MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL 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
Banking Office, 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 savings and loan
holding company incorporated in the Commonwealth of Pennsylvania and
headquartered in Philadelphia, Pennsylvania. 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. The Bank provides a
full range of banking services through its Banking Offices located in the
counties of Philadelphia, Chester, Montgomery and Delaware in the Commonwealth
of Pennsylvania and Wilmington, Delaware and its transactional website
RMBgo.com. The Bank has three subsidiaries: Ridge Service Corporation, which is
inactive; Montgomery Service Corporation, which holds investments in small
business investment companies and engages in real estate development and
management; and Rox-Del Corp., which holds investments.
For the year ended December 31, 2001, net income was $3.7 million, or $.57 per
diluted earnings per share, compared to $5.2 million, or $.75 per diluted
earnings per share for the year ended December 31, 2000. During the fourth
quarter, the Company sold and realized a pre-tax net loss on certain available
for sale securities of $200,000 and recorded write downs on the carrying values
of certain other available for sale securities and other assets totaling
$469,000 on a pre-tax basis. Additionally, due to economic conditions and
changes in the Company's loan mix, a fourth quarter review of the allocation of
the allowance for loan losses by loan category was performed resulting in a
pre-tax addition to the provision of $300,000.
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 the 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 Asset/Liability Committee meets monthly
or more frequently as deemed necessary. 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.
8
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 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, 2001,
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.
More than
Within Six Months One Year to Three Years Over
Six Months Twelve Months Three Years to Five Years Five Years Total
---------- ------------- ----------- ------------- ---------- -----
Interest-earning assets:
Loans receivable $ 6,598 $ 27,945 $ 43,798 $ 24,910 $ 155,969 $ 259,220
Mortgage-backed securities 34,057 32,908 99,060 69,370 63,821 299,216
Investment securities 769 750 87,227 88,746
Interest-earning deposits 18,814 18,814
-------------------------------------------------------------------------
Total interest-earning assets $ 60,238 $ 60,853 $ 143,608 $ 94,280 $ 307,017 $ 665,996
-------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits $ 128,501 $ 95,835 $ 109,194 $ 60,002 $ 38,052 $ 431,583
FHLB Advances other borrowings 87,571 21,000 65,000 5,000 1,884 180,455
-------------------------------------------------------------------------
Total interest-bearing liabilities $ 216,072 $ 116,835 $ 174,194 $ 65,002 $ 39,936 $ 612,038
-------------------------------------------------------------------------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $(155,834) $ (55,982) $ (30,586) $ 29,278 $ 267,081 $ 53,958
-------------------------------------------------------------------------
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities $(155,834) $(211,816) $(242,402) $(213,123) $ 53,958
-------------------------------------------------------------------------
Cumulative excess (deficiency)
of interest-earning assets over
interest-bearing liabilities as a
percentage of total assets (21.63%) (29.40%) (33.65%) (29.58%) 7.49%
-------------------------------------------------------------------------
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 are presented in the
period in which they amortize, reprice, or mature and do not contain prepayment
assumptions. Mortgage-backed securities are presented in the period in which
they amortize, reprice or mature and contain consensus median prepayment speeds
available on Bloomberg. NOW Accounts and transaction checking, money market and
passbook accounts are assumed to decay at a rate of 28% per year. It should be
noted that passbook, statement savings, MMDA and NOW accounts are generally
9
subject to immediate withdrawal. However, 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. Borrowed funds are included in the period in which
they mature or can be called.
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, which could cause
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 100, 200 and 300
basis points or minus 100 basis points from the level at December 31, 2001. Due
to an abnormally low prevailing interest rate environment the OTS did not
provide a calculation for the minus 200 and minus 300 basis point change in
rates. 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 $ 9,973 $(55,629) -85% 1.57% (773)
200 28,231 (37,371) -57% 4.29% (500)
100 47,178 (18,424) -28% 6.92% (237)
0 65,602 9.29%
(100) 70,612 5,010 8% 9.83% 54
(200) N/A N/A N/A N/A N/A
(300) N/A N/A N/A N/A N/A
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 $79.4
million compared to $65.6 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 $39.9 million, or an NPV ratio of 5.96 %,
compared to an NPV dollar amount of $28.2 million, or NPV ratio of 4.29%, 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.
10
Changes in Financial Condition
General
Total assets of the Company increased by $20.2 million or 3.0%, from $700.2
million at December 31, 2000 to $720.4 million at December 31, 2001. The
increase is primarily attributable to growth in loans which was funded by
mortgage-backed securities repayments, proceeds from agency securities sold and
called and an increase in deposits.
Cash and Investments
Cash and investments (including investments held to maturity and available for
sale and trading securities) decreased by $59.7 million, or 33.8%, to $116.9
million at December 31, 2001 compared to $176.6 million at December 31, 2000.
The decrease is primarily attributable to calls and sales of agency securities
of $39.6 million and $17.3 million, respectively. See "Overview".
Mortgage-Backed Securities Available for Sale
Mortgage-backed securities available for sale increased $40.3 million, or 15.6%,
to $299.2 million at December 31, 2001 compared to $258.9 million at December
31, 2000. The increase was the result of purchases of $195.4 million partially
offset by repayments and sales of $116.1 million and $40.0 million,
respectively.
Loans Receivable, Net
Loans receivable, net increased $39.9 million, or 18.2%, to $259.2 million at
December 31, 2001 compared to $219.4 million at December 31, 2000. The increase
is attributable to increases in residential loans of $4.3 million, home equity
loans and lines of $7.9 million, commercial real estate and commercial loans of
$21.9 million, and construction loans of $9.5 million. The increase in loans
receivable, net was funded by mortgage-backed securities repayments, proceeds
from agency securities called and an increase in deposits of $24.9 million. Such
loan growth was due to additional lending personnel, increased branch loan
referral activity, enhanced marketing efforts and the allocation of resources
and personnel to business development.
Deposits
Deposits increased by $24.9 million, or 6.1%, to $431.6 million at December 31,
2001 from $406.7 million at December 31, 2000. This increase was primarily
attributable to an increase in NOW accounts and transaction checking of $6.2
million, money market accounts of $13.4 million and passbook accounts of $6.0
million. The increase was due to the introduction of new deposit products, new
branches, focused marketing efforts and the implementation of branch goal
setting.
Payable to Brokers and Dealers
Payable to brokers and dealers decreased by $13.8 million, or 49.4%, to $14.1
million at December 31, 2001 from $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 and not yet sold by TGH Securities at each
quarter-end or year-end period.
Equity
At December 31, 2001, total stockholders' equity was $85.4 million, or 11.9% of
total assets, compared to $83.1 million, or 11.9% of total assets, at December
31, 2000. The $2.4 million increase was due to a decrease in the accumulated
other comprehensive loss of $5.3 million and net income of $3.7 million,
partially offset by dividends paid of $2.0 million and $5.4 million in stock
repurchase costs. Accumulated other comprehensive loss decreased as a result of
changes in the net unrealized gain (loss) on the available for sale securities
due to fluctuations in interest rates. Because of interest rate volatility, the
Company's accumulated other comprehensive income (loss) could materially
fluctuate for each quarter-end 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.
11
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. Information is based on average daily balances during the
indicated periods; yields were adjusted for the effects of tax-free investments
using the statutory tax rate.
Year ended December 31,
At ---------------------------------------------------------------------------------------
12/31/01 2001 2000 1999
-------- --------------------------- ---------------------------- ----------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
---- -------- -------- ---- -------- -------- ---- -------- -------- ----
Interest-earning assets:
Loans receivable (1) 7.63% $238,164 $19,175 8.05% $184,915 $15,395 8.33% $144,808 $11,443 7.90%
Mortgage-backed securities 5.91% 278,091 17,636 6.34% 223,287 15,623 7.00% 213,971 13,745 6.42%
Cash and investment securities 4.08% 89,484 5,167 5.77% 118,861 8,232 6.93% 96,225 6,545 6.80%
Tax exempt securities 7.94% 59,367 4,621 7.78% 54,702 4,297 7.86% 49,569 3,674 7.41%
----------------- ------------------ -------------------
Total interest-earning assets 6.65% $665,106 $46,599 7.01% $581,765 $43,547 7.49% $504,573 $35,407 7.02%
----------------- ------------------ -------------------
Non-interest-earning assets 46,364 37,021 21,726
-------- -------- --------
Total assets $711,470 $618,786 $526,299
-------- -------- --------
Interest-bearing liabilities:
Deposits 3.33% $413,705 $17,450 4.22% $343,318 $15,866 4.62% $280,598 $11,676 4.16%
FHLB advances and other borrowings 5.27% 183,883 9,781 5.32% 176,867 9,815 5.55% 156,488 7,996 5.11%
----------------- ------------------ ---------------------------
Total interest-bearing
liabilities 3.90% $597,588 $27,231 4.56% $520,185 $25,681 4.94% $437,086 $19,672 4.50%
----------------- ------------------ ---------------------------
Non-interest-bearing liabilities 26,764 22,102 6,349
-------- -------- --------
Total liabilities 624,352 542,287 443,435
-------- -------- --------
Stockholder's equity 87,118 76,499 82,864
-------- -------- --------
Total liabilities and
stockholders' equity $711,470 $618,786 $526,299
-------- -------- --------
Net interest income 19,368 17,866 15,735
Less tax equivalent adjustments (1,571) (1,461) (1,249)
------- ------- -------
Net interest income $17,797 $16,405 $14,486
------- ------- -------
Interest rate spread 2.75% 2.45% 2.55% 2.52%
------ ------ ------
Net yield on interest-earning
assets 2.91% 3.07% 3.12%
------ ------ ------
Ratio of average interest-earning
assets to average interest-bearing
liabilities 111.30% 111.84% 115.44%
------ ------ ------
(1) Non-accrual loans and loan fees have been included and are considered
immaterial to the analysis herein.
12
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 and is
presented on a tax-equivalent basis. 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,
--------------------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
---------------------------------------- --------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- --------------------------------------
Volume Rate Rate/Volume Net Volume Rate Rate/Volume Net
---------------------------------------- --------------------------------------
(Dollars in Thousands)
Interest Income:
Loans receivable $ 4,433 $ (507) $ (146) $ 3,780 $ 3,169 $ 613 $ 170 $ 3,952
Mortgage-backed securities 3,835 (1,463) (359) 2,013 598 1,226 53 1,878
Cash and investment securities (2,035) (1,369) 338 (3,065) 1,540 119 28 1,687
Tax exempt securities 366 (39) (3) 324 380 220 23 623
---------------------------------------- --------------------------------------
Total interest-earning assets $ 6,599 $(3,377) $ (170) $ 3,052 $ 5,688 $ 2,178 $ 274 $ 8,140
---------------------------------------- --------------------------------------
Interest expense:
Deposits $ 3,253 $(1,384) $ (284) $ 1,585 $ 2,610 $ 1,291 $ 289 $ 4,190
FHLB advances and other borrowings 389 (408) (16) (35) 1,041 688 90 1,819
---------------------------------------- --------------------------------------
Total interest-bearing liabilities $ 3,642 $(1,792) $ (300) $ 1,550 $ 3,651 $ 1,980 $ 378 $ 6,009
---------------------------------------- --------------------------------------
Net change in interest income $ 2,957 $(1,585) $ 130 $ 1,502 $ 2,037 $ 198 $ (104) $ 2,131
---------------------------------------- --------------------------------------
Net Income
The Company reported net income of $3.7 million, $5.2 million and $5.3 million
for the years ended December 31, 2001, 2000 and 1999, respectively. The $1.5
million decrease in net income for the year ended December 31, 2001 compared to
December 2000 was due to a $3.5 million increase in operating expenses and to
fourth quarter charges aggregating $1.0 million before tax, resulting from the
sale and write downs on the carrying values of certain assets and a provision
for loan losses, offset by an increase in net interest income of $1.0 million.
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. In 2000
the Company opened five banking offices which were acquired in two branch
acquisition transactions. 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.
Net Interest Income
Net interest income increased $1.0 million, or 6.4%, to $16.9 million for the
year ended December 31, 2001 from $15.9 million in 2000. The increase was the
result of a $2.9 million increase in interest income offset by increases of $1.5
million and $367,000 in interest expense and the provision for loan losses,
respectively.
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.
Detailed changes for the year ended December 31, 2001 and 2000 are contained in
the Average Balance Sheet and Rate Volume Analysis on pages 12 and 13.
Interest Income
Total interest income amounted to $45.0 million for the year ended December 31,
2001 compared to $42.1 million in 2000. The increase in 2001 of $2.9 million, or
7.0%, over 2000 was primarily due to an increase of $83.3 million in the average
balance of interest-earning assets partially offset by a decrease in the average
yield of 48 basis points (with 100 basis points being equal to 1%). The increase
in average balances was due to loan growth during the year while the decrease in
yield reflects effects of the interest rate environment and the multiple federal
reserve easings during 2001.
13
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 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 47 basis points. The increase in average balances was due to the investing of
cash received in the branch transactions, 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.
Interest Expense
Total interest expense increased by $1.5 million or 6.0% for the year ended
December 31, 2001 compared to 2000. The increase was primarily attributable to
an increase of $1.6 million in interest on deposits. The effect of the increase
in the average balance of deposits of $70.4 million was partially offset by a
decrease of 40 basis points in the average rate paid.
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 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 Federal Home Loan Bank ("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.
Provision for Loan Losses
The Company recorded a provision for loan losses of $847,000 in 2001, $480,000
in 2000 and $240,000 in 1999. 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 2001 due mainly to the addition of
$300,000 to the provision in the fourth quarter as a result of a review of the
allocation of the allowance for loan losses by loan category. See "Overview".
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, 2001, 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, 2001 was $2.3 million as compared
to $2.1 million for 2000. Despite realizing losses and recording writedowns
aggregating $669,000 in the fourth quarter of 2001, other income increased
$168,000 due to increased revenues generated by TGH Securities. Trading revenues
were $1.7 million for the year ended December 31, 2001 versus $705,000 for the
same prior year-end period. TGH Securities commenced operations in May 2000.
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 Expenses
For the year ended December 31, 2001, other expenses increased $3.5 million, or
30.6%, to $14.9 million as compared to $11.4 million in 2000. The increase was
due to the building of the Bank's infrastructure in the areas of credit
administration, training, electronic banking and business development, the
operations of TGH Securities and
14
the branch acquisitions. Accordingly, salaries and employee benefits, occupancy
and equipment costs, other expenses and the amortization of the excess of cost
over fair value of net assets acquired increased $1.7 million, $714,000,
$595,000, and $465,000, respectively, over the same prior year-end period. The
majority of such expense was not reflected for a full year in the prior year
period. In addition, salary and employee benefits and other expenses for TGH
Securities are directly related to the trading revenues it generates.
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 are primarily attributable to the branch acquisitions, the
addition of personnel in commercial lending and the personnel and operations at
TGH Securities.
Income Taxes
Income tax expense for the years ended December 31, 2001, 2000 and 1999, was
$652,000 or 15% of pre-tax income, $1.4 million or 22% of pre-tax income and
$1.6 million, or 23% of pre-tax income, respectively. The decrease in the
effective tax rate in 2001 was due to the fourth quarter charges discussed above
resulting in less taxable income.
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, 2001, 2000, and 1999, the
Company originated loans in the amounts of $114.3 million, $82.6 million, and
$45.8 million, respectively. The Company also purchases loans and
mortgage-backed securities to reduce liquidity not otherwise required for local
loan demand. For the years ended December 31, 2001, 2000 and 1999 purchases of
loans and mortgage-backed securities totaled $195.4 million, $102.0 million, and
$67.0 million, respectively. 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.
The Company utilizes FHLB advances to leverage its balance sheet as deemed
necessary. 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'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, 2001, cash and cash equivalents totaled $22.7
million.
The Company anticipates that it will have sufficient funds available to meet its
current commitments. As of December 31, 2001, the Company had $33.0 million in
commitments to fund loans. Certificates of deposit, which were scheduled to
mature in one year or less, as of December 31, 2001, totaled $169.3 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 7.6%, 7.6%
and 18.2%, respectively, at December 31, 2001, 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, 2001. See Note
12 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.
15
Selected Consolidated Financial Data and Other Data
(Dollars in thousands, except per share data)
2001 2000 1999 1998 1997
---------------------------------------------------------------
Income Statement Data:
Interest income $ 45,028 $ 42,086 $ 34,158 $ 23,682 $ 20,582
Interest expense 27,231 25,681 19,672 12,933 11,002
Net interest income 17,797 16,405 14,486 10,749 9,580
Provision for loan losses 847 480 240 270 120
Non-interest income 2,300 2,132 951 415 2,808
Non-interest expense 14,910 11,421 8,221 7,075 6,824
Income before income taxes 4,340 6,636 6,976 3,819 5,444
Net income 3,688 5,201 5,348 2,350 3,354
Balance Sheet Data:
Total assets 720,408 700,180 554,759 492,039 276,650
Loans (net) 259,220 219,360 161,158 136,466 97,435
Mortgage-backed securities available for sale 299,216 258,870 204,706 229,883 111,486
Investment securities held to maturity 63,824 - - 54,129 34,529
Investment securities available for sale 16,078 128,198 115,463 20,274 3,698
Deposits 431,583 406,684 292,619 276,390 230,558
FHLB advances 176,884 171,884 176,884 106,884 7,884
Stockholders' equity 85,455 83,058 74,660 100,229 28,470
Per Share Data:
Basic earnings per share (1) 0.58 0.76 0.73 0.17 NM
Diluted earnings per share (1) 0.57 0.75 0.72 0.16 NM
Cash dividends per share (1) 0.29 0.25 0.21 0.05 NM
Tangible book value per share (2) 11.77 10.63 9.60 11.14 NM
Selected Ratios: (3)
Performance Ratios
Return on average assets 0.52% 0.84% 1.02% .65% 1.18%
Return on average equity 4.23 6.79 6.45 3.63 12.41
Stockholders' equity to assets 11.86 11.86 13.46 20.37 10.27
Net interest margin (4) 2.91 3.07 3.12 3.19 3.50
Interest rate spread (4) 2.45 2.55 2.52 2.43 3.14
Asset Quality Ratios
Non-performing loans to total loans (5) 1.23 0.08 0.14 0.28 0.74
Non-performing assets to total assets (5) 0.45 0.03 0.07 0.09 0.30
Allowance for loan losses as a percentage 79.00 989.00 553.00 264.00 109.36
of non-performing loans
Allowance for loan losses as a percentage 1.05 0.91 0.85 0.94 0.77
of total average loans at end of period
Net charge-offs (recoveries) as a percentage .01 0.02 0.03 0.01 (.08)
of average loans
Banking Offices 12 11 6 6 6
(1) There were no shares outstanding until July 1998.
(2) Tangible book value per share represents stockholders' equity less
intangible assets divided by the number of share issued and outstanding.
(3) With the exception of end of period ratios, all ratios are based on average
monthly balances during indicated periods.
(4) 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.
(5) 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.
STOCK MARKET INFORMATION
2001 2002
-------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------
High 9.81 9.65 10.40 9.90 7.06 7.06 8.13 8.00
Low 7.94 9.20 8.10 9.01 6.25 6.06 7.06 7.56
16
Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Per Share Data)
December 31,
ASSETS 2001 2000
----------------------
Cash on hand and in banks $ 3,909 $ 4,132
Interest-bearing deposits 18,814 16,188
----------------------
Total cash and cash equivalents 22,723 20,320
Investments held to maturity (approximate fair value $62,558) 63,824
Investments available for sale at fair value
(amortized cost - 2001, $16,654; 2000, $134,858) 16,078 128,198
Mortgage-backed securities available for sale
at fair value (amortized cost - 2001, $295,998; 2000, $258,297) 299,216 258,870
Trading securities 14,261 28,034
Loans receivable (net of allowance for loan losses - 2001, $2,511; 2000, $1,682) 259,220 215,832
Loans held for sale 3,528
Accrued interest receivable 4,056 4,711
Federal Home Loan Bank stock - at cost 8,844 8,594
Real estate acquired through foreclosure - net 81 47
Office properties and equipment - net 6,340 6,920
Prepaid expenses and other assets 4,240 2,243
Cash surrender value of life insurance 12,563 12,066
Excess of cost over fair value of net assets acquired 7,680 7,419
Prepaid income taxes 538
Deferred income taxes 744 3,398
----------------------
TOTAL ASSETS $ 720,408 $ 700,180
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 431,583 $ 406,684
FHLB advances 176,884 171,884
Payable to brokers and dealers 14,109 27,879
Other borrowings 1,000 1,750
Accrued interest payable 918 982
Advances from borrowers for taxes and insurance 2,571 2,534
Accounts payable and accrued expenses 7,360 4,871
Dividends payable 528 498
Accrued income taxes 40
----------------------
Total liabilities 634,953 617,122
----------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, no par value, 10,000,000 shares authorized,
none issued in 2001 or 2000
Common stock, $.10 par value, 40,000,000 shares authorized, 8,999,989 shares
issued and 6,607,955 outstanding in 2001; 8,999,989 issued and 7,118,161 shares
outstanding in 2000 900 900
Additional paid-in capital 92,889 93,330
Common stock acquired by stock benefit plans (6,383) (7,261)
Treasury stock at cost, 2,392,034 shares at December 31, 2001
and 1,881,828 shares at December 31, 2000 (21,626) (16,645)
Accumulated other comprehensive gain (loss) 1,286 (4,015)
Retained earnings - partially restricted 18,389 16,749
----------------------
Total stockholders' equity 85,455 83,058
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 720,408 $ 700,180
----------------------
See notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Year Ended December 31,
2001 2000 1999
--------------------------------
INTEREST INCOME:
Interest on loans $ 19,175 $ 15,395 $ 11,443
Interest on mortgage-backed securities 17,636 15,623 13,745
Interest on investments:
Taxable 4,533 7,450 6,024
Tax-exempt 3,051 2,836 2,424
Dividends 633 782 522
--------------------------------
Total interest income 45,028 42,086 34,158
--------------------------------
INTEREST EXPENSE:
Interest on deposits 17,450 15,866 11,676
Interest on FHLB advances and other borrowings 9,781 9,815 7,996
--------------------------------
Total interest expense 27,231 25,681 19,672
--------------------------------
NET INTEREST INCOME 17,797 16,405 14,486
PROVISION FOR LOAN LOSSES 847 480 240
--------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,950 15,925 14,246
--------------------------------
OTHER INCOME:
Service charges and other fees 1,006 549 355
Trading revenues from brokerage operations 1,748 705
Loss on small business investment company investments (772)
Loss on sale of real estate owned (33) (2)
Gain (loss) on sale of mortgage-backed securities available for sale 249 173 (16)
(Loss) gain on sale of loans (11) 23
(Loss) gain on sale and writedown of investments available for sale (215) 333 155
Gain on sale of property and equipment 33
Rental income 203 153 151
Other income 92 196 308
--------------------------------
Total other income 2,300 2,132 951
--------------------------------
OTHER EXPENSES:
Salaries and employee benefits 7,663 5,986 4,227
Occupancy and equipment 2,335 1,621 1,168
Federal insurance premium 78 63 166
Professional fees 420 408 541
Advertising 353 342 244
Amortization of excess of cost over fair value of assets acquired 720 255
Other 3,341 2,746 1,875
--------------------------------
Total other expenses 14,910 11,421 8,221
--------------------------------
INCOME BEFORE INCOME TAXES 4,340 6,636 6,976
--------------------------------
INCOME TAXES:
Current 969 1,508 2,835
Deferred (317) (73) (1,207)
--------------------------------
Total income taxes 652 1,435 1,628
--------------------------------
NET INCOME $ 3,688 $ 5,201 $ 5,348
--------------------------------
BASIC EARNINGS PER SHARE $ 0.58 $ 0.76 $ 0.73
--------------------------------
DILUTED EARNINGS PER SHARE $ 0.57 $ 0.75 $ 0.72
--------------------------------
See notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Common Accumulated
Stock Other
Acquired Compre- Retained Total
Additional by Stock hensive Earnings - Stock
Common Paid-in Benefit Treasury Income Partially holders'
Stock Capital Plans Stock (Loss) Restricted Equity
----------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------
Comprehensive income:
Net income 3,688 3,688
Other comprehensive income, net of tax:
Net unrealized gain on investment and
mortgage-backed securities available for
sale, net of reclassification adjustment (1) 4,729 4,729
-------
Comprehensive income - - - - - - 8,417
-------
Amortization of unrealized loss on held to
maturity securities transferred from
available for sale 572 572
ESOP stock committed to be released 419 419
Excess of cost of ESOP shares committed
to be released above fair value (17) (17)
Purchase of treasury stock (5,390) (5,390)
Restricted stock plan amortization 459 459
Exercise of stock options (424) 409 (15)
Dividends paid (2,048) (2,048)
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $900 $92,889 $(6,383) $(21,626) $ 1,286 $18,389 $85,455
----------------------------------------------------------------------------------
(1) Disclosure of reclassification amount, net of tax for the years ended:
2001 2000 1999
-----------------------------
Net unrealized appreciation (depreciation) arising during the year $4,707 $8,759 $(14,157)
Net gains (losses) included in net income 22 334 92
-----------------------------
Net unrealized gain (loss) on securities $4,729 $9,093 $(14,065)
-----------------------------
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
2001 2000 1999
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 3,688 $ 5,201 $ 5,348
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 847 480 240
Depreciation 1,043 717 466
Amortization of stock benefit plans 850 821 571
Loans held for sale originated (1,687)
Amortization of:
Excess of cost over fair value of assets acquired 720 255
Net premiums (discounts) on:
Loans purchased 76 17 (23)
Investments (1,061) (1,361) (1,263)
Mortgage-backed securities 1,882 803 1,496
Loss (gain) on sale and writedown of investments 215 (333) (155)
Loss (gain) on sale of loans 11 (23)
(Gain) loss on sale of mortgage-backed securities (249) (173) 16
Gain on sale of property and equipment (33)
Loss on sale of real estate owned 33 2
Net decrease (increase) in trading securities 13,773 (28,034)
Increase in other assets (3,622) (10,104) (322)
(Decrease) increase in other liabilities (11,413) 29,103 (674)
-----------------------------------
Net cash provided by (used in) operating activities 6,760 (2,631) 4,015
-----------------------------------
INVESTING ACTIVITIES:
Principal collected on:
Mortgage-backed securities 116,124 24,441 46,475
Loans 70,314 36,557 30,246
Loans originated (114,340) (82,578) (45,854)
Loans acquired (12,365) (7,720)
Increase in loans resulting from branch acquisitions (340)
Purchases of:
Investments (2,193) (5,268) (72,492)
Mortgage-backed securities (195,452) (89,683) (59,279)
Property and equipment (1,448) (1,327) (832)
FHLB stock (250) (1,399) (3,500)
Decrease (increase) in property and equipment 985 (3,534)
resulting from branch acquisitions
Maturities and calls of investments 39,632 2,333
Proceeds from the sale of:
Loans 3,199 23
Real estate owned 54 40
Property and equipment 110
Mortgage-backed securities 39,994 17,617 28,561
Investments 17,330 833 17,108
FHLB stock 1,500
-----------------------------------
Net cash used in investing activities (26,105) (115,359) (64,914)
-----------------------------------
20
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in Thousands)
Year Ended December 31,
2001 2000 1999
-----------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 24,899 19,088 16,229
Increase in deposits resulting from branch acquisitions 94,977
Net increase in advances from borrowers for taxes and insurance 37 62 243
Net increase (decrease) in FHLB borrowings 5,000 (5,000) 70,000
Net (decrease) increase in other borrowings (750) (1,250) 3,000
Purchase of treasury stock (5,390) (4,858) (13,326)
Purchase of restricted stock plan shares (2,761)
Net proceeds from exercise of stock options 300
Cash dividends (2,048) (1,906) (1,725)
-----------------------------------
Net cash provided by financing activities 21,748 101,113 71,960
-----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,403 (16,877) 11,061
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,320 37,197 26,136
-----------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 22,723 $ 20,320 $ 37,197
-----------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid on deposits and funds borrowed $ 27,299 $ 25,534 $ 19,306
Income taxes paid 967 1,209 1,267
Noncash transfers from loans to real estate owned 47 85 101
Noncash transfer of investments held to maturity to
available for sale 54,129
Noncash transfer of investments available for sale to
held to maturity 75,446
See notes to consolidated financial statements.
21
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in Thousands, Except Per Share Data)
1. NATURE OF OPERATIONS
--------------------
The primary business of Thistle Group Holdings, Co. (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 holds investments in small business
investment companies and engages in real estate development and management, and
RoxDel Corp., which holds investments. The primary business of the Bank is
attracting customer deposits from the general public through its network of
branches and its transactional website, 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 accompanying consolidated financial
statements include the accounts of the Company, the Bank and the Company's and
the Bank's wholly-owned subsidiaries. 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 accounting principles generally accepted
in the United States of America 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
income and are determined using the specific identification method.
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.
22
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 investment 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.
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology
and Documentation Issues. SAB No. 102 expresses the SEC staff's views on the
development, documentation, and application of a systematic methodology for
determining the allowance for loan losses in accordance with accounting
principles generally accepted in the United States of America. Also in July
2001, the federal banking agencies issued guidance on this topic through the
Federal Financial Institutions Examination Council interagency guidance, Policy
Statement on Allowance for Loan and Lease Losses Methodologies and Documentation
for Banks and Savings Institutions. In Management's opinion, the Company's
methodology and documentation of the allowance for loan losses meets the
guidance issued.
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. The amounts ultimately
recoverable from the sale of real estate acquired through foreclosure could
differ materially from the amounts used in arriving at the net carrying value of
the assets at time of foreclosure because of future market factors beyond the
control of the Company.
Prepaid Expenses and Other Assets - Included in prepaid expenses and other
assets are certain investments in small business investment companies which are
held by a service corporation of the Bank. During the fourth quarter of 2001, it
was determined that an other-than-temporary impairment existed and, as such,
these investments were written down to fair value.
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, 2001, 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 using the interest method.
23
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 Principals 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 intrinsic value
method and has not recognized compensation expense under this method.
In March 2000, 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.
Since the issuance of FIN No. 44, the FASB staff has received a number of
questions related to accounting for stock compensation under APB No. 25 and FIN
No. 44. The Emerging Issues Task Force ("EITF") in EITF 00-23 has reached
consensuses on a number of questions, although some issues and questions are
still being considered. The Company monitors the status of EITF 00-23.
Earnings Per Share - Basic earnings per share for 2001, 2000 and 1999 is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share for 2001, 2000 and 1999 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, 2001, 2000 and 1999 are as follows:
December 31,
2001 2000 1999
----------------------------------
Average common shares outstanding - basic 6,382,478 6,866,018 7,359,241
Increase in shares due to dilutive options 34,434 34,431 90,626
----------------------------------
Adjusted shares outstanding - diluted 6,416,912 6,900,449 7,449,867
----------------------------------
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 - Under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted, the
Company is required to 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. Currently, the Company has no embedded derivatives that
require bifurcation. The Company does not employ hedging activities that require
designation as either fair value or cash flow hedges, or hedges of a net
investment in a foreign operation.
Recent Accounting Pronouncements - In June 2001, the FASB issued two new
pronouncements: SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 is effective as follows: (a) use of
the pooling-of-interest method is prohibited for business combinations initiated
after June 30,
24
2001; and (b) the provisions of SFAS No. 141 also apply to all business
combinations accounted for by the purchase method that are completed after June
30, 2001. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those assets
were initially recognized. However, SFAS No. 142 does not change the accounting
prescribed for certain acquisitions by banking and thrift institutions,
resulting in continued amortization of the excess of cost over fair value of net
assets acquired under SFAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions. In October 2001, the FASB decided to undertake a
limited scope project to reconsider part of the guidance in SFAS No. 72. In
particular, the FASB decided to reconsider the provisions of that statement that
require recognition and amortization of an unidentifiable intangible asset-an
asset that is sometimes referred to in practice as "SFAS 72 goodwill". At
December 31, 2001, the Company's "SFAS 72 goodwill" amounted to $7,680 and is
subject to amortization. The FASB has commenced its deliberations on this
limited scope project and expects to issue a final statement on this project in
the fourth quarter of 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of the APB No. 30, Reporting of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. This statement is effective for fiscal years
beginning after December 15, 2001. The adoption of this statement did not have
an impact on the Company's financial position or results of operations when
adopted.
Reclassifications - Certain items in the 2000 and 1999 consolidated financial
statements have been reclassified to conform with the presentation in the 2001
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
excess of cost over fair value of net assets acquired was $7,700 for these two
transactions and is being amortized over twelve years. At December 31, 2000, the
allocation of purchase price was preliminary pending final valuation of the fair
market value of the assets acquired and the liabilities assumed. The allocation
of purchase price was completed during the quarter ended March 31, 2001. An
adjustment was recorded increasing the excess of cost over fair value of assets
acquired and decreasing office properties and equipment for $985.
4. INVESTMENTS HELD TO MATURITY
----------------------------
On May 31, 2001, the Company reclassified $75,446 of certain U.S. government
agency securities, FHLB and FHLMC bonds and municipal bonds from available for
sale to held to maturity as it is the intent of the Company to hold such
securities to maturity. The transfer was recorded at fair value. At December 31,
2001, $457 was included as a component of other comprehensive income
representing the unamortized holding loss that resulted from the transfer.
25
Investments held to maturity at December 31, 2001 consisted of the following:
Held to Maturity
December 31, 2001
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------
FHLB and FHLMC Bonds -
More than 10 years $15,201 $ 793 $14,408
Municipal bonds - 5 to 10 years 777 $ 12 789
More than 10 years 47,846 294 779 47,361
----------------------------------------------
Total $63,824 $ 306 $ 1,572 $62,558
----------------------------------------------
5. INVESTMENTS AVAILABLE FOR SALE
------------------------------
A comparison of cost and approximate fair value of investments, by maturity, is
as follows:
Available for Sale
December 31, 2001
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------
Mutual funds $ 1,530 $ 1,530
Capital trust securities 9,077 $1,037 8,040
Equity investments 4,528 $467 6 4,989
Other 1,519 1,519
----------------------------------------------
Total $16,654 $467 $1,043 $16,078
----------------------------------------------
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
----------------------------------------------
Proceeds from the sale of investments available for sale during the year ended
December 31, 2001 were $17,330 resulting in gross gains of $221 and gross losses
of $311. 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.
During the year ended December 31, 2001, the Company recognized an
other-than-temporary impairment on certain investment securities resulting in a
charge to operations of $125.
26
6. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
---------------------------------------------
Mortgage-backed securities available for sale are summarized as follows:
Available for Sale
December 31, 2001
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------
GNMA pass-through certificates $106,452 $2,385 $108,837
FNMA pass-through certificates 114,634 768 $293 115,109
FHLMC pass-through certificates 66,417 554 378 66,593
FHLMC real estate mortgage
investment conduits 4,591 182 4,773
FHLMC collateralized mortgage
obligations 3,904 3,904
----------------------------------------------
Total $295,998 $3,889 $671 $299,216
----------------------------------------------
Available for Sale
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
----------------------------------------------
Proceeds from the sale of mortgage-backed securities during the year ended
December 31, 2001 were $39,994, resulting in a gain of $249. 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.
27
7. LOANS RECEIVABLE
----------------
Loans receivable consist of the following:
December 31,
2001 2000
----------------------
Mortgage loans:
1-4 Family residential $ 125,504 $ 121,230
Commercial real estate 62,532 54,763
Home equity lines of credit and improvement loans 20,923 12,999
Commercial loans 28,866 14,731
Construction loans - net 23,677 14,210
Loans on savings accounts 637 726
Consumer loans 879 152
----------------------
Total loans 263,018 218,811
Plus unamortized premiums 267 347
Less:
Net discounts on loans purchased and
loans acquired through merger (13) (15)
Deferred loan fees (1,541) (1,629)
Allowance for loan losses (2,511) (1,682)
----------------------
Total $ 259,220 $ 215,832
----------------------
The Company originates loans to customers in its local market area, principally
Philadelphia, Pennsylvania, its four adjoining counties and Wilmington,
Delaware. 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 $62,532 and $54,763
at December 31, 2001 and 2000, respectively. Of the commercial real estate
loans, as of December 31, 2001 and 2000, $41,597 and $40,253 are collateralized
by multi-family residential property; $20,935 and $14,510 by business property,
respectively.
At December 31, 2001, 2000 and 1999, the Company was servicing loans for others
amounting to $15,624, $8,745 and $1,706, 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 $296, $168 and $124 at December
31, 2001, 2000 and 1999, respectively. The Company has not recorded mortgage
servicing rights as an asset as Management considers the right to service these
loans immaterial to the financial statements.
Following is a summary of changes in the allowance for loan losses:
Year Ended December 31,
2001 2000 1999
-------------------------------------------
Balance, beginning $ 1,682 $ 1,234 $ 1,036
Provision 847 480 240
Charge-offs (18) (32) (42)
-------------------------------------------
Balance, ending $ 2,511 $ 1,682 $ 1,234
-------------------------------------------
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, 2001 and 2000, 100% of the
impaired loan balance was measured for impairment based on the fair value of the
loans'
28
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,
2001 2000
------------------
Impaired loans without a valuation allowance $ - $ -
Impaired loans with a valuation allowance $2,830 -
------------------
Total impaired loans $2,830 -
------------------
Valuation allowance related to impaired loans $ 707 $ -
------------------
Year Ended December 31,
2001 2000 1999
----------------------------
Average impaired loans $2,830 $ 303 $1,246
Interest income recognized on impaired loans - 27 100
No cash basis interest income was recognized in 2001, 2000 or 1999 for the
impaired loans included above. Nonaccrual loans for which interest has been
fully reserved totaled approximately $3,178 and $170 at December 31, 2001 and
2000, respectively. There were no accruing loans 90 days or more delinquent or
troubled debt restructurings. No additional funds are committed to be advanced
in connection with impaired loans.
The Company originates and purchases fixed and adjustable interest rate loans
and mortgage-backed securities. At December 31, 2001 fixed rate loans and
mortgage-backed securities were approximately $435,200, and adjustable interest
rate loans and mortgage-backed securities were approximately $123,800.
As of December 31, 2001, the Company had approximately $33,000 in outstanding
loan commitments with interest rates ranging from 4.25% to 8.50%. 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
$1,099, $1,088 and $1,167 at December 31, 2001, 2000 and 1999, respectively.
Originations to these persons were $95, $28 and $52 for the years ended December
31, 2001, 2000 and 1999, respectively. Loan repayments for the years ended
December 31, 2001, 2000 and 1999 were $84, $107 and $757, respectively.
8. OFFICE PROPERTIES AND EQUIPMENT
-------------------------------
Office properties and equipment are summarized by major classification as
follows:
December 31,
2001 2000
-----------------------
Land $ 1,668 $ 1,628
Buildings 4,188 4,882
Furniture and equipment 5,596 4,624
Leasehold improvements 439 316
-----------------------
Total 11,891 11,450
Accumulated depreciation and amortization (5,551) (4,530)
-----------------------
Net $ 6,340 $ 6,920
-----------------------
29
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, 2001 are as follows:
December 31:
2002 $ 212
2003 188
2004 134
2005 125
2006 112
Thereafter 547
------
Total minimum future rental payments $1,318
------
The leases contained options to extend for periods from five to fourteen years.
The cost of such rentals is not included in the above. Leasehold expense was
approximately $229, $94 and $9 for the years ended December 31, 2001, 2000 and
1999, respectively.
9. DEPOSITS
--------
Deposits consist of the following major classifications:
December 31,
2001 2000
----------------------------------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
----------------------------------------
NOW accounts and transaction checking $ 47,372 1.08% $ 41,181 1.11%
Money Market Demand accounts 40,029 2.17 26,582 4.15
Passbook accounts 109,257 2.48 103,209 3.22
Certificate accounts 234,925 4.38 235,712 6.07
----------------------------------------
Total $431,583 3.33% $406,684 4.72%
----------------------------------------
At December 31, 2001 and 2000, the Company had deposits of $100 or greater
totaling approximately $72,450 and $57,214, 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,
2001 2000
----------------------------
1 year or less $169,258 $194,289
1 year - 3 years 41,022 21,489
3 years - 5 years 24,645 19,934
----------------------------
Total $234,925 $235,712
----------------------------
Interest expense on deposits is as follows:
Year Ended December 31,
2001 2000 1999
--------------------------------
NOW and MMDA $ 1,620 $ 996 $ 661
Passbook 2,982 3,215 3,238
Certificates 12,875 11,687 7,800
Early withdrawal penalties (27) (32) (23)
--------------------------------
Total $ 17,450 $ 15,866 $ 11,676
--------------------------------
30
10. FHLB ADVANCES AND OTHER BORROWINGS
----------------------------------
A summary of advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh
follows:
December 31,
2001 2000
------------------------------------------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
------------------------------------------------
Advances from FHLB
due after December 31, 2006 $176,884 5.32% $171,884 5.30%
------------------------------------------------
The advances are collateralized under a blanket collateral lien agreement.
Included in the table above at December 31, 2001 and 2000 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. At December 31,
2001, $175,000 are convertible advances of which $85,000 are convertible
quarterly at the option of the FHLB.
The Company has other borrowings of $1,000 and $1,750 at December 31, 2001 and
2000 respectively, from an unaffiliated lender. The borrowing carries a variable
interest rate which was 5.0% at December 31, 2001 and is due in December 2002.
11. INCOME TAXES
------------
The Company and its subsidiaries file a consolidated federal income tax return.
The Company uses the specific charge-off method for computing reserves for bad
debts. The bad debt deduction allowable under this method is available to large
banks with assets greater than $500 million. Generally, this method allows the
Company to deduct an annual addition to the reserve for bad debts equal to its
net charge-offs. Retained earnings at December 31, 2001 and 2000 include
approximately $5,400 in allocations of earnings for bad debt deductions of the
Bank for which no income tax has been provided.
Income tax expense consists of the following components:
Year Ended December 31: Federal State Total
-------------------------------
2001 $ 628 $24 $ 652
2000 1,435 1,435
1999 1,628 1,628
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,
2001 2000 1999
---------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------
Tax at federal tax rate $1,476 34.0 % $2,257 34.0 % $2,371 34.0 %
Tax-exempt income (880) (20.3) (864) (13.0) (727) (10.4)
State income tax expense,
net of federal income tax 15 0.3
Other 41 1.0 42 0.6 (16) (0.3)
---------------------------------------------------------
Total $ 652 15.0 % $1,435 21.6 % $1,628 23.3 %
---------------------------------------------------------
A valuation allowance against deferred tax assets is not considered necessary
because it is more likely than not the deferred tax asset will be fully
realized.
31
Items that give rise to significant portions of the deferred tax accounts are as
follows:
December 31,
2001 2000
------------------
Deferred tax assets:
Unrealized loss on investments and mortgage-backed securities $ - $ 2,072
Deferred loan fees 524 552
Allowance for loan losses 869 517
Reserve for uncollected interest 99 14
Supplemental pension and other retirement accruals 660 616
------------------
2,152 3,771
------------------
Deferred tax liabilities:
Unrealized gain on investments and mortgage-backed securities (899) -
Office properties and equipment (138) (137)
Other (371) (236)
------------------
(1,408) (373)
------------------
Total $ 744 $ 3,398
------------------
12. REGULATORY CAPITAL REQUIREMENTS
-------------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional, discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
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, 2001,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, 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.
Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------
At December 31, 2001:
Tangible $51,892 7.64% $10,183 1.5% N/A N/A
Core (Leverage) 51,892 7.64 27,156 4.0 $33,943 5.0%
Tier 1 risk-based 51,892 17.34 N/A N/A 40,732 6.0
Total risk-based 54,403 18.18 23,940 8.0 29,925 10.0
Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes 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
32
Capital at December 31, 2001 for financial statement purposes differs from
tangible, core (leverage), and Tier 1 risk-based capital amounts by $2,761
representing the exclusion of unrealized gains on securities available for sale,
the exclusion of goodwill, intangible and other disallowed assets of $7,793 and
$23,009 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, 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.
The Bank has 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.
Federal banking regulations place certain restrictions on dividends paid and
loans or advances made by the Bank to the Company. The total amount of
dividends, which may be paid at any date, is generally limited to the retained
earnings of the Bank, and loans or advances are limited to 10 percent of the
Bank's capital stock and surplus on a secured basis. In addition, dividends paid
by the Bank to the Company would be prohibited if the effect thereof would cause
the Bank's capital to be reduced below applicable minimum capital requirements.
In 2001, the Bank paid dividends to the Company of $2,250.
13. PENSION AND PROFIT-SHARING PLANS
--------------------------------
The Company had a defined benefit pension plan which covered all eligible
employees. 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
curtailment did not result in any additional funding or expenses for the
Company. Net periodic pension cost for the year ended December 31, 1999 was
$121.
The Company also maintains a profit-sharing plan for eligible employees.
Profit-sharing contributions are at the discretion of the Board of Directors.
Contributions to the profit-sharing plan were suspended in 1998. 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 $75 and $60
for the years ended December 31, 2001 and 2000, respectively.
14. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
-------------------------------------
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's loan 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, 2001, 146,650 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 $390, $303 and $350 for the years ended December 31, 2001, 2000
and 1999 respectively.
33
15. OTHER EMPLOYEE BENEFITS
-----------------------
Stock Option Plans - 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 638,985 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.
At December 31, 2001, options outstanding under a prior plan were 5,551 with an
exercise price of $2.07.
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, 1999 222,064 $1.80 - $2.07 $1.94 60 months
-------------------------------------------------------------
Granted 601,985 $7.00 - $8.94 $8.89
Exercised 155,441 $1.80 - $2.07 $1.93
-------------------------------------------------------------
Outstanding at December 31, 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
-------------------------------------------------------------
Granted 1,500 $9.55 $9.55
Exercised 62,402 $1.80 - $6.25 $2.02
-------------------------------------------------------------
Outstanding at December 31, 2001 643,206 $2.07 - $9.55 $8.72 96 months
-------------------------------------------------------------
Exercisable at December 31, 2001 622,647 $2.07 - $9.55 $8.77
-------------------------------------------------------------
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,
2001 2000 1999
------------------------
Net income:
As reported $3,688 $5,201 $5,348
Pro forma 3,684 5,129 4,667
Net income per common and common equivalent share:
Earnings per common share
As reported $ 0.57 $ 0.75 $ 0.72
Pro forma 0.57 0.74 0.63
Weighted average fair value of
options granted during the period $ 2.69 $ 2.04 $ 1.77
34
The Black Scholes 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:
December 31,
2001 2000 1999
--------------------------------
Risk free interest rate of return 4.90% 5.15% 6.50%
Expected option life (months) 120 120 120
Expected volatility 26.07% 21.83% 27.11%
Expected dividends 3.20% 3.00% 3.40%
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, 2001 and 2000, the Company had outstanding awards aggregating 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, 2001 and
2000, the deferred cost of the unearned RSP shares totaled $1,565, and $2,024,
respectively, 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, 2001, 2000
and 1999, the Company recognized compensation and employee benefit expense of
$460, $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 $69,
$207 and $197 for the years ended December 31, 2001, 2000 and 1999,
respectively.
16. 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 that 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.
17. 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.
35
December 31,
2001 2000
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------
Assets:
Cash and cash equivalents $ 22,723 $ 22,723 $ 20,320 $ 20,320
Investments held to maturity 63,824 62,558
Investments available for sale 16,078 16,078 128,198 128,198
Mortgage-backed securities available for sale 299,216 299,216 258,870
258,870
Trading securities 14,261 14,261 28,034 28,034
Loans receivable 259,220 263,526 215,832 215,857
Loans held for sale 3,528 3,528
Federal Home Loan Bank stock 8,844 8,844 8,594 8,594
Liabilities:
NOW, MMDA and Passbook accounts 196,658 196,658 170,972 170,972
Certificate accounts 234,925 240,825 235,712 236,486
FHLB Advances 176,884 185,579 171,884 171,771
Other borrowings 1,000 1,000 1,750 1,750
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 - 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 is estimated using rates currently offered
for deposits and advances of similar maturities.
FHLB Advances - The fair value of FHLB Advances is estimated using market value
indications received from the Federal Home Loan Bank of Pittsburgh.
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, 2001 and 2000. 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.
36
18. PARENT COMPANY FINANCIAL INFORMATION
------------------------------------
Condensed financial statements of Thistle Group Holdings, Co. are as follows:
Condensed Statements of Financial Condition
December 31,
2001 2000
----------------------
Assets
Cash and cash equivalents $ 1,324 $ 1,002
Investments available-for-sale 3,623 4,102
Investment in subsidiaries 82,344 75,043
Loans receivable 6,383 7,262
Prepaid expenses and other assets 237 233
----------------------
Total assets $93,911 $87,642
----------------------
Liabilities and Stockholders' Equity
Other borrowings $ 7,000 $ 3,750
Dividends payable 528 498
Other liabilities 928 336
----------------------
Total liabilities 8,456 4,584
Stockholders' equity 85,455 83,058
Total liabilities and stockholders' equity $93,911 $87,642
----------------------
Condensed Statements of Income
Year Ended December 31,
2001 2000 1999
------------------------
Income:
Interest on loans $ 512 $ 615 $ 521
Interest and dividends on investments 118 202 558
Gain on sale of investments 195 262
Other miscellaneous income 178 8
------------------------
Total income 1,003 825 1,341
------------------------
Interest on other borrowings 332 275 78
------------------------
Operating expenses 351 354 150
------------------------
Income before income taxes and
equity in undistributed income of subsidiaries 320 196 1,113
Income tax expense 87 80 347
------------------------
Income before equity in undistributed
income of subsidiaries 233 116 766
Equity in undistributed income
of subsidiaries 3,455 5,085 4,582
------------------------
Net income $3,688 $5,201 $5,348
------------------------
37
Condensed Statements of Cash Flows
Year Ended December 31,
2001 2000 1999
--------------------------------
Operating activities:
Net income $ 3,688 $ 5,201 $ 5,348
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of subsidiary (3,455) (5,085) (4,582)
Gain on sale of investments (195) (262)
(Increase) decrease in other assets (60) (266) 809
Increase in other liabilities 427 139 216
--------------------------------
Net cash provided by (used in) operating activities 405 (11) 1,529
--------------------------------
Investing activities:
Purchase of investments (50) (6,600)
Decrease (increase) in loans receivable 879 937 (2,124)
Proceeds from the sale of investments 795 5,895
Dividends received from subsidiaries 2,431 3,000 4,800
--------------------------------
Net cash provided by investing activities 4,105 3,887 1,971
--------------------------------
Financing activities:
Net increase in other borrowings 3,250 750 3,000
Capital contribution to subsidiary (2,000)
Purchase of treasury stock (5,390) (4,857) (13,326)
Dividends paid (2,048) (1,906) (1,725)
Net proceeds from exercise of stock options 300
--------------------------------
Net cash used in financing activities (4,188) (8,013) (11,751)
--------------------------------
Increase (decrease) in cash 322 (4,137) (8,251)
Cash, beginning of year 1,002 5,139 13,390
--------------------------------
Cash, end of year $ 1,324 $ 1,002 $ 5,139
--------------------------------
Supplemental Disclosure -
Noncash transfer of investments to subsidiary $ 16,162
19. 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.
38
20. QUARTERLY FINANCIAL DATA (Unaudited)
-----------------------------------
Unaudited quarterly financial data for the years ended December 31, 2001 and
2000 is as follows:
2001 2000
---------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Interest income $ 11,650 $ 11,295 $ 11,186 $ 10,897 $ 9,547 $ 10,074 $ 10,926 $ 11,539
Interest expense 7,155 7,052 6,716 6,308 5,730 6,145 6,782 7,024
---------------------------------------------------------------------------------------
Net interest income 4,495 4,243 4,470 4,589 3,817 3,929 4,144 4,515
Provision for loan losses 120 120 187 420(1) 120 120 120 120
---------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,375 4,123 4,283 4,169 3,697 3,809 4,024 4,395
---------------------------------------------------------------------------------------
Non-interest income (loss) 432 876 1,210 (218)(1) 338 615 677 502
Non-interest expense 3,652 3,598 3,853 3,807 2,358 2,406 3,031 3,626
---------------------------------------------------------------------------------------
Income before taxes 1,155 1,401 1,640 144 1,677 2,018 1,670 1,271
Provision for income taxes 179 256 372 (155) 372 438 329 296
---------------------------------------------------------------------------------------
Net income $ 976 $ 1,145 $ 1,268 $ 299 $ 1,305 $ 1,580 $ 1,341 $ 975
---------------------------------------------------------------------------------------
Per share:
Earnings per share - basic $ 0.15 $ 0.17 $ 0.20 $ 0.05 $ 0.18 $ 0.23 $ 0.20 $ 0.15
Earnings per share - diluted 0.15 0.17 0.20 0.05 0.18 0.23 0.20 0.15
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.
(1) During the fourth quarter, the Company sold and realized a pre-tax net loss
on certain available for sale securities of $200,000 and recorded write
downs on the carrying values of certain other available for sale securities
and other assets totaling $469,000 on a pre-tax basis. Additionally, due to
economic conditions and changes in the Company's loan mix, a fourth quarter
review of the allocation of the allowance for loan losses by loan category
was performed resulting in a pre-tax addition to the provision of $300,000.
39
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 1, 2002
40