,022 $481,130 $ 631,210
================================================================================
Interest-bearing liabilities:
Deposits $ 163,256 $ 111,902 $ 110,884 $ 20,642 $ 406,684
Advances from borrowers
for taxes and insurance 2,534 2,534
Other borrowings 1,750 1,750
FHLB Advances 85,000 60,000 25,000 $ 1,884 171,884
--------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 165,790 $ 196,902 $ 172,634 $ 45,642 $ 1,884 $ 582,852
================================================================================
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $(131,872) $ (184,849) $ (130,547) $ 16,380 $479,246 $ 48,358
================================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $(131,872) $ (316,721) $ (447,268) $ (430,888) $ 48,358
================================================================================
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percentage of total assets (18.83%) (45.23%) (63.88%) (61.54%) 6.91%
================================================================================
The Company's analysis of its interest-rate sensitivity incorporates certain
assumptions concerning the amortization of loans and other interest-earning
assets and the repricing characteristics of deposits. The following assumptions
were made in calculating the values in the GAP table: loans and mortgage-backed
securities are presented in the period in which they amortize, reprice, or
mature and do not contain prepayment assumptions. Passbook and statement savings
accounts are assumed to decay at a rate of 30.0%, 30.0%, and 40.0% in each of
the first three years, respectively. Money Market ("MMDA") and negotiable order
of withdrawal ("NOW") accounts are assumed to decay at a rate of 75% and 25%, in
one year or less and over one year, respectively. Decay rates are based on
assumption rates using industry experience adjusted by the Company as needed to
reflect its individual experience. It should be noted that passbook, statement
savings, MMDA and NOW accounts are generally subject to immediate withdrawal.
However,
11
management considers a portion of these deposits to be core deposits having
significantly longer effective maturities based upon the Company's retention of
such deposits in changing interest rate environments.
The table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the repricing of various
categories of assets and liabilities is discretionary and is subject to
competition and other pressures. As a result, various assets and liabilities
indicated as repricing within the same period may in fact reprice at different
times and at different rate levels.
Net Portfolio Value
The Company also monitors its interest rate sensitivity using the Office of
Thrift Supervision ("OTS") model which estimates the change in its net portfolio
value ("NPV") in the event of a range of assumed changes in market interest
rates. NPV is defined as the current market value of the Bank's assets, less the
current market value of its liabilities, plus or minus the current value of
off-balance-sheet items. The change in NPV measures the Bank's vulnerability to
changes in interest rates by estimating the change in the market value of its
assets, liabilities and off-balance-sheet items as a result of an instantaneous
change in the general level of interest rates.
As market interest rates decrease, the average maturities of the Bank's loans
and investment securities shorten due to quicker prepayments, causing a
relatively moderate increase in their value. The Bank's deposit accounts have
relatively minor movements in a declining interest rate environment, since they
are primarily short term in nature, resulting in the value of deposits
decreasing more quickly than the value of assets increase.
The following table lists the percentage change in the Bank's net portfolio
value assuming an immediate change in interest rates of plus or minus up to 300
basis points from the level at December 31, 2000. Dollar amounts are expressed
in thousands.
Net Portfolio Value Net Portfolio Value as a % of
Assets
- -------------------------------------------------------------------------------------------------------------
Changes in Rates Percentage Net Portfolio Basis Point
in Basis Points Dollar Amount Dollar Change Change Value Ratio Change
- -------------------------------------------------------------------------------------------------------------
300 $ 4,375 $ (57,574) -92% .75% (814)
200 23,755 (34,194) -59% 3.90% (498)
100 44,424 (13,526) -23% 7.01% (188)
0 57,950 8.89%
(100) 67,960 10,010 17% 10.18% 130
(200) 71,491 13,541 23% 10.57% 169
(300) 77,642 19,692 34% 11.29% 240
The calculations in the NPV table above indicate that the Bank's NPV would be
adversely affected by increases in interest rates but could be favorably
affected by decreases in interest rates. In addition, the Bank may be deemed to
have more than a normal level of interest rate risk under applicable regulatory
capital requirements.
When various asset categories are adjusted to include assets of the Company, the
NPV dollar amount in a flat rate scenario (zero basis points) increases to $74.5
million compared to $57.9 million on a Bank only basis. In the event of an
instantaneous and permanent increase of 200 basis points, the Company's NPV
dollar amount would decrease to $37.9 million, or an NPV ratio of 6.09%,
compared to an NPV dollar amount of $23.8 million, or NPV ratio of 3.90%, on a
Bank only basis.
Like the GAP table, the NPV model has some shortcomings. Certain assumptions
have to be made that may or may not actually reflect how actual yields and costs
will react to market interest rates. For example, the NPV model assumes that the
makeup of the Company's interest rate sensitive assets and liabilities will
remain constant over the period being measured. Thus, although using such a
model can be instructive in providing an indication of the Company's exposure to
interest rate risk, it cannot precisely forecast the effects of a change in
market interest rates, and the results indicated by the model are likely to
differ from actual results.
Changes in Financial Condition
General
Total assets of the Company increased by $145.4 million or 26.2%, from $554.8
million at December 31, 1999 to $700.2 million at December 31, 2000. The
increase is primarily attributable to growth in loans receivable and
mortgage-backed securities. Growth in assets was funded by internal deposit
growth and deposits acquired through the Branch Acquisitions.
12
Cash and Investments
Cash and investments (including investments available for sale and trading
securities) increased by $23.9 million, or 15.7%, to $176.6 million at December
31, 2000 compared to $152.7 million at December 31, 1999. The increase is
primarily attributable to trading securities of $28.0 million from TGH
Securities, an increase in investments of approximately $12.7 million offset by
a decrease in cash and cash equivalents of $16.9 million. The increase in
investments available for sale resulted from purchases and a decrease in the
unrealized loss. The decrease in cash and cash equivalents resulted from the
Company decreasing its liquidity as there was no longer a concern for
anticipated cash needs relating to the end of century rollover.
Mortgage-Backed Securities Available for Sale
Mortgage-backed securities available for sale increased $54.2 million, or 26.5%,
to $258.9 million at December 31, 2000 compared to $204.7 million at December
31, 1999. The increase was the result of purchases and a decrease in the
unrealized loss offset by repayments and sales.
Loans Receivable, Net
Aggregate loans receivable net increased $58.2 million, or 36.1%, to $219.4
million at December 31, 2000 compared to $161.2 million at December 31, 1999.
The increase is generally attributable to increases in residential loans of
$11.2 million, home equity loans and lines of $4.5 million, commercial mortgage
loans of $24.9 million, commercial business loans of $9.2 million and
construction loans of $8.8 million.
Office Properties and Equipment
Office properties and equipment increased $4.1 million, or 142.6%, from $2.9
million at December 31, 1999 to $6.9 million at December 31, 2000. The increase
was due mainly to the purchase of real estate and fixed assets related to the
Branch Acquisitions in the amount of $3.5 million.
Excess of Cost over Fair Value of Assets Acquired
Excess of cost over fair value of assets acquired was recorded in connection
with the Branch Acquisitions, which totaled $7.7 million. This intangible asset
is amortized on a straight-line basis over the period of expected benefit which
approximates 12 years. At December 31, 2000, amortization expense totaled
$255,000.
Deposits
Deposits increased by $114.1 million, or 39%, to $406.7 million at December 31,
2000 from $292.6 million at December 31, 1999. This increase was primarily
attributable to increases in certificates of deposit of $70.9 million, NOW
accounts and transaction checking of $21.3 million, money market accounts of
$17.6 million and passbook accounts of $4.2 million. These increases were due
primarily to the Branch Acquisitions.
Payable to Brokers and Dealers
Payable to brokers and dealers was $27.9 million at December 31, 2000. The
amount represents monies due for trading securities purchased but not yet
settled by TGH Securities. This payable may fluctuate from period to period,
depending upon the amount of securities purchased by TGH Securities at each
quarter-end or year-end period.
Equity
At December 31, 2000, total stockholders' equity was $83.1 million, or 11.9% of
total assets, compared to $74.7 million, or 13.5% of total assets, at December
31, 1999. The $8.4 million increase was due to net income of $5.2 million, a
decrease of $9.1 million in accumulated other comprehensive loss, offset by
dividends paid of $1.9 million and $4.9 million in stock repurchase costs.
Accumulated other comprehensive loss decreased as a result of changes in the net
unrealized (loss) on the available for sale securities due to fluctuations in
interest rates. Because of interest rate volatility, the Company's accumulated
other comprehensive loss could materially fluctuate for each interim and
year-end period.
Results of Operations
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily on its net interest
income, which is the difference between interest income earned on its loans and
investments ("interest-earning assets") and interest paid on its deposits and
any borrowed funds ("interest-bearing liabilities"). Net interest income is
affected by:
o the interest rate spread - the difference between rates of interest earned
on interest-earning assets and rates paid on its interest-bearing
liabilities; and
o the aggregate amounts of its interest-earning assets and interest-bearing
liabilities.
13
Average Balance Sheet
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of
average daily balances has caused any material differences in the information
presented.
Year ended December 31,
At -----------------------------------------------------------------------------------------------
12/31/00 2000 1999 1998
------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable (1) 8.04% $184,915 $15,395 8.33% $144,808 $11,443 7.90% $110,059 $8,933 8.12%
Mortgage-backed
securities 7.38% 223,287 15,623 7.00% 213,971 13,745 6.42% 158,400 9,633 6.08%
Cash and investment
securities 6.81% 118,861 8,232 6.93% 96,225 6,545 6.80% 64,905 4,407 6.79%
Tax exempt securities
(2) 5.33% 54,702 2,836 5.18% 49,569 2,425 4.89% 14,721 710 4.82%
------------------- -------------------- --------------------
Total interest-earning
assets 7.32% $581,765 $42,086 7.23% $504,573 $34,158 6.77% $348,085 $23,683 6.80%
------------------- -------------------- --------------------
Non-interest-earning
assets 37,021 21,725 12,037
--------- ---------- ----------
Total assets $618,786 $526,298 $360,122
========= ========== ==========
Interest-bearing
liabilities:
Savings accounts 3.22% $99,363 $3,214 3.23% $100,455 $3,238 3.22% $97,634 $3,592 3.68%
Certificate accounts 6.07% 199,196 11,656 5.85% 149,592 7,777 5.20% 127,478 6,825 5.35%
Other deposit accounts 2.27% 44,759 996 2.23% 30,551 661 2.18% 22,749 535 2.35%
------------------- -------------------- --------------------
Total deposits 4.71% 343,318 15,866 4.62% $280,598 $11,676 4.16% $247,861 $10,952 4.42%
------------------- -------------------- --------------------
Borrowings 5.33% 174,901 9,780 5.59% 154,801 7,964 5.14% 38,884 1,956 5.03%
Other liabilities
(escrow) 2.00% 1,966 35 1.76% 1,687 32 1.92% 1,620 26 1.60%
Total
interest-bearing
liabilities 4.89% $520,185 $25,681 4.94% $437,086 $19,672 4.50% $288,365 $12,934 4.48%
------------------- -------------------- --------------------
Non-interest-bearing
liabilities 22,102 6,349 7,119
--------- ---------- ----------
Total liabilities 542,287 443,435 295,484
--------- ---------- ----------
Stockholder's equity 76,499 82,864 64,638
--------- ---------- ----------
Total liabilities
and Stockholders'
equity $618,786 $526,299 $360,122
========= ========== ==========
Net interest income $16,405 $14,486 $10,749
========= ========= =========
Interest rate spread 2.43% 2.30% 2.27% 2.32%
=========== =========== =========
Net yield on
interest-earning
assets 2.82% 2.87% 3.09%
=========== =========== =========
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 111.84% 115.44% 120.71%
=========== =========== =========
(1) Non-accrual loans and loan fees have been included and are considered
immaterial to the analysis herein.
(2) Tax exempt securities are presented on a coupon basis.
14
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected the
Company's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate); (ii) changes in rate (change in rate
multiplied by prior year volume); and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
Year ended December 31,
----------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
----------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
---------------------------------------- ---------------------------------------
(Dollars in Thousands)
Interest Income:
Loans receivable $ 3,169 $ 613 $ 170 $ 3,952 $ 2,820 $ (236) $ (74) $ 2,510
Mortgage-backed securities 598 1,227 53 1,878 3,380 542 190 4,112
Cash and investment securities 1,540 119 28 1,687 2,127 8 4 2,139
Tax exempt securities 251 145 15 411 1,681 10 24 1,715
---------------------------------------- ---------------------------------------
Total interest-earning assets $ 5,558 $ 2,104 $ 266 $ 7,928 $10,008 $ 324 $ 144 $10,476
======================================= =======================================
Interest expense:
Deposit accounts $ 2,610 $ 1,291 $ 289 $ 4,190 $ 1,446 $ (637) $ (84) $ 725
Borrowings 1,034 693 90 1,817 5,831 44 132 6,007
Other liabilities 5 (3) (0) 2 1 5 0 6
---------------------------------------- ---------------------------------------
Total interest-bearing liabilities $ 3,649 $ 1,981 $ 379 $ 6,009 $ 7,278 $ (588) $ 48 $ 6,738
======================================= =======================================
Net change in interest income $ 1,909 $ 123 $ (113) $ 1,919 $ 2,730 $ 912 $ 96 $ 3,738
======================================= =======================================
Net Income
The Company reported net income of $5.2 million, $5.3 million and $2.4 million
for the years ended December 31, 2000, 1999 and 1998, respectively. The $100,000
decrease in net income for the year ended December 31, 2000 compared to December
1999 was primarily due to the Branch Acquisitions. Operating expenses for the
year ended December 31, 2000 increased $3.2 million, offset by increases of $1.7
million and $1.2 million in net interest income and other income, respectively.
The $2.9 million increase in net income for the year ended December 31, 1999
compared to the year ended December 1998 was primarily due to a $3.8 million
increase in net interest income as well as a decrease in the effective tax rate
paid by the Company from 38.5% in 1998 to 23.3% in 1999, offset in part by a
$1.1 million increase in operating expenses.
Net Interest Income
Net interest income increased $1.7 million, or 11.8%, to $15.9 million for the
year ended December 31, 2000 from $14.2 million in 1999. The increase was the
result of a $7.9 million increase in interest income offset by a $6.0 million
increase in interest expense.
Net interest income increased $3.7 million, or 34.8%, to $14.5 million in the
year ended December 31, 1999 from $10.8 million in 1998. The increase came as a
result of a $10.5 million increase in interest income offset by a $6.7 million
increase in interest expense.
Interest Income
Total interest income amounted to $42.1 million for the year ended December 31,
2000 compared to $34.2 million in 1999. The increase in 2000
15
of $7.9 million, or 23.2%, over 1999 was primarily due to an increase of $77.2
million in the average balance of interest-earning assets and an increase in the
average yield of 44 basis points (with 100 basis points being equal to 1%). The
increase in average balances was due to the investing of cash received in the
Branch Acquisitions, while the increase in yield reflects effects of the
interest rate environment during 2000 and the composition of the loan portfolio.
During 2000, the Company had a greater percentage of commercial and consumer
loans outstanding than in 1999. These loans generally are at higher rates and of
shorter duration than single family mortgages.
Total interest income amounted to $34.2 million for the year ended December 31,
1999 compared to $23.7 million for the year ended December 31, 1998. The
increase in 1999 of $10.5 million, or 44.2%, over 1998 was primarily due to an
increase in income from all interest earning assets, resulting from an increase
of $156.5 million, or 45%, in the average balance outstanding of those assets.
This increase was partially offset by a 3 basis point decrease in the related
yield (with 100 basis points being equal to 1%). The increase in average
balances was due to the investing of proceeds from the stock sale in July 1998
and the leveraging of the Company's capital base, while the slight decrease in
yield reflects the effects of the interest rate environment existing during
1999.
Interest Expense
Total interest expense increased by $6.0 million or 30.6% for the year ended
December 31, 2000 compared to 1999. The increase was primarily attributable to
an increase of $4.2 million in interest on deposits and an increase of $1.9
million in interest on Federal Home Loan Bank ("FHLB") borrowings. The increase
in interest on deposits was due to an increase of $62.7 million in the average
balance of deposits and an increase of 46 basis points in the average rate paid.
The increase in interest expense on FHLB borrowings was due to an increase of
$20.1 million in the average balance of borrowings combined with an increase of
45 basis points in the average rate paid.
Total interest expense increased by $6.7 million, or 52.1%, for the year ended
December 31, 1999 compared to 1998. The increase was primarily attributable to a
$6.0 million increase in interest expense in FHLB borrowings and a $699,000
increase in interest on deposits. Interest expense on FHLB borrowings increased
due to a $115.9 million increase in the average balance of such borrowings
combined with an 11 basis point increase in the average rate paid. The interest
expense on deposits increased due to a $32.7 million increase in the average
balance of deposits offset by a 26 basis point decline in the average rate paid.
The increase in average borrowings and deposits was used to fund loan
originations and purchase investment securities and mortgage-backed securities.
Provision for Loan Losses
The Company recorded a provision for loan losses of $480,000 in 2000, $240,000
in 1999 and $270,000 in 1998. Provisions for loan losses are charged to earnings
to bring the total allowance for loan losses to a level considered appropriate
by management based on historical experience, the volume and type of lending
conducted by the Company, the amount of the Company's classified assets, the
status of past due principal and interest payments, general economic conditions,
particularly as they relate to the Company's primary market area, and other
factors related to the collectibility of the Company's loan portfolio.
The provision for loan losses increased in 2000 as a result of the Company's
change in the mix of the products offered in the loan portfolio - from lower
yielding loans (i.e., one- to four-family loans) to higher yielding loans (i.e.,
commercial real estate, home equity lines of credit and improvement loans,
commercial non-mortgage loans and construction loans). Such change in the
portfolio mix resulted in an increase in the risk profile inherent within the
loan portfolio. See "Loans Receivable, Net."
Although management of the Company believes that the Company's allowance for
loan losses was adequate at December 31, 2000, based on facts and circumstances
available to it, there can be no assurances that additions to such allowance
will not be necessary in future periods, which would adversely affect the
Company's results of operations for such periods. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's provision for loan losses and the carrying
value of its other non-performing assets based on their judgements about
information available to them at the time of their examination.
Other Income
Other income for the year ended December 31, 2000 was $2.1 million as compared
to $951,000 for 1999. The $1.2 million, or 124.2% increase, was due primarily to
TGH Securities' trading revenues of $705,000, a $506,000 net gain on asset sales
in 2000 versus $137,000 in 1999 and an increase of $194,000 in service charges
and other fees.
Other income for the year ended December 31, 1999 was $951,000 as compared to
$415,000 for 1998. The $536,000 increase in other income resulted from a
$137,000 net gain on asset sales in 1999 and the absence of a $115,000 net loss
on such sales during 1998, a $228,000 recovery of an accrual for interest and
penalties on a state income tax case that was settled during the year combined
with an $80,000 recovery on loans secured by commercial equipment lines that had
been charged off in prior years.
Other Expenses
For the year ended December 31, 2000, other expenses increased $3.2 million, or
38.9%, to $11.4 million as compared to $8.2 million in 1999. The increases in
other expenses is primarily attributable to the Branch
16
Acquisitions, the addition of personnel in commercial lending and the personnel
and operations at TGH Securities.
For the year ended December 31, 1999, other expenses increased $1.1 million, or
16.2%, to $8.2 million as compared to $7.1 million in 1998. Salaries and
employee benefits increased $307,000 due to normal salary increases, addition of
personnel and compensation expenses related to the restricted stock plan.
Occupancy and equipment costs increased $177,000 due to increased depreciation
related to the purchase of a new computer system in August 1998 and to increased
costs for maintenance contracts related to the addition of new hardware.
Professional costs increased $260,000 due to accounting and legal fees
associated with being a listed company, legal costs incurred related to the
adoption of the Company's stock plans and various corporate and regulatory
actions, the outsourcing of the Company's internal audit function and consulting
fees related to Y2K contingency planning. Advertising and promotion increased
$112,000 as the Company began a focused strategic marketing effort in the latter
half of 1999, which included additional media costs for new product campaigns.
Increases in other expenses amounted to $269,000 due to costs associated with
the production of the Company's initial annual report and proxy statements,
transfer agent and NASDAQ listing fees, as well as other expenses related to the
in-house computer system.
Income Taxes
Income tax expense for the years ended December 31, 2000, 1999 and 1998, was
$1.4 million, $1.6 million and $1.5 million, respectively. The primary reason
for the decrease in the effective tax rate was the reduction in state taxes
resulting from purchases of tax exempt securities. The Company has also employed
various strategies to reduce both federal and state taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from principal
and interest payments on loans, mortgage-backed securities and other
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions, competition and the consolidation of the financial institution
industry.
The primary investment activity of the Company is the origination and purchase
of mortgage loans, commercial business loans, mortgage-backed securities and
other investments. During the years ended December 31, 2000, 1999 and 1998, the
Company originated loans in the amounts of $82.6 million, $47.5 million and $28
million, respectively. The Company also purchases loans and mortgage-backed
securities to reduce liquidity not otherwise required for local loan demand, in
2000 to employ funds received from deposits acquired in two separate branch
transactions, and in 1999 and 1998, as part of its leveraging strategy.
Purchases of loans and mortgage-backed securities totaled $102.0 million, $67.0
million and $220.3 million, respectively, in those same periods. Other
investment activities include investment in U.S. government and federal agency
obligations, municipal bonds, debt and equity investments in financial services
firms, FHLB of Pittsburgh stock and consumer loans.
Until 1998, the Company had historically not utilized borrowings as a source of
funds. In 1998 and 1999, the Company utilized FHLB advances to leverage its
balance sheet as discussed earlier. In addition, other sources of liquidity can
be found in the Company's balance sheet, such as investment securities maturing
within one year and unencumbered mortgage-backed securities that are readily
marketable. The Company has other sources of liquidity if a need for additional
funds arises.
The Company is required to maintain minimum levels of liquid assets as defined
by OTS regulations. The requirement, which may be varied at the direction of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio is
currently 4.0%. The Company's liquidity ratio was 5.2% at December 31, 2000.
The Company's most liquid assets are cash and cash equivalents, which include
investment in highly liquid short-term investments. The level of these assets is
dependent on the Company's operating, financing and investing activities during
any given period. At December 31, 2000, cash and cash equivalents totaled $20.3
million.
The Company anticipates that it will have sufficient funds available to meet its
current commitments. As of December 31, 2000, the Company had $17.9 million in
commitments to fund loans. Certificates of deposit which were scheduled to
mature in one year or less, as of December 31, 2000, totaled $194.3 million.
Management believes that a significant portion of such deposits will remain with
the Company.
The Bank had core, tangible and total risk-based capital ratios of 8.0%, 8.0%
and 22.4%, respectively, at December 31, 2000, which significantly exceeded the
OTS's respective minimum requirements of 4.00%, 1.50% and 8.00%. The Bank was
classified as a "well-capitalized" institution on December 31, 2000. See Note 11
to the Consolidated Financial Statements.
Impact of Inflation and Changing Prices
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are financial. As a result, interest rates have a greater impact on the
Company's performance than do 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.
17
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER DATA
(Dollars in Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------
Income Statement Data:
Interest income $ 42,086 $ 34,158 $ 23,682 $ 20,582 $ 20,264
Interest expense 25,681 19,672 12,933 11,002 11,069
Net interest income 16,405 14,486 10,749 9,580 9,195
Provision for loan losses 480 240 270 120 139
Non-interest income 2,132 951 415 2,808 583
Non-interest expense(1) 11,421 8,221 7,075 6,824 9,890
Income (loss) before income taxes 6,636 6,976 3,819 5,444 (251)
Net income (loss) 5,201 5,348 2,350 3,354 (363)
Balance Sheet Data:
Total assets 700,180 554,759 492,039 276,650 294,332
Loans (net) 219,360 161,158 136,466 97,435 100,773
Mortgage-backed securities available for sale 258,870 204,706 229,883 111,486 93,410
Investment securities held to maturity - - 54,129 34,529 46,464
Investment securities available for sale 128,198 115,463 20,274 3,698 2,631
Deposits 406,684 292,619 276,390 230,558 256,546
FHLB Advances 171,884 176,884 106,884 7,884 7,884
Stockholders' equity 83,058 74,660 100,229 28,470 24,581
Per Share Data:
Basic earnings per share(2) 0.76 0.73 0.17 NM NM
Diluted earnings per share(2) 0.75 0.72 0.16 NM NM
Cash dividends per share(2) 0.25 0.21 0.05 NM NM
Tangible book value per share(3) 11.67 9.60 11.14 NM NM
Selected Ratios:(4)
Performance
Return on average assets 0.84% 1.02% .65% 1.18% (.13)%
Return on average equity 6.79 6.45 3.63 12.41 (1.45)
Stockholders' equity to assets 11.86 13.46 20.37 10.27 8.35
Net interest margin(5) 2.82 2.87 3.09 3.50 3.29
Interest rate spread(5) 2.30 2.27 2.32 3.14 2.99
Asset Quality Ratios
Non-performing loans to total loans(6) 0.08 0.14 0.28 0.74 3.04
Non-performing assets to total assts(6) 0.03 0.07 0.09 0.30 1.08
Allowance for loan losses as a percentage of
non-performing loans 989.00 553.00 264.00 109.36 21.24
Allowance for loan losses as a percentage of
total average loans at end of period 0.91 0.85 0.94 0.77 0.63
Net charge-offs (recoveries) as a percentage of average loans 0.02 0.03 0.01 (.08) 0.02
Banking Offices 11 6 6 6 8
(1) Includes a special assessment of $1,533 to recapitalize the Savings
Association Insurance Fund ("SAIF") and a $1,181 write-down of lease
receivables during 1996.
(2) There were no shares outstanding until July 1998.
(3) Book value per share represents stockholders' equity divided by the number
of shares issued and outstanding.
(4) With the exception of end of period ratios, all ratios are based on average
monthly balances during indicated periods.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities, and net interest margin represents net interest income as a
percent of average interest-earning assets.
(6) Non-performing loans consist of non-accrual loans and accruing loans 90
days or more overdue; and non-performing assets consist of non-performing
loans and real estate owned, in each case net of related reserves.
NM Not meaningful as a result of the conversion and reorganization completed
in July 1998.
18
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
December 31,
--------------------------
ASSETS 2000 1999
Cash on hand and in banks $ 4,132 $ 19,494
Interest-bearing deposits 16,188 17,703
--------------------------
Total cash and cash equivalents 20,320 37,197
Investments available for sale at fair value (amortized cost - 2000,
$ 134,858; 1999, $128,729) 128,198 115,463
Mortgage-backed securities available for sale at fair value
(amortized cost - 2000, $258,297; 1999, $211,304) 258,870 204,706
Trading securities 28,034
Loans receivable (net of allowance for loan losses - 2000, $1,682; 1999, $1,234) 215,832 157,233
Loans held for sale 3,528 3,925
Accrued interest receivable 4,711 3,692
Federal Home Loan Bank stock - at cost 8,594 8,844
Real estate acquired through foreclosure - net 47 104
Office properties and equipment - net 6,920 2,853
Prepaid expenses and other assets 2,243 1,145
Cash surrender value of life insurance 12,066 11,590
Excess of cost over fair value of net assets acquired 7,419
Deferred income taxes 3,398 8,007
--------------------------
TOTAL ASSETS $ 700,180 $ 554,759
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 406,684 $ 292,619
FHLB advances 171,884 176,884
Payable to brokers and dealers 27,879
Other borrowings 1,750 3,000
Accrued interest payable 982 835
Advances from borrowers for taxes and insurance 2,534 2,472
Accounts payable and accrued expenses 4,871 3,790
Dividends payable 498 467
Accrued income taxes 40 32
--------------------------
Total liabilities 617,122 480,099
--------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, no par value, 10,000,000 shares authorized,
none issued in 2000 or 1999
Common stock, $.10 par value, 40,000,000 shares authorized,
8,999,989 shares issued and 7,118,161 outstanding in 8,999,989 shares
issued and 7,780,432 outstanding in 1999 900 900
Additional paid-in capital 93,330 93,400
Common stock acquired by stock benefit plans (7,261) (8,199)
Treasury stock at cost, 1,881,828 shares at December 31, 2000 and
1,219,557 shares at December 31, 1999 (16,645) (11,787)
Accumulated other comprehensive loss (4,015) (13,108)
Retained earnings - partially restricted 16,749 13,454
--------------------------
Total stockholders' equity 83,058 74,660
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 700,180 $ 554,759
==========================
See notes to consolidated financial statements.
19
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Year Ended December 31,
--------------------------------
2000 1999 1998
INTEREST INCOME:
Interest on loans $ 15,395 $ 11,443 $ 8,933
Interest on mortgage-backed securities 15,623 13,745 9,632
Interest and dividends on investments 11,068 8,970 5,117
--------------------------------
Total interest income 42,086 34,158 23,682
--------------------------------
INTEREST EXPENSE:
Interest on deposits 15,866 11,676 10,977
Interest on FHLB advances and other borrowings 9,815 7,996 1,956
--------------------------------
Total interest expense 25,681 19,672 12,933
--------------------------------
NET INTEREST INCOME 16,405 14,486 10,749
PROVISION FOR LOAN LOSSES 480 240 270
--------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,925 14,246 10,479
--------------------------------
OTHER INCOME (LOSS):
Service charges and other fees 549 355 367
Trading revenues from brokerage operations 705
Loss on sale of real estate owned (33) (2) (49)
Gain (loss) on sale of mortgage-backed securities available for sale 173 (16) (74)
Gain on sale of loans 23
Gain on sale of investments available for sale 333 155 8
Gain on sale of property and equipment 33
Rental income 153 151 163
Other income 196 308
--------------------------------
Total other income 2,132 951 415
--------------------------------
OTHER EXPENSES:
Salaries and employee benefits 5,986 4,227 3,920
Occupancy and equipment 1,621 1,168 991
Federal insurance premium 63 166 145
Professional fees 408 541 281
Advertising 342 244 132
Amortization of excess of cost over fair value of assets acquired 255
Other 2,746 1,875 1,606
--------------------------------
Total other expenses 11,421 8,221 7,075
--------------------------------
INCOME BEFORE INCOME TAXES 6,636 6,976 3,819
--------------------------------
INCOME TAXES:
Current 1,508 2,835 1,322
Deferred (73) (1,207) 147
--------------------------------
Total income taxes 1,435 1,628 1,469
--------------------------------
NET INCOME $ 5,201 $ 5,348 $ 2,350
================================
BASIC EARNINGS PER SHARE $ 0.76 $ 0.73 $ 0.17
================================
DILUTED EARNINGS PER SHARE $ 0.75 $ 0.72 $ 0.16
================================
See notes to consolidated financial statements.
20
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Common
Stock Accumulated Retained Total
Additional Acquired by Other Earnings- Stock
Common Paid-In Stock Benefit Treasury Comprehensive Partially holders'
Stock Capital Plans Stock Income(Loss) Restricted Equity
---------------------------------------------------------------------------
BALANCE, JANUARY 1, 1998 $162 $18,455 $ 1,390 $ 8,463 $ 28,470
Comprehensive income:
Net income 2,350 2,350
Other comprehensive income, net of tax:
Net unrealized gain on investment and
mortgage-backed securities available
for sale, net of reclassification adjustment(1) (433) (433)
-------
Comprehensive income - - - - - - 1,917
-------
Dividends paid pre-reorganization (82) (82)
Stock conversion 738 76,171 $(6,285) 70,624
ESOP stock committed to be released 210 210
Excess of cost of ESOP shares committed to be
released above fair value (10) (10)
Dividends paid (900) (900)
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 900 94,616 (6,075) 957 9,831 100,229
---------------------------------------------------------------------------
Comprehensive loss:
Net income 5,348 5,348
Other comprehensive loss, net of tax:
Net unrealized loss on investment and
mortgage-backed securities available
for sale, net of reclassification adjustment(1) (14,065) (14,065)
-------
Comprehensive loss - - - - - - (8,717)
-------
ESOP stock committed to be released 418 418
Excess of cost of ESOP shares committed to be
released above fair value (41) (41)
Purchase of treasury stock $(13,326) (13,326)
Common stock acquired by stock benefit plans (2,761) (2,761)
Restricted stock plan amortization 219 219
Exercise of stock options (1,175) 1,539 364
Dividends paid (1,725) (1,725)
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 900 93,400 (8,199) (11,787) (13,108) 13,454 74,660
---------------------------------------------------------------------------
Comprehensive income:
Net income 5,201 5,201
Other comprehensive income, net of tax:
Net unrealized gain on investment and
mortgage-backed securities available
for sale, net of reclassification adjustment(1) 9,093 9,093
-------
Comprehensive income - - - - - - 14,294
-------
ESOP stock committed to be released 420 420
Excess of cost of ESOP shares committed to be
released above fair value (70) (70)
Purchase of treasury stock (4,858) (4,858)
Restricted stock plan amortization 518 518
Dividends paid (1,906) (1,906)
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $900 $93,330 $(7,261) $(16,645) $(4,015) $16,749 $ 83,058
===========================================================================
2000 1999 1998
-------------------------------
(1) Disclosure of reclassification amount, net of tax for the years ended:
Net unrealized appreciation (depreciation) arising during the year $ 8,759 $(14,157) $ (345)
Net gains (losses) included in net income 334 92 (88)
-------------------------------
Net unrealized (loss) gain on securities $ 9,093 $(14,065) $ (433)
===============================
See notes to consolidated financial statements.
21
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
-----------------------------------
2000 1999 1998
-----------------------------------
OPERATING ACTIVITIES:
Net income $ 5,201 $ 5,348 $ 2,350
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Provision for loan losses 480 240 270
Depreciation 717 466 319
Amortization of stock benefit plans 821 571 (10)
Loans held for sale originated (1,687) (1,845)
Amortization of:
Excess of cost over fair value of assets acquired 255
Net premiums (discounts) on:
Loans purchased 17 (23) (286)
Investments (1,361) (1,263) (1,011)
Mortgage-backed securities 803 1,496 1,305
Gain on sale of investments (333) (155) (8)
Gain on sale of loans (23)
(Gain) loss on sale of mortgage-backed securities (173) 16 74
Gain on sale of property and equipment (33)
Loss on sale of real estate owned 33 2 49
Net increase in trading securities (28,034)
Increase in other assets (10,104) (322) (11,182)
Increase (decrease) in other liabilities 29,103 (674) (797)
-----------------------------------
Net cash (used in) provided by operating activities (2,631) 4,015 (10,772)
-----------------------------------
INVESTING ACTIVITIES:
Principal collected on:
Mortgage-backed securities 24,441 46,475 47,504
Loans 36,557 30,246 24,818
Loans originated (82,578) (45,854) (26,181)
Loans acquired (12,365) (7,720) (36,098)
Increase in loans resulting from branch acquisitions (340)
Purchases of:
Investments (5,268) (72,492) (57,750)
Mortgage-backed securities (89,683) (59,279) (184,234)
Property and equipment (1,327) (832) (1,304)
FHLB stock (1,399) (3,500) (3,642)
Increase in property and equipment resulting from branch acquisitions (3,534)
Maturities of investments 2,333 20,902
Proceeds from the sale of:
Loans 23
Real estate owned 54 40 180
Property and equipment 110
Mortgage-backed securities 17,617 28,561 15,898
Investments 833 17,108 2,147
FHLB stock 1,500
-----------------------------------
Net cash used in investing activities (115,359) (64,914) (197,760)
-----------------------------------
22
THISTLE GROUP HOLDINGS, CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
2000 1999 1998
-----------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 19,088 16,229 45,832
Increase in deposits resulting from branch acquisitions 94,977
Net increase in advances from borrowers for taxes and insurance 62 243 43
Net (decrease) increase in FHLB borrowings (5,000) 70,000 99,000
(Decrease) increase in other borrowings (1,250) 3,000
Purchase of treasury stock (4,858) (13,326)
Purchase of restricted stock plan shares (2,761)
Net proceeds from exercise of stock options 300
Proceeds from the stock offering, net of offering costs 70,624
Cash dividends (1,906) (1,725) (982)
-----------------------------------
Net cash provided by financing activities 101,113 71,960 214,517
-----------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,877) 11,061 5,985
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,197 26,136 20,151
-----------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,320 $ 37,197 $ 26,136
===================================
SUPPLEMENTAL DISCLOSURES:
Interest paid on deposits and funds borrowed $ 25,534 $ 19,306 $ 11,325
Income taxes paid 1,209 1,267 1,570
Noncash transfers from loans to real estate owned 85 101 168
Noncash transfer of investments held to maturity to
available for sale 54,129
See notes to consolidated financial statements.
23
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars in Thousands, Except Per Share Data)
1. NATURE OF OPERATIONS
On July 14, 1998, Thistle Group Holdings, Inc. (the "Mid-Tier Holding Company")
completed its mutual to stock conversion (the "Conversion and Reorganization").
In connection with the Conversion and Reorganization, Thistle Group Holdings,
Co. (the "Company"), a unitary thrift holding company incorporated in
Pennsylvania, sold 7,856,370 shares of its common stock in subscription and
community offerings at $10.00 per share. Furthermore, based on an independent
appraisal of the Company, existing minority stockholders of the Mid-Tier Holding
Company converted each share of the Mid-Tier Holding Company into 5.5516 shares
of common stock of Thistle Group Holdings, Co. (the "Exchange"). Upon completion
of the Conversion and Reorganization, the Mid-Tier Holding Company and FJF
Financial, M.H.C. were merged with and into the Bank and the Bank changed its
name to Roxborough Manayunk Bank and became the wholly-owned subsidiary of
Thistle Group Holdings, Co. A total of 8,999,989 shares of common stock of
Thistle Group Holdings, Co. (excluding fractional shares issued in the Exchange)
were issued in connection with the Conversion and Reorganization. After the
effect of establishing the Employee Stock Ownership Plan (see Note 13) and
reorganization and stock offering costs of approximately $1.7 million, the
Company realized net proceeds of approximately $70.6 million.
The primary business of the Company is to act as a holding company for
Roxborough Manayunk Bank (the "Bank"), a federally chartered capital stock
savings bank, TGH Corp., which holds investments and TGH Securities, a
broker/dealer subsidiary which commenced operations in 2000. The Bank has three
subsidiaries, Ridge Service Corporation, which is inactive, Montgomery Service
Corporation, which manages a small commercial real estate property and invests
in small business investment companies, and Roxdel Corp., which holds
investments. The primary business of the Bank is attracting customer deposits
from the general public through its eleven Banking Offices and its transactional
website, www.RMBgo.com, and investing these deposits, together with funds from
borrowings and operations, primarily in single-family residential loans,
commercial real estate loans and mortgage-backed securities, and to a lesser
extent in secured consumer, home improvement and commercial non-mortgage loans
and investment securities. The Bank's primary regulator is the Office of Thrift
Supervision ("OTS").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements contained
herein for the periods prior to July 14, 1998 are those of Thistle Group
Holdings, Inc., which was organized for the purpose of holding all of the
capital stock of Roxborough Manayunk Bank. The consolidated financial statements
contained herein for the periods subsequent to July 14, 1998 are those of
Thistle Group Holdings, Co., which was organized in March of 1998, and its
subsidiaries. The Company's business is conducted principally through the Bank.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Investment and Mortgage-Backed Securities - Debt and equity securities are
classified and accounted for as follows:
Held to Maturity - Debt securities that management has the positive intent and
ability to hold until maturity are classified as held to maturity and are
carried at their remaining unpaid principal balance, net of unamortized premiums
or unaccreted discounts. Premiums are amortized and discounts are accreted using
the interest method over the estimated remaining term of the underlying
security.
Available for Sale - Debt and equity securities that will be held for indefinite
periods of time, including securities that may be sold in response to changes to
market interest or prepayment rates, needs for liquidity and changes in the
availability of and the yield of alternative investments are classified as
available for sale. These assets are carried at fair value. Fair value is
determined using published quotes as of the close of business. Unrealized gains
and losses are excluded from earnings and are reported net of tax as a separate
component of stockholders' equity until realized. Realized gains and losses on
the sale of investment or mortgage-backed securities are reported in the
consolidated statement of operations and are determined using the specific
identification method.
24
Interest Income - Interest income on loans and investment and mortgage-backed
securities is recognized as earned. Income recognition is generally discontinued
when loans become 90 days contractually past due. An allowance for any
uncollected interest is established at that time by a charge to operations.
Trading Securities - Trading securities are securities owned by TGH Securities,
a wholly-owned broker/dealer subsidiary of the Company. Trading securities are
carried at fair value and are recorded on a trade date basis. These securities
generally consist of short-term municipal notes and bonds. Gains and losses both
realized and unrealized are included in operating income. Payable to brokers and
dealers includes amounts payable to clearing organizations.
Loans Held for Sale - The Company originates loans for portfolio investment or
for sale in the secondary market. During the period of origination, loans are
designated as held for sale or held for investment. Loans held for sale are
carried at the lower of cost or fair value, determined on an aggregate basis.
Loans receivable designated as held for portfolio have been so designated due to
management's intent and ability to hold such loans until maturity or pay-off.
Provisions for Losses - Provisions for losses include charges to reduce the
recorded balances of loans receivable to their estimated net realizable value or
fair value, as applicable. Such provisions are based on management's estimate of
net realizable value and/or fair value of the collateral, as applicable,
considering the current and currently anticipated future operating or sales
conditions, thereby causing these estimates to be particularly susceptible to
changes that could result in a material adjustment to results of operations in
the near term. Recovery of the carrying value of such loans and real estate is
dependent to a great extent on economic, operating and other conditions that are
beyond the Company's control.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosure. The Company values impaired loans
using the fair value of the collateral. Any reserves determined under SFAS No.
114 would be included in the allowance for loan losses.
Real Estate Acquired Through Foreclosure - Real estate acquired through
foreclosure is carried at the lower of fair value or balance of the loan on the
property at date of acquisition less estimated selling costs. Costs relating to
the development and improvement of property are capitalized, and those relating
to holding the property are charged to expense.
Office Properties and Equipment - Office properties and equipment are recorded
at cost. Depreciation is computed using the straight-line method over the
expected useful lives of the related assets which range from three to 25 years.
The costs of maintenance and repairs are expensed as incurred, and renewals and
betterments are capitalized.
Cash Surrender Value of Life Insurance - The Company is the beneficiary of
insurance policies on the lives of officers and employees of the Bank. The
Company has recognized the amount that could be realized under the insurance
policies as an asset in the statement of financial condition.
Interest Rate Risk - At December 31, 2000, the Company's assets consist
primarily of assets that earned interest at fixed interest rates. Those assets
were funded primarily with short-term liabilities that have interest rates that
vary with market rates over time.
The shorter duration of the interest-sensitive liabilities indicates that the
Company is exposed to interest rate risk because, in a rising rate environment,
liabilities will be repricing faster at higher interest rates, thereby reducing
the market value of long-term assets and net interest income.
Loan Fees - The Company defers all loan fees, net of certain direct loan
origination costs, and recognizes income as a yield adjustment over the
contractual life of the loan considering prepayments using the interest method.
Unearned Discounts and Premiums - Unearned discounts and premiums are accreted
over the expected average lives of the loans purchased using the interest
method.
Income Taxes - Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Accounting for Stock-Based Compensation - The Company accounts for stock options
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, which
allows an entity to choose between the intrinsic value method, as defined in
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees or the fair value method of accounting for stock-based compensation
described in SFAS No. 123. An entity using the intrinsic value method must
disclose pro forma net income and earnings per share as if the stock based
compensation was accounted for using the fair value method. The Company
continues to account for stock-based compensation using the
25
intrinsic value method and has not recognized compensation expense under this
method.
In March 2000, the Financial Accounting Standards Board ("FASB") Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation ("FIN
No. 44") was issued. FIN No. 44 clarifies the application of APB No. 25 for
certain issues. The Company adopted the provisions of FIN No. 44 in fiscal year
2000. The adoption of the interpretation did not have a material effect on the
consolidated financial statements.
Earnings Per Share - Basic earnings per share for 2000, 1999 and 1998 is
computed by dividing income available to common stockholders (for 1998 the
amount calculated was net income from July 14, 1998 through December 31, 1998 or
$1,400) by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share for 2000, 1999 and 1998 is computed using the
weighted average number of common shares outstanding and common share
equivalents that would arise from the exercise of stock options. The weighted
average shares used in the basic and diluted earnings per share computations for
the years ended December 31, 2000 and 1999 and for the period July 14, 1998
through December 31, 1998 are as follows:
July 14, 1998 to
December 31, December 31, December 31,
2000 1999 1998
----------------------------------------------
Average common shares
outstanding - basic 6,866,018 7,359,241 8,372,155
Increase in shares due to
dilutive options 34,431 90,626 174,732
----------------------------------------------
Adjusted shares outstanding -
diluted 6,900,449 7,449,867 8,546,887
==============================================
Comprehensive Income - In accordance with SFAS No. 130, Reporting Comprehensive
Income, the Company presents, as a component of comprehensive income, the
amounts from transactions and other events which currently are excluded from the
statement of income and are recorded directly to stockholders' equity.
Accounting for Derivative Instruments - In June 1998, FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
Nos. 137 and 138 and interpreted by the FASB and the Derivatives Implementation
Group through "Statement 133 Implementation Issues." This statement requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on the intended use of the derivative and the resulting designation. The
Company adopted this statement on January 1, 1999. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations. In accordance with the provisions of this statement, the
Company transferred $54,129 of investments held to maturity to available for
sale.
Recent Accounting Pronouncements - In September 2000, SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement No. 125, was issued. This
statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of SFAS No. 125 provisions without reconsideration.
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This statement
is effective for all fiscal years ending after December 15, 2000. The adoption
of this statement did not have a material impact on the Company's consolidated
financial statements.
Reclassifications - Certain items in the 1999 and 1998 consolidated financial
statements have been reclassified to conform with the presentation in the 2000
consolidated financial statements.
3. ACQUISITIONS
On May 23, 2000, the Bank signed a definitive agreement with Crown Bank FSB to
purchase its branch office located in Wilmington, Delaware. The transaction
closed on September 9, 2000. The Bank acquired approximately $41,000 in deposit
liabilities plus accrued interest, $1,800 in property and equipment, $300 in
loans and $37,300 in cash.
On May 25, 2000, the Bank signed a definitive agreement with Wilmington Trust
Company of Pennsylvania to purchase four branch offices located in Lionville,
Media, Westtown and West Chester, Pennsylvania. The transaction closed on August
4, 2000. The Bank acquired approximately $54,500 in deposit liabilities plus
accrued interest, $1,700 in property and equipment and $46,700 in cash.
The transactions were accounted for under the purchase method of accounting. The
allocation of purchase price is preliminary pending final valuation of the fair
market value of the assets acquired and the liabilites assumed. The excess of
cost over fair value of net assets acquired was $7,700 for these two
transactions and is being amortized over twelve years.
26
4. INVESTMENTS AVAILABLE FOR SALE
A comparison of cost and approximate fair value of investments, by maturity, is
as follows:
December 31, 2000
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------------
U.S. Treasury securities and securities
of U.S. Government agencies:
5 to 10 years $ 6,011 $ 49 $ 36 $ 6,024
More than 10 years 42,000 877 41,123
FHLB and FHLMC Bonds -
More than 10 years 18,883 2,680 16,203
Municipal bonds - 5 to 10 years 153 153
More than 10 years 46,703 372 1,127 45,948
Mutual funds 1,439 1,439
Capital trust securities 12,847 2,120 10,727
Equity investments 5,345 241 482 5,104
Other 1,477 1,477
------------------------------------------------------------
Total $ 134,858 $ 662 $ 7,322 $ 128,198
============================================================
December 31, 1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------------------------
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 3,000 $ 166 $ 2,834
5 to 10 years 3,017 52 2,965
More than 10 years 42,000 3,294 38,706
FHLB and FHLMC Bonds -
More than 10 years 17,622 3,961 13,661
Municipal bonds -
More than 10 years 41,613 4,484 37,129
Mutual funds 1,345 1,345
Capital trust securities 12,900 1,560 11,340
Equity investments 5,795 $ 795 544 6,046
Other 1,437 1,437
----------------------------------------------------------------
Total $ 128,729 $ 795 $ 14,061 $ 115,463
================================================================
27
In connection with the adoption of SFAS No. 133, the Company transferred $54,129
of investment securities held to maturity to available for sale on January 1,
1999.
Proceeds from the sale of investments available for sale during the year ended
December 31, 2000 were $833 resulting in a gain of $333. Proceeds from the sale
of investments available for sale during the year ended December 31, 1999 were
$17,108 resulting in a gain of $155. Proceeds from the sale of investments
available for sale during the year ended December 31, 1998 were $2,147 resulting
in a gain of $8.
5. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows:
December 31, 2000
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
---------------------------------------------------------------
GNMA pass-through certificates $ 159,303 $ 1,394 $ 622 $ 160,075
FNMA pass-through certificates 74,246 178 697 73,727
FHLMC pass-through certificates 18,837 238 19,075
FHLMC real estate mortgage investment conduits 5,911 115 33 5,993
---------------------------------------------------------------
Total $ 258,297 $ 1,925 $ 1,352 $ 258,870
===============================================================
December 31, 1999
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
---------------------------------------------------------------
GNMA pass-through certificates $ 111,825 $ 324 $ 3,186 $ 108,963
FNMA pass-through certificates 77,567 69 3,835 73,801
FHLMC pass-through certificates 20,550 260 189 20,621
FHLMC real estate mortgage investment conduits 1,362 41 1,321
---------------------------------------------------------------
Total $ 211,304 $ 653 $ 7,251 $ 204,706
===============================================================
Proceeds from the sale of mortgage-backed securities during the year ended
December 31, 2000 were $17,617 resulting in a gain of $173. Proceeds from the
sale of mortgage-backed securities during the year ended December 31, 1999 were
$28,561 resulting in a loss of $16. Proceeds from the sale of mortgage-backed
securities during the year ended December 31, 1998 were $15,898 resulting in a
loss of $74.
28
6. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31
2000 1999
-----------------------
Mortgage loans;
1-4 Family residential $121,230 $110,032
Commercial real estate 54,763 29,867
Home equity lines of credit and improvement loans 12,999 8,518
Commercial nonmortgage loans 14,731 5,496
Construction loans - net 14,210 5,365
Loans on savings accounts 726 170
Consumer loans 152 126
-----------------------
Total loans 218,811 159,574
Plus unamortized premiums 347 373
Less:
Net discounts on loans purchased and
loans acquired through merger (15) (28)
Deferred loan fees (1,629) (1,452)
Allowance for loan losses (1,682) (1,234)
-----------------------
Total $215,832 $157,233
=======================
The Company originates loans to customers in its local market area, principally
Philadelphia, Pennsylvania and the four adjoining counties. The Company
occasionally purchases loans in Pennsylvania, New Jersey and Delaware. The
ultimate repayment of these loans is dependent to a certain degree on the local
economy and real estate market.
Originated or purchased commercial real estate loans totaled $54,763 and $29,867
at December 31, 2000 and 1999, respectively. Of the commercial real estate
loans, as of December 31, 2000 and 1999, $40,253 and $19,490 are collateralized
by multi-family residential property; $14,510 and $10,377 by business property,
respectively.
At December 31, 2000, 1999 and 1998, the Company was servicing loans for others
amounting to $8,745, $1,706 and $2,558, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. In connection with these loans serviced for others, the Company held
borrower's escrow balances of approximately $168, $124 and $167 at December 31,
2000, 1999 and 1998, respectively.
Following is a summary of changes in the allowance for loan losses:
Year Ended December 31,
2000 1999 1998
----------------------------------
Balance, beginning $1,234 $1,036 $ 783
Provision 480 240 270
Charge-offs (32) (42) (85)
Recoveries 68
----------------------------------
Balance, ending $1,682 $1,234 $1,036
==================================
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of probable losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118. A loan is considered to be impaired when, based upon current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan. An insignificant
delay or shortfall in amount of payments does not necessarily result in the loan
being identified as impaired. For this purpose, delays less than 90 days are
considered to be insignificant. As of December 31, 2000 and 1999, 100% of the
impaired loan balance was measured for impairment based on the fair value of the
loans' collateral. Impairment losses are included in the provision for loan
losses. SFAS Nos. 114 and 118 do not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include consumer loans and residential real estate
loans and are not included in the data that follows:
December 31,
2000 1999
-------------------
Impaired loans with no related reserve
for loan losses calculated under SFAS No. 114 $ - $1,707
December 31,
2000 1999 1998
------------------------------
Average impaired loans $303 $1,246 $1,265
Interest income recognized
on impaired loans 27 100 101
No cash basis interest income was recognized in 2000, 1999 or 1998 for the
impaired loans included above. Nonaccrual loans for which interest has been
fully reserved totaled approximately $170 and $223 at December 31, 2000 and
1999, respectively.
29
The Company originates and purchases fixed and adjustable interest rate loans
and mortgage-backed securities. At December 31, 2000 fixed rate loans and
mortgage-backed securities were approximately $405,600, and adjustable interest
rate loans and mortgage-backed securities were approximately $69,100.
As of December 31, 2000, the Company had approximately $17,900 in outstanding
loan commitments with interest rates ranging from 7.63% to 9.50%. These
commitments are subject to normal credit risk and have commitment terms of
ninety days or less.
Certain directors and officers of the Company have loans with the Company. Such
loans were made in the ordinary course of business and do not represent more
than a normal risk of collection. Total loans to these persons amounted to
$1,088, $1,167 and $1,872 at December 31, 2000, 1999 and 1998, respectively.
Originations to these persons were $28, $52 and $470 for the years ended
December 31, 2000, 1999 and 1998, respectively. Loan repayments for the years
ended December 31, 2000, 1999 and 1998 were $107, $757 and $176, respectively.
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
December 31,
2000 1999
------------------
Land $ 1,628 $ 528
Buildings 4,882 2,909
Furniture and equipment 4,624 3,189
Leasehold improvements 316 87
------------------
Total 11,450 6,713
Accumulated depreciation and amortization (4,530) (3,860)
------------------
Net $ 6,920 $ 2,853
==================
The future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2000 are as follows:
December 31:
2001 $207
2002 138
2003 115
2004 62
2005 53
Thereafter 121
----
Total minimum future rental payments $696
====
Leasehold expense was approximately $94, $9 and $9 for the years ended December
31, 2000, 1999 and 1998, respectively.
8. DEPOSITS
Deposits consist of the following major classifications:
December 31,
2000 1999
--------------------------------------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
--------------------------------------------
NOW accounts and transaction
checking $ 41,181 1.11 % $ 19,880 1.28 %
Money Market Demand accounts 26,582 4.15 8,963 3.43
Passbook accounts 103,209 3.22 99,018 3.26
Certificate accounts 235,712 6.07 164,758 5.27
--------------------------------------------
Total $406,684 4.72 % $292,619 4.26 %
===========================================
At December 31, 2000 and 1999, the Company had deposits of $100 or greater
totaling approximately $57,214 and $34,032, respectively. Deposits in excess of
$100 are not federally insured.
While frequently renewed at maturity rather than paid out, certificate accounts
were scheduled to mature contractually within the following periods:
December 31,
2000 1999
---------------------------
1 year or less $ 194,289 $ 108,647
1 year - 3 years 21,489 49,174
3 years - 5 years 19,934 6,937
---------------------------
Total $ 235,712 $ 164,758
===========================
30
Interest expense on deposits is as follows:
Year Ended December 31,
2000 1999 1998
------------------------------------------
NOW and MMDA $ 3,215 $ 661 $ 534
Passbook 11,687 3,238 3,603
Certificates 996 7,800 6,851
Early withdrawal penalties (32) (23) (11)
------------------------------------------
Total $ 15,866 $11,676 $10,977
=========================================
9. FHLB ADVANCES AND OTHER BORROWINGS
A summary of advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh
follows:
December 31,
2000 1999
-----------------------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
-----------------------------------------
Advances from FHLB due
by December 31,
2000 $ 30,000 4.06%
2001
2002 10,000 5.05
Thereafter $171,884 5.30% 136,884 5.24
-----------------------------------------
Total $171,884 5.30% $176,884 5.03%
=========================================
The advances are collateralized under a blanket collateral lien agreement. The
$30,000 of advances due by December 31, 2000 were borrowed under an overnight
line of credit and were repaid during the year ended December 31, 2000. The
interest rate on these advances adjusts daily. Also, included in the table above
at December 31, 2000 and 1999 are convertible advances whereby the FHLB has the
option at a predetermined time to convert the fixed interest rate to an
adjustable rate tied to LIBOR. The Company then has the option to prepay these
advances if the FHLB converts the interest rate. These advances are included in
the year in which they mature.
The Company has other borrowings of $1,750 and $3,000 at December 31, 2000 and
1999, respectively, from an unaffiliated lender. The borrowing carries a
variable interest rate which was 8.5 % at December 31, 2000 and is due in
December 2002.
10. INCOME TAXES
As of January 1, 1996, the Bank changed its method of computing reserves for bad
debts to the experience method. The bad debt deduction allowable under this
method is available to small banks with assets less than $500 million. Beginning
January 1, 1999, the Bank changed its method of computing reserves for bad debts
to the specific charge-off method. The bad debt deduction allowable under this
method is available to large banks with assets greater than $500 million.
Generally, this method allows the Bank to deduct an annual addition to the
reserve for bad debts equal to its net charge-offs.
A thrift institution required to change its method of computing reserves for bad
debts to the experience method treats such change as a change in a method of
accounting determined solely with respect to the "applicable excess reserves" of
the institution. The amount of the applicable excess reserves is taken into
account ratably over a six taxable-year period, beginning with the first taxable
year beginning after December 31, 1995. For financial reporting purposes, the
Company has not incurred any additional tax expense. Amounts that had been
previously deferred will be reversed for financial reporting purposes and will
be included in the income tax return of the Company, increasing income tax
payable. The change from the experience method to the specific charge-off method
in 1999 did not result in a recapture of bad debt reserves for tax purposes.
Retained earnings at December 31, 2000 and 1999 includes approximately $5.4
million of income for which no deferred income taxes will need to be provided.
Income tax expense consists of the following components:
-------------------------------
Year Ended December 31: Federal State Total
-------------------------------
2000 $1,435 $ 1,435
1999 1,628 1,628
1998 1,258 $211 1,469
The Company's provision for income taxes (benefit) differs from the amounts
determined by applying the statutory federal income tax rate to income before
income taxes for the following reasons:
Year Ended December 31,
2000 1999 1998
--------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------
Tax at federal tax rate $ 2,257 34.0 % $ 2,371 34.0 % $ 1,298 34.0 %
Tax-exempt income (864) (13.0) (727) (10.4) (202) (5.3)
State income tax expense,
net of federal income tax 139 3.6
Other 42 0.6 (16) (0.3) 234 6.1
--------------------------------------------------------------------------
Total $ 1,435 21.6 % $ 1,628 23.3 % $ 1,469 38.4 %
=========================================================================
31
Items that give rise to significant portions of the deferred tax accounts are as
follows:
December 31,
2000 1999
------------------
Deferred tax assets:
Unrealized loss on investments and mortgage-backed securities $ 2,072 $ 6,754
Deferred loan fees 552 493
Allowance for loan losses 517 313
Reserve for uncollected interest 14 16
Supplemental pension and other retirement accruals 616 561
------------------
3,771 8,137
------------------
Deferred tax liabilities:
Office properties and equipment (137) (12)
Other (236) (118)
------------------
(373) (130)
------------------
Total $ 3,398 $ 8,007
==================
11. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal and state 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 Bank's 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
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and core capital (as defined in the regulations) to total
adjusted assets (as defined), and of risk-based capital (as defined) to
risk-weighted assets (as defined). Management believes, as of December 31, 2000,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Bank must maintain minimum tangible, core and risk-based ratios as set forth
in the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
Required for Well-Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------
At December 31, 2000:
Tangible $51,909 8.0% $ 9,706 1.5% N/A N/A
Core (Leverage) 51,909 8.0 25,884 4.0 $32,355 5.0%
Tier 1 risk-based 51,909 21.7 N/A N/A 38,825 6.0
Total risk-based 53,591 22.4 19,106 8.0 64,709 10.0
Required for Well-Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------
At December 31, 1999:
Tangible $57,781 10.6% $ 8,214 1.5% N/A N/A
Core (Leverage) 57,781 10.6 21,905 4.0 $27,381 5.0%
Tier 1 risk-based 57,781 30.2 N/A N/A 32,857 6.0
Total risk-based 59,015 30.9 15,296 8.0 19,120 10.0
32
Capital at December 31, 2000 for financial statement purposes differs from
tangible, core (leverage), and Tier 1 risk-based capital amounts by $2,460
representing the exclusion of unrealized loss on securities available for sale,
the exclusion of goodwill and other intangible assets of $7,593 and $26,016 of
capital maintained at the holding company. Total risk-based capital differs from
tangible, core (leverage), and Tier 1 risk-based by the allowance for loan
losses.
Capital at December 31, 1999 for financial statement purposes differs from
tangible, core (leverage), and Tier 1 risk-based capital amounts by $12,247
representing the exclusion of unrealized gain on securities available for sale
and $29,126 of capital maintained at the holding company. Total risk-based
capital differs from tangible, core (leverage), and Tier 1 risk-based by the
allowance for loan losses.
At the date of the conversion and reorganization, the Bank established a
liquidation account in the amount equal to its retained earnings at December 31,
1997, the date of the latest balance sheet contained in the final prospectus
utilized in the Company's public offering. The liquidation account will be
maintained for the benefit of eligible account holders who continue to maintain
their accounts at the Bank after conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will not
restore the eligible account holder's interest in the liquidation account. In
the event of a complete liquidation of the Bank each eligible account holder
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for accounts
then held.
12. PENSION AND PROFIT-SHARING PLANS
The Company had a defined benefit pension plan which covered all eligible
employees. Benefits were based upon years of service and the employees' average
compensation during the term of employment. On November 18, 1999, the Board of
Directors elected to terminate the defined benefit pension plan effective
December 31, 1999. Approval of such termination was received from the Internal
Revenue Service in August of 2000. The Company disbursed the plan assets in
accordance with the plan document. The amounts shown for December 31, 1999 are
after the effect of curtailment. The curtailment and settlement did not result
in any additional funding or expenses for the Company.
The following table sets forth the plan's net periodic pension cost at December
31, 1999 and 1998:
1999 1998
--------------------
Service cost - benefits earned during the period $ 103 $ 106
Interest cost on projected benefit obligation 97 119
Actual return on plan assets (70) (97)
Net amortization and deferral (9) (17)
--------------------
Net periodic pension cost $ 121 $ 111
====================
The following table sets forth the plan's prepaid pension asset at December 31,
1999:
1999
------
Acturial present value of benefit obligations:
Vested benefits $1,168
Nonvested benefits -
------
Accumulated benefit obligation 1,168
Effect of future salary increases -
------
Projected benefit obligation 1,168
Plan assets at fair value 1,408
------
Plan assets greater than projected benefit obligation 240
Unrecognized:
Prior service cost -
Net loss from past experience 1
Net asset at date of transition (52)
------
Prepaid pension asset $ 189
======
The following table sets forth a reconciliation of beginning and ending balances
of the benefit obligation:
Year ended Year Ended
December 31, December 31,
2000 1999
---------------------------------
Balance, beginning $1,168 $2,194
Service cost 103
Interest cost 97
Acturial gains and losses 41
Benefits paid (710)
Reduction due to curtailment (557)
Reduction due to settlement (1,168) -
---------------------------------
Balance, ending $ - $1,168
=================================
33
The following table sets forth a reconciliation of beginning and ending balances
of the fair value of plan assets:
Year Ended Year Ended
December 31, December 31,
2000 1999
----------------------------
Balance, beginning $1,408 $1,852
Actual return on plan assets 70
Contributions by employer 196
Benefits paid (710)
Settlement (1,408)
----------------------------
Balance, ending $ - $1,408
============================
The weighted-average discount rate, the expected long-term rate of return on
assets and rate of increase in future compensation levels used in determining
the actuarial present value of the projected benefit obligation was 6% for the
year ended December 31, 1999. The plan assets consisted primarily of
certificates of deposit at the Bank.
The Company also maintains a profit-sharing plan for eligible employees.
Profit-sharing contributions are at the discretion of the Board of Directors.
The contribution was $114 in 1998. As of July 1998, contributions to the
profit-sharing plan were suspended. Plan assets consist primarily of a
diversified stock portfolio.
Effective January 1, 2000, the Company amended the profit-sharing plan and
instituted a 401(k) defined contribution plan which provides for pre-tax
contributions by eligible employees with matching contributions at the
discretion of the Board of Directors. Matching contributions were $60 for the
year ended December 31, 2000.
13. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
As part of the conversion and reorganization, in July 1998, the ESOP borrowed
$6,285 from the Company in order to purchase 628,509 shares of the common stock
of the Company. Since the Company's ESOP is internally leveraged, the Company
does not report the loan receivable from the ESOP as an asset and does not
report the ESOP as a liability. The Company accounts for its ESOP in accordance
with AICPA Statement of Position 93-6, Employers' Accounting for Employee Stock
Ownership Plans, which requires the Company to recognize compensation expense
equal to the fair value of the ESOP shares during the periods in which they
become committed to be released. To the extent that the fair value of the ESOP
shares differs from the cost of such shares, this differential is charged or
credited to equity as additional paid-in capital. Management expects the
recorded amount of expense to fluctuate as continuing adjustments are made to
reflect changes in the fair value of the ESOP shares. As of December 31, 2000,
104,750 shares were committed to be released of which 41,900 shares had not yet
been allocated to participant accounts. The Company recorded compensation and
employee benefit expense related to the ESOP of $303, $350 and $200 for the
years ended December 31, 2000, 1999 and 1998 respectively.
14. OTHER EMPLOYEE BENEFITS
Stock Option Plans - The 1994 and 1992 Stock Option Plans were adopted by the
Board of Directors to provide additional incentive to retain officers, directors
and key employees. Options were granted at the estimated fair value at the date
of grant. Options for the 1992 plan vested over a five year period. Options for
the 1994 plan vested immediately. In connection with the conversion and
reorganization, the options were adjusted to reflect the exchange ratio (see
Note 1). At December 31, 2000, options outstanding under the 1994 and 1992 Plans
totaled 66,623 with an exercise price ranging from $1.80 to $2.07.
During the year ended December 31, 1999, the stockholders of the Company
approved the adoption of the 1999 Stock Option Plan. Common stock totaling
785,637 shares has been reserved for issuance under the Plan. An aggregate of
637,485 shares have been granted to the Company's executive officers,
non-employee directors and other key employees subject to vesting and other
provisions of the Plan. The following table summarizes transactions regarding
the stock option plans:
Weighted Weighted
Average Average
Number of Exercise Exercise Remaining
Option Price Price Contractual
Shares Range Per Share Life
-----------------------------------------------------------
Outstanding at January 1, 1998 222,064 $1.80 - $2.07 $1.94 60 months
-----------------------------------------------------------
Exercisable at December 31, 1998 222,064 $1.80 - $2.07 $1.94
-----------------------------------------------------------
Granted 601,985 $7.00 - $8.94 $8.89
Exercised 155,441 $1.80 - $2.07 $1.93
-----------------------------------------------------------
Outstanding at January 1, 1999 668,608 $1.80 - $8.94 $8.07 113 months
Exercisable at December 31, 1999 460,231 $1.80 - $8.94 $7.93
Granted 35,500 $6.25 - $8.00 $6.79
-----------------------------------------------------------
Outstanding at December 31, 2000 704,108 $1.80 - $8.94 $8.13 102 months
-----------------------------------------------------------
Exercisable at December 31, 2000 569,753 $1.80 - $8.94 $8.07
-----------------------------------------------------------
34
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net income and income per share would have been reduced to the pro forma amounts
indicated below:
Year Ended December 31,
2000 1999
------------------------
Net income:
As reported $ 5,201 $ 5,348
Pro forma 5,129 4,667
Net income per common and common
equivalent share:
Earnings per common share
As reported $ 0.75 $ 0.72
Pro forma 0.74 0.63
Weighted average fair value of
options granted during the period $ 2.04 $ 1.77
The binomial option-pricing model was used to determine the grant date fair
value of options. Significant assumptions used to calculated the above fair
value of the awards are as follows:
Year Ended December 31,
2000 1999
------------------------
Risk free interest rate of return 5.15% 6.50%
Expected option life (months) 120 120
Expected volatility 21.83% 27.11%
Expected dividends 3.0 % 3.4 %
Restricted Stock Plan - During the year ended December 31, 1999, the
stockholders of the Company approved the adoption of the 1999 Restricted Stock
Plan ("RSP"). There are 314,254 shares authorized under the RSP. As of December
31, 2000, the Company had outstanding awards aggregating to 249,460 shares to
the Company's Board of Directors, executive officers and other key employees
subject to vesting and other provisions of the RSP. At December 31, 2000, the
deferred cost of the unearned RSP shares totaled $2,024 and is recorded as a
charge against stockholders' equity. Compensation expense will be recognized
ratably over a five year vesting period for executive officers and other key
employees and over a four-year vesting period for non-employee directors. For
the years ended December 31, 2000 and 1999, the Company recognized compensation
and employee benefit expense of $518 and $219, respectively, related to the RSP.
Supplemental Retirement Benefits - In November 1995, the Company entered into a
Nonqualified Retirement and Death Benefit Agreement (the "Agreement") with
certain officers of the Company. The purpose of the Agreement is to provide the
officers with supplemental retirement benefits equal to a specified percentage
of final compensation and a preretirement death benefit if the officer does not
attain age 65. Total expense relating to this benefit was approximately $207,
$197 and $328 for the years ended December 31, 2000, 1999 and 1998,
respectively.
15. SHAREHOLDER RIGHTS PLAN
On September 13, 1999, the Company's Board of Directors adopted a Shareholder
Rights Plan. Under the Plan, each shareholder of record at the close of business
on September 30, 1999 received a dividend distribution of one Right for each
outstanding share of common stock. The Rights expire on September 13, 2009 and
thereafter have no further value. They are redeemable by the Board of Directors
at a price of $.01 per Right at any time within the ten year period until a
person or group has acquired 15% or more of the then outstanding common stock.
The rights will be exercisable only if a person or group acquires 15% or more of
the Company's common stock or announces a tender offer, the consummation of
which would result in ownership by a person or group of 15% of the common stock.
Each right will entitle stockholders to buy one one-hundredth of a share of a
new series of junior participating preferred stock at an exercise price of $30.
If the Company is acquired in a merger or other business combination
transaction, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value of twice such price. In addition, if a person or group
acquires 15% or more of the Company's outstanding common stock, each Right will
entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current exercise price, a number of the company's
common shares having a market of twice such price. Following the acquisition by
a person or group of beneficial ownership of 15% or more of the Company's common
stock and prior to an acquisition of 50% or more of the common stock, the Board
of Directors may exchange the Rights (other than Rights owned by such person or
group), in whole or in part, at an exchange ratio of one share of common stock
(or one one-hundredth of a share of the new series of junior participating
preferred stock) per Right.
35
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the carrying amounts and the estimated fair value of
financial instruments is made in accordance with the requirements of SFAS No.
107, Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
December 31,
2000 1999
------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------
Assets:
Cash and cash equivalents $ 20,320 $ 20,320 $ 37,197 $ 37,197
Investments available for sale 128,198 128,198 115,463 115,463
Mortgage-backed securities available for sale 258,870 258,870 204,706 204,706
Trading securities 28,034 28,034
Loans receivable 215,832 215,857 157,233 154,756
Loans held for sale 3,528 3,528 3,925 3,925
Federal Home Loan Bank stock 8,594 8,594 8,844 8,844
Liabilities;
NOW, MMDA and Passbook accounts 170,972 170,972 127,861 127,861
Certificate accounts 235,712 236,486 164,758 164,224
FHLB Advances 171,884 171,771 176,884 150,225
Other borrowings 1,750 1,750 3,000 3,000
Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount
is a reasonable estimate of fair value.
Investment, Mortgage-backed and Trading Securities - Fair values are based on
quoted market prices or dealer quotes.
Loans Receivable and Loans Held for Sale - Fair values are based on broker
quotes.
Federal Home Loan Bank Stock - Although FHLB Stock is an equity interest in an
FHLB, it is carried at cost because it does not have a readily determinable fair
value.
NOW, MMDA, Passbook, Certificate Accounts and FHLB Advances - The fair value of
NOW, MMDA and Passbook accounts is the amount payable on demand at the reporting
date. The fair value of certificate accounts and FHLB Advances is estimated
using rates currently offered for deposits and advances of similar maturities.
Other Borrowings - As the borrowing is at a variable rate, the carrying value is
a reasonable estimate of fair value.
Commitments to Extend Credit and Letters of Credit - Fair values for off-balance
sheet commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings. The fair value of commitments is deemed
immaterial for disclosures in the table above.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2000 and 1999. Although management is
not aware of any factors that would significantly affect the fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since that date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
17. CONTINGENCIES
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending will not materially affect the
Company's consolidated financial statements.
36
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of Thistle Group Holdings, Co. are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
2000 1999
----------------------
Assets
Cash and cash equivalents $ 1,002 $ 5,139
Investments available-for-sale 4,102 3,651
Investment in subsidiaries 75,043 61,458
Loans receivable 7,262 8,199
Prepaid expenses and other assets 233 103
----------------------
Total assets $87,642 $78,550
======================
Liabilities and Stockholders' equity
Other borrowings $ 3,750 $ 3,000
Dividends payable 498 467
Other liabilities 336 423
----------------------
Total liabilities 4,584 3,890
Stockholders' equity 83,058 74,660
----------------------
Total liabilities and stockholders' equity $87,642 $78,550
======================
CONDENSED STATEMENTS OF INCOME
Year Ended
December 31,
2000 1999 1998
-----------------------------------
Income:
Interest on loans $ 615 $ 521 $ 215
Interest and dividends on investments 202 558 374
Gain on sale of investments 262 8
Other miscellaneous income 8
-----------------------------------
Total income 825 1,341 597
-----------------------------------
Interest on other borrowings 275 78
-----------------------------------
Operating expenses 354 150 23
-----------------------------------
Income before income taxes and
equity in undistributed income
of subsidiaries 196 1,113 574
Income tax expense 80 347 176
-----------------------------------
Income before equity in undistributed
income of subsidiaries 116 766 398
Equity in undistributed income
of subsidiaries 5,085 4,582 1,952
-----------------------------------
Net income $5,201 5,348 $2,350
===================================
37
Condensed Statements of Cash Flows
Year Ended
December 31,
2000 1999 1998
------------------------------
Operating activities:
Net income $5,201 $ 5,348 $ 2,350
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed earnings of subsidiary (5,085) (4,582) (1,952)
Gain on sale of investments (262) (8)
Decrease (increase) in other assets (266) 809 (912)
Increase in other liabilities 139 216 452
------------------------------
Net cash provided by (used in) operating activities (11) 1,529 (70)
------------------------------
Investing activities:
Purchase of investments (50) (6,600) (14,820)
Increase in loans receivable 937 (2,124) (6,075)
Proceeds from the sale of investments 5,895 2,147
Dividends received from subsidiaries 3,000 4,800 900
------------------------------
Net cash provided by (used in) investing activities 3,887 1,971 (17,848)
------------------------------
Financing activities:
Net proceeds from stock offering 70,624
Proceeds from other borrowings 750 3,000
Capital contribution to subsidiary (2,000) (38,632)
Purchase of treasury stock (4,857) (13,326)
Dividends paid (1,906) (1,725) (900)
Net proceeds from exercise of stock options 300
------------------------------
Net cash (used in) provided by financing activities (8,013) (11,751) 31,092
------------------------------
(Decrease) increase in cash (4,137) (8,251) 13,174
Cash, beginning of year 5,139 13,390 216
------------------------------
Cash, end of year $1,002 $ 5,139 $13,390
==============================
Supplemental Disclosure -
Noncash transfer of investments to subsidiary $16,162
38
19. QUARTERLY FINANCIAL DATA (Unaudited)
Unaudited quarterly financial data for the years ended December 31, 2000 and
1999 is as follows:
2000 1999
-----------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
Interest income $9,547 $10,074 $10,926 $11,539 $7,770 $8,311 $8,924 $9,153
Interest expense 5,730 6,145 6,782 7,024 4,300 4,688 5,167 5,517
-----------------------------------------------------------------------------
Net interest income 3,817 3,929 4,144 4,515 3,470 3,623 3,757 3,636
Provision for loan losses 120 120 120 120 30 120 45 45
-----------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,697 3,809 4,024 4,395 3,440 3,503 3,712 3,591
-----------------------------------------------------------------------------
Non-interest income 338 615 677 502 148 400 146 257
Non-interest expense 2,358 2,406 3,031 3,626 1,921 2,067 2,276 1,957
-----------------------------------------------------------------------------
Income before taxes 1,677 2,018 1,670 1,271 1,667 1,836 1,582 1,891
Provision for income taxes 372 438 329 296 462 427 292 447
-----------------------------------------------------------------------------
Net income $1,305 $ 1,580 $ 1,341 $ 975 $1,205 $1,409 $1,290 $1,444
=============================================================================
Per share:
Earnings per share - basic $ 0.18 $ 0.23 $ 0.20 $ 0.15 $ 0.16 $ 0.19 $ 0.18 $ 0.20
Earnings per share - diluted 0.18 0.23 0.20 0.15 0.15 0.19 0.18 0.20
Common stock price range
of the Company:
High 7.06 7.06 8.13 8.00 9.94 9.25 9.00 7.69
Low 6.25 6.06 7.06 7.56 8.50 8.25 7.00 6.62
Earnings per share is computed independently for each period presented.
Consequently, the sum of the quarters may not equal the total earnings per share
for the year.
Independent Auditors' Report
To the Board of Directors of Thistle Group Holdings, Co. and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of Thistle Group Holdings, Co. and subsidiaries (the "Company") as of December
31, 2000 and 1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial
statements present fairly, in all material respects, the consolidated financial
position of Thistle Group Holdings, Co. and subsidiaries as of December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 24, 2001
39