Management's Discussion and Analysis
of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and related notes.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes," "anticipates," "contemplates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, changes in regulatory policies, risks associated with
the effect of opening a new branch, the ability to control costs and expenses,
and general economic and 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, Thistle Group Holdings Capital Trust I, a company used to issue
trust preferred securities, and TGH Securities, a broker/dealer subsidiary. The
Bank provides a full range of banking services through its branch offices
located in the counties of Philadelphia, Chester, Montgomery and Delaware in the
Commonwealth of Pennsylvania and Wilmington, Delaware and through its
transactional web site RMBgo.com. The Bank has three subsidiaries, Ridge Service
Corporation, which is inactive, Montgomery Service Corporation, which held
investments in small business investment companies and engages in real estate
development and management, and RoxDel Corp., which holds investments.
Unless the context indicates otherwise, all references to the Company refer
collectively to the Company and the Bank.
Critical Accounting Policies
The following is a summary of those accounting policies that the Company
considers to be critical as they require management's most difficult judgments
as a result of the need to make estimates about the effects of matters that are
inherently uncertain.
Allowance for Loan Losses - The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent losses, information about specific
borrower situations and estimated collateral values, and economic conditions.
The Company's allowance review procedures consist of the following:
- - Identifying large balance loans for individual review under Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan". In general, these consist of large balance
commercial loans and commercial mortgages (Statement 114 loans).
- - Calculating the estimated fair value, using observable market prices,
discounted cash flows or the value of the underlying collateral for
Statement 114 loans which are determined to be impaired as defined by
Statement 114.
- - Classifying all non-impaired large balance loans based on credit risk
ratings and allocating an allowance for loan losses based on appropriate
factors, including recent loss history for similar loans.
- - Identifying all smaller balance homogeneous loans for evaluation
collectively under the provisions of Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies". In general, these loans
include residential mortgages, consumer loans, installment loans, smaller
balance commercial loans and mortgages and lease receivables.
- - Reviewing the results to determine the appropriate balance of the allowance
for loan losses. This review gives additional consideration to factors such
as the mix of loans in the portfolio, the balance of the allowance relative
to total loans and non-performing assets, trends in the overall risk
profile of the portfolio, trends in delinquencies and non-accrual loans and
local and national economic conditions.
10
This process involves subjective judgements and assumptions and is subject to
change based on factors that may be outside the control of the Company.
Goodwill - With the adoption of Statement of Financial Accounting Standards Nos.
142 and 147, effective January 1, 2002 the Company ceased amortization of
goodwill. The recorded goodwill is subject to impairment testing to determine
whether write-downs of the recorded balances are necessary. Such testing is
based upon a number of factors, which are based upon assumptions and management
judgements. These factors include among other things, future growth rates,
discount rates, and earnings capitalization rates.
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 or to the same extent 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 composition of its assets and liabilities. Then it considers its
business strategy, current operating environment, capital and liquidity
requirements, as well as its current performance objectives, and determines an
appropriate level of risk. The Board of Directors has adopted guidelines within
which the Company attempts to manage its interest rate risk, trying to minimize
to the extent practical its vulnerability to changes in interest rates.
The Board of Directors reviews the Company's interest rate risk exposure
quarterly and has appointed an Asset/Liability Committee made up of senior
management that is responsible for working with the Board of Directors to
establish strategies to manage interest rate risk and to evaluate the
effectiveness of these strategies. The Committee also attempts to determine the
effect that changes in interest rates will have on interest earning assets and
liabilities of the Company and whether such effects are within the limits set by
the Board of Directors.
GAP Table
Interest rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or
mature within a given period of time. The difference, or the interest rate
repricing "GAP," provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates over a period
of time. A GAP is considered positive when the amount of interest-rate sensitive
assets maturing or repricing over a specified period of time exceeds the amount
of interest-rate sensitive liabilities maturing or repricing within that period
and is considered negative when the amount of interest-rate sensitive
liabilities maturing or repricing over a specified period of time exceeds the
amount of interest-rate sensitive assets maturing or repricing within that
period. Generally, during a period of rising interest rates, a 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, 2002,
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.
11
Thistle Group Holdings, Co. and Subsidiaries
More than More than
Within Six to One Year to Three Years Over
Six Months Twelve Months Three Years to Five Years Five Years Total
-------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable $ 73,190 $ 45,998 $ 90,953 $ 58,610 $ 31,212 $ 299,963
Mortgage-backed securities 44,799 42,116 139,353 94,848 48,455 369,571
Investment securities 791 541 77,404 78,736
Interest-bearing deposits 24,660 24,660
-------------------------------------------------------------------------------
Total interest-earning assets $ 143,440 $ 88,114 $ 230,306 $ 153,999 $ 157,071 $ 772,930
===============================================================================
Interest-bearing liabilities:
Deposits $ 115,632 $ 111,512 $ 133,360 $ 79,376 $ 53,000 $ 492,880
FHLB Advances and other borrowings 150,261 45,000 25,000 5,000 1,884 227,145
-------------------------------------------------------------------------------
Total interest-bearing liabilities $ 265,893 $ 156,512 $ 158,360 $ 84,376 $ 54,884 $ 720,025
===============================================================================
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities $(122,453) $ (68,398) $ 71,946 $ 69,623 $ 102,187 $ 52,905
===============================================================================
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(122,453) $(190,851) $(118,905) $(49,282) $ 52,905
-------------------------------------------------------------------------------
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities as a
percentage of total assets (14.28%) (22.26%) (13.87%) (5.75%) 6.17%
===============================================================================
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 contain annual prepayment
assumptions ranging from 15% to 40%. Mortgage-backed securities are presented in
the period in which they amortize, reprice, or mature and contain consensus
median prepayment speeds available on Bloomberg. Checking, money market and
passbook accounts are assumed to decay at a rate of 28% per year. It should be
noted that checking, money market and passbook accounts are generally 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.
12
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, 2002. Due
to an abnormally low prevailing interest rate environment, the OTS did not
provide calculations for the minus 200 and minus 300 basis point changes in
rates. Dollar amounts are expressed in thousands.
Net Portfolio Value Net Portfolio Value as a % of Assets
-------------------------------------------------------------------------------------------
Changes in Rates Net Portfolio Basis Point
in Basis Points Dollar Amount Dollar Change Percentage Change Value Ratio Change
-------------------------------------------------------------------------------------------
300 $25,759 $(31,890) (55%) 3.37% (366)
200 40,270 (17,380) (30%) 5.13% (190)
100 52,219 (5,430) (9%) 6.49% (54)
0 57,650 7.03%
(100) 52,737 (4,912) (9%) 6.38% (65)
The calculations in the NPV table above indicate that the Bank's NPV would be
adversely affected by increases and 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 $69.4
million compared to $57.6 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 $50.6 million, or an NPV ratio of 6.36%,
compared to an NPV dollar amount of $40.3 million, or NPV ratio of 5.13%, on a
Bank only basis.
Like the GAP table, the NPV model has some shortcomings. Certain assumptions
have to be made that may or may not actually reflect how actual yields and costs
will react to market interest rates. For example, the NPV model assumes that the
makeup of the Company's interest rate sensitive assets and liabilities will
remain constant over the period being measured. Thus, although using such a
model can be instructive in providing an indication of the Company's exposure to
interest rate risk, it cannot precisely forecast the effects of a change in
market interest rates, and the results indicated by the model are likely to
differ from actual results.
Changes in Financial Condition
General - Total assets of the Company increased by $137.0 million, or 19.0%,
from $72 0.4 million at December 31, 2001 to $857.4 million at December 31,
2002. The increase is primarily attributable to growth in loans and purchases of
mortgage-backed securities funded by an increase in deposits and FHLB advances.
Cash and Investment Securities - Cash and investment securities (including
investments held to maturity and available for sale and trading securities)
increased by $17.7 million, or 15.2%, to $134.6 million at December 31, 2002
compared to $116.9 million at December 31, 2001. The increase is primarily
attributable to an increase of $29.4 million in trading securities and purchases
of investments of $6.3 million, offset by calls and sales of investments of
$22.0 million.
Mortgage-Backed Securities Available for Sale - Mortgage-backed securities
available for sale increased $70.4 million, or 23.5%, to $369.6 million at
December 31, 2002 compared to $299.2 million at December 31, 2001. The increase
was the result of purchases of $323.0 million, partially offset by repayments
and sales of $159.6 million and $93.7 million, respectively.
Loans Receivable, Net - Loans receivable increased $40.7 million, or 15.7%, to
$300.0 million at December 31, 2002 compared to $259.2 million at December 31,
2001. The increase is generally attributable to increases in commercial real
estate loans of $30.2 million, home equity loans and lines of credit of $7.6
million and construction loans of $4.8 million.
Deposits - Deposits increased by $61.3 million, or 14.2%, to $492.9 million at
December 31, 2002 from $431.6 million at December 31, 2001. This increase was
primarily attributable to increases in checking accounts of $44.2 million, money
market accounts of $4.2 million and passbook accounts of $15.4 million.
FHLB Advances - FHLB Advances increased $44.0 million or 24.9%, to $220.9
million at December 31, 2002 compared to $176.9 million at December 31, 2001.
The increase was due mainly to $39.0 million borrowed under an overnight line of
credit to fund purchases of mortgage-backed securities.
13
Payable to Brokers and Dealers - Payable to brokers and dealers increased by
$27.8 million, or 197%, to $41.9 million at December 31, 2002 from $14.1 million
at December 31, 2001. 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.
Company-Obligated Manditorily Redeemable Preferred Securities Of A Subsidiary
Trust Holding Solely Junior Subordinated Debentures Of The Company - In 2002,
the Company through a wholly-owned subsidiary trust, sold $10.0 million of
pooled floating rate capital securities with a stated value and liquidation
preference of $1,000 per share (see Note 17 to the Consolidated Financial
Statements).
Equity - At December 31, 2002, total stockholders' equity was $76.4 million, or
8.9% of total assets, compared to $85.4 million, or 11.9% of total assets, at
December 31, 2001. The $9.0 million decrease was due to $17.7 million in stock
repurchase costs and dividends paid of $1.9 million, offset by an increase in
the accumulated other income of $4.6 million and net income of $4.9 million.
Accumulated other comprehensive income increased as a result of changes in the
net unrealized gain on the available for sale securities due to fluctuations in
interest rates and the higher balances of such assets. Because of interest rate
volatility, the Company's accumulated other comprehensive income could
materially fluctuate for each interim and year-end period.
Results of Operations
Analysis of Net Interest Income - Historically, the Company's earnings have
depended primarily on its net interest income, which is the difference between
interest income earned on its loans and investments ("interest-earning assets")
and interest paid on its deposits and any borrowed funds ("interest-bearing
liabilities"). Net interest income is affected by:
o the interest rate spread - the difference between rates of interest
earned on interest-earning assets and rates paid on its
interest-bearing liabilities; and
o the aggregate amounts of its interest-earning assets and
interest-bearing liabilities.
Average Balance Sheet - The following table sets forth, at and 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.
14
At Year Ended December 31,
12/31/02 2002 2001 2000
------------------------------------------------------------------------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) 7.19% $284,879 $ 22,315 7.83% $238,164 $ 19,175 8.05% $184,915 $ 15,395 8.33%
Mortgage-backed
securities 4.63% 320,036 15,591 4.87% 278,091 17,636 6.34% 223,287 15,623 7.00%
Cash and investment
securities 2.32% 56,553 1,850 3.27% 89,484 5,167 5.77% 118,861 8,232 6.93%
Tax exempt securities 7.90% 66,006 5,017 7.60% 59,367 4,621 7.78% 54,702 4,297 7.86%
------------------- ------------------- -------------------
Total interest-earning assets 5.73% $727,474 $ 44,773 6.15% $665,106 $ 46,599 7.01% $581,765 $ 43,547 7.49%
------------------- ------------------- -------------------
Non-interest-earning
assets 32,998 46,364 37,021
-------- -------- --------
Total assets $760,472 $711,470 $618,786
======== ======== ========
Interest-bearing liabilities:
Deposits 2.44% $462,324 $ 13,393 2.90% $413,705 $ 17,450 4.22% $343,318 $ 15,866 4.62%
FHLB advances and
other borrowings 4.51% 196,697 9,969 5.07% 183,883 9,781 5.32% 176,867 9,815 5.55%
------------------- ------------------- -------------------
Total interest-bearing
liabilities 3.09% $659,021 $ 23,362 3.54% $597,588 $ 27,231 4.56% $520,185 $ 25,681 4.94%
------------------- ------------------- -------------------
Non-interest-bearing
liabilities 20,614 26,764 22,102
-------- -------- --------
Total liabilities 679,635 624,352 542,287
-------- -------- --------
Stockholder's equity 80,837 87,118 76,499
-------- -------- --------
Total liabilities and
Stockholders' equity $760,472 $711,470 $618,786
======== ======== ========
Net interest income 21,411 19,368 17,866
Less tax equivalent adjustments (1,706) (1,571) (1,461)
-------- -------- --------
Net interest income $ 19,705 $ 17,797 $ 16,405
======== ======== ========
Interest rate spread 2.64% 2.61% 2.45% 2.55%
====== ====== ======
Net yield on
interest-earning assets 2.94% 2.91% 3.07%
====== ====== ======
Ratio of average
interest-earning assets
to average
interest-bearing liabilities 110.39% 111.30% 111.84%
====== ====== ======
(1) Non-accrual loans and loan fees have been included and are considered
immaterial to the analysis herein.
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.
15
Thistle Group Holdings, Co. and Subsidiaries
Year ended December 31,
2002 vs. 2001 2001 vs. 2000
-------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest Income:
Loans receivable $ 3,761 $ (519) $ (102) $ 3,140 $ 4,433 $ (507) $ (146) $ 3,780
Mortgage-backed securities 2,660 (4,088) (617) (2,045) 3,835 (1,463) (359) 2,013
Cash and investment securities (1,902) (2,240) 824 (3,318) (2,035) (1,369) 338 (3,065)
Tax exempt securities 517 (109) (12) 396 366 (39) (3) 324
-------------------------------------------------------------------------------------
Total interest-earning assets $ 5,036 $(6,956) $ 93 $(1,827) $ 6,599 $(3,377) $ (170) $ 3,052
======================================================================================
Interest expense:
Deposits $ 2,051 $(5,466) $ (642) $(4,058) $ 3,253 $(1,384) $ (284) $ 1,585
FHLB advances and other borrowings 682 (460) (32) 189 389 (408) (16) (35)
-------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,733 $(5,926) $ (674) $(3,869) $ 3,642 $(1,792) $ (300) $ 1,550
-------------------------------------------------------------------------------------
Net change in interest income $ 2,303 $(1,030) $ 768 $ 2,042 $ 2,957 $(1,585) $ 130 $ 1,502
======================================================================================
Net Income - The Company reported net income of $4.9 million, $3.7 million and
$5.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Earnings per diluted share were $0.89, $0.57 and $0.75 for fiscal years 2002,
2001 and 2000 respectively. The $1.2 million increase in net income for the year
ended December 31, 2002 compared to December 31, 2001 was due to a $2.0 million
increase in net interest income and a $1.0 million increase in other income,
offset, in part, by an increase of $1.4 million in other expense.
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 writedowns 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.
Net Interest Income - Net interest income, after the provision for loan losses,
increased $2.0 million, or 12.1%, to $19.0 million for the year ended December
31, 2002 from $16.9 million in 2001. The increase was, primarily, the result of
a $3.9 million decrease in interest expense and a $145,000 decrease in the
provision for loan losses, offset by a decrease of $2.0 million in interest
income.
Net interest income, after the provision for loan losses, 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.
Detailed changes for the years ended December 31, 2002 and 2001 are contained in
the Average Balance Sheet and Rate Volume Analysis on pages 15 and 16.
Interest Income - Total interest income amounted to $43.1 million for the year
ended December 31, 2002 compared to $45.0 million in 2001. The decrease in 2002
of $2.0 million, or 4.4%, over 2001 was primarily due to a decrease in the
average tax-equivalent yield of 86 basis points (with 100 basis points being
equal to 1%) partially offset by an increase of $62.4 million in the average
balance of interest-earning assets. In addition, $1 million of additional loan
interest is included in the year ended December 31, 2002 due to the payoff of a
$5.7 million commercial loan. Excluding the additional income earned on the
commercial loan, the average yield would have decreased 99 basis points.
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
tax-equivalent yield of 48 basis points. 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.
16
Interest Expense - Total interest expense for the year ended December 31, 2002
decreased $3.9 million over the year ended December 31, 2001. The decrease in
interest expense is due to a decrease in the average cost of funds of 102 basis
points partially offset by an increase in the average balance of
interest-bearing liabilities of $61.4 million.
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 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.
Provision for Loan Losses - The Company recorded a provision for loan losses of
$702,000 in 2002, $847,000 in 2001 and $480,000 in 2000. 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.
Although management of the Company believes that the Company's allowance for
loan losses was adequate at December 31, 2002, 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, 2002 increased
$988,000 over the year ended December 31, 2001. This increase was the result of
the following increases and decreases:
- Service charges and other fees increased $519,000 due primarily to the
recognition of a $460,000 fee on the payoff of the $5.7 million
commercial loan discussed above.
- Gains on the sale of loans totaled $257,000 in the current year
period. The Company sells longer-term residential fixed rate loans in
the secondary market.
- Gains on the sale of mortgage-backed securities totaled $823,000 in
the current period versus $249,000 in the prior year period.
- Losses on the sale of investment securities totaled $537,000 in the
current period versus $215,000 in the prior year period.
- A writedown of $585,000 was recorded in the current period on real
estate owned.
- Trading revenues decreased $145,000.
- The prior year period contained a $772,000 loss on a subsidiary's
investment in small business investment companies ("SBIC's"). As of
December 31, 2002, the Company's subsidiary has exited all SBIC
investments.
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
prior year period. TGH Securities commenced operations in May 2000.
Other Expenses - Other expense for the year ended December 31, 2002 increased
$1.4 million over the year ended December 31, 2001. This increase was the result
of the following increases and decreases:
- Salaries and employee benefits increased $488,000. The majority of the
increase was the result of a writedown in 2002 of the cash surrender
value of certain life insurance policies. The remaining increase was
due to the addition of personnel in lending, the opening of two new
banking offices and normal salary increases.
- Occupancy and equipment costs increased $409,000 due to depreciation
expense in connection with the completion of the installation of a new
enterprise-wide telephone system in the first quarter of 2002,
additional equipment purchases and related expenses for two new
banking offices.
17
- Professional fees increased $318,000 primarily related to fees
incurred in connection with the Company's contested Annual Meeting
held in April 2002.
- Interest expense on redeemable preferred securities was $437,000 for
the year ended December 31, 2002 due to the issuance of $10 million of
preferred trust securities in April 2002.
- Other expenses increased $500,000 due to additional printing and
mailing expenses resulting from the Company's contested Annual
Meeting, costs related to the repurchase of shares and standstill
agreement executed, and increases in payroll taxes, FHLB service
charges, and Office of Thrift Supervision assessment fees.
- The prior year period included $720,000 of goodwill amortization. As
noted in the notes to the financial statements, the Company ceased
amortization of goodwill when the Company adopted SFAS No. 147.
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 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, $610,000, and $465,000, respectively, over the
prior year 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.
Income Taxes - Income tax expense for the years ended December 31, 2002, 2001
and 2000, was $1.0 million, or 17.4% of pre-tax income, $652,000, or 15.0% of
pre-tax income, and $1.4 million, or 21.6% of pre-tax income, respectively. The
decrease in the effective tax rate in 2001 was due to the fourth quarter charges
discussed above.
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, 2002, 2001, and 2000, the
Company originated loans in the amounts of $176.7 million, $114.3 million, and
$82.6 million, respectively. The Company also purchases loans and
mortgage-backed securities to reduce liquidity not otherwise required for local
loan demand. Purchases of loans and mortgage-backed securities totaled $324.0
million, $195.4 million, and $102.0 million, respectively, in those same
periods. Other investment activities include investment in U.S. government and
federal agency obligations, municipal bonds, debt and equity investments in
financial services firms, FHLB of Pittsburgh stock and consumer loans.
The Company has the ability to obtain advances from the FHLB of Pittsburgh
through several credit programs with the FHLB in amounts not to exceed the
Bank's maximum borrowing capacity and subject to certain conditions, including
holding a predetermined amount of FHLB stock as collateral. As an additional
source of funds, the Company has access to the federal reserve discount window.
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, 2002, cash and cash equivalents totaled $24.7
million.
The Company anticipates that it will have sufficient funds available to meet its
current commitments. As of December 31, 2002, the Company had $38.7 million in
commitments to fund loans. Certificates of deposit, which were scheduled to
mature in one year or less, as of December 31, 2002, totaled $154.4 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 6.9%, 6.9%
and 15.0%, respectively, at December 31, 2002, 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, 2002. 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.
18
Selected Consolidated Financial Data and Other Data
(Dollars in Thousands, Except Per Share Data)
2002 2001 2000 1999 1998
----------------------------------------------------------------
Income Statement Data:
Interest income $ 43,067 $ 45,028 $ 42,086 $ 34,158 $ 23,682
Interest expense 23,362 27,231 25,681 19,672 12,933
Net interest income 19,705 17,797 16,405 14,486 10,749
Provision for loan losses 702 847 480 240 270
Other income 3,288 2,300 2,132 951 415
Other expense 16,355 14,910 11,421 8,221 7,075
Income before income taxes 5,936 4,340 6,636 6,976 3,819
Net income 4,902 3,688 5,201 5,348 2,350
Balance Sheet Data:
Total assets 857,422 720,408 700,180 554,759 492,039
Loans (net) 299,963 259,220 219,360 161,158 136,466
Mortgage-backed securities available for sale 369,571 299,216 258,870 204,706 229,883
Investment securities held to maturity -- 63,824 -- -- 54,129
Investment securities available for sale 66,239 16,078 128,198 115,463 20,274
Deposits 492,880 431,583 406,684 292,619 276,390
FHLB Advances 220,884 176,884 171,884 176,884 106,884
Stockholders' equity 76,399 85,455 83,058 74,660 100,229
Per Share Data:
Basic earnings per share (1) 0.90 0.58 0.76 0.73 0.17
Diluted earnings per share (1) 0.89 0.57 0.75 0.72 0.16
Cash dividends per share (1) 0.33 0.29 0.25 0.21 0.05
Tangible book value per share (2) 13.07 11.77 10.63 9.60 11.14
Selected Ratios:(3)
Performance Ratios
Return on average assets 0.64% 0.52% 0.84% 1.02% 0.65%
Return on average equity 6.06 4.23 6.79 6.45 3.63
Stockholders' equity to assets 8.91 11.86 11.86 13.46 20.37
Net interest margin (4) 2.94 2.91 3.07 3.12 3.19
Interest rate spread (4) 2.61 2.45 2.55 2.52 2.43
Dividend payout ratio 38.90 55.53 36.65 32.26 41.79
Asset Quality Ratios
Non-performing loans to total loans (5) 0.17 1.23 0.08 0.14 0.28
Non-performing assets to total assets (5) 0.26 0.45 0.03 0.07 0.09
Allowance for loan losses as percent of
non-performing loans 437.00 79.00 989.00 553.00 264.00
Allowance for loan losses as a percent of
total average loans at end of period 0.78 1.05 0.91 0.85 0.94
Net charge-offs as a percent of average loans 0.35 0.01 0.02 0.03 0.01
Banking Offices 13 12 11 6 6
(1) There were no shares outstanding until July 1998.
(2) Tangible book value per share represents stockholders' equity divided by
the number of shares issued and outstanding.
(3) With the exception of end of period ratios, all ratios are based on average
daily 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.
19
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, 2002 and 2001, 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, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 financial position of Thistle Group Holdings, Co. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for the excess of cost over fair value
of net assets acquired (goodwill) to conform to Statement of Financial
Accounting Standards No. 147.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 14, 2003
20
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
December 31,
ASSETS 2002 2001
-----------------------
Cash on hand and in banks $ 4,819 $ 3,909
Interest-bearing deposits 19,841 18,814
----------------------
Total cash and cash equivalents 24,660 22,723
Investments held to maturity (approximate fair value $62,558) 63,824
Investments available for sale at fair value
(amortized cost - 2002, $65,098; 2001, $16,654) 66,239 16,078
Mortgage-backed securities available for sale
at fair value (amortized cost - 2002, $361,869; 2001, $295,998) 369,571 299,216
Trading securities 43,714 14,261
Loans receivable (net of allowance for loan losses - 2002, $2,209; 2001, $2,511) 299,963 259,220
Accrued interest receivable 4,260 4,056
Federal Home Loan Bank stock - at cost 12,497 8,844
Real estate acquired through foreclosure - net 1,717 81
Office properties and equipment - net 6,346 6,340
Prepaid expenses and other assets 5,706 5,522
Cash surrender value of life insurance 15,069 12,563
Goodwill 7,680 7,680
----------------------
TOTAL ASSETS $ 857,422 $ 720,408
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 492,880 $ 431,583
FHLB advances 220,884 176,884
Payable to brokers and dealers 41,924 14,109
Other borrowings 3,650 1,000
Accrued interest payable 976 918
Advances from borrowers for taxes and insurance 2,611 2,571
Accounts payable and accrued expenses 7,625 7,360
Dividends payable 473 528
----------------------
Total liabilities 771,023 634,953
----------------------
Company-obligated manditorily redeemable preferred securities of a subsidiary trust holding
solely junior subordinated debentures of the Company 10,000
----------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, no par value, 10,000,000 shares authorized,
none issued in 2002 or 2001
Common stock, $.10 par value, 40,000,000 shares authorized, 8,999,989 shares
issued and 5,259,424 shares outstanding in 2002; 8,999,989 issued and 6,607,955 shares
outstanding in 2001 900 900
Additional paid-in capital 92,884 92,889
Common stock acquired by stock benefit plans (5,537) (6,383)
Treasury stock at cost, 3,740,565 shares at December 31, 2002
and 2,392,034 shares at December 31, 2001 (39,068) (21,626)
Accumulated other comprehensive income 5,836 1,286
Retained earnings - partially restricted 21,384 18,389
----------------------
Total stockholders' equity 76,399 85,455
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 857,422 $ 720,408
======================
See notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Year Ended December 31,
2002 2001 2000
--------------------------------
INTEREST INCOME:
Interest on loans $ 22,315 $ 19,175 $ 15,395
Interest on mortgage-backed securities 15,591 17,636 15,623
Interest on investments:
Taxable 1,467 4,533 7,450
Tax-exempt 3,313 3,051 2,836
Dividends 381 633 782
--------------------------------
Total interest income 43,067 45,028 42,086
--------------------------------
INTEREST EXPENSE:
Interest on deposits 13,393 17,450 15,866
Interest on FHLB advances and other borrowings 9,969 9,781 9,815
--------------------------------
Total interest expense 23,362 27,231 25,681
--------------------------------
NET INTEREST INCOME 19,705 17,797 16,405
PROVISION FOR LOAN LOSSES 702 847 480
--------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,003 16,950 15,925
--------------------------------
OTHER INCOME:
Service charges and other fees 1,525 1,006 549
Trading revenues from brokerage operations 1,603 1,748 705
Loss on small business investment company investments (772)
Loss on sale of real estate owned (17) (33)
Writedown on real estate owned (585)
Gain on sale of mortgage-backed securities available for sale 823 249 173
Gain (loss) on sale of loans 257 (11) 23
(Loss) gain on sale and writedown of investments available for sale (537) (215) 333
Gain on sale of property and equipment 33
Rental income 211 203 153
Other income 8 92 196
--------------------------------
Total other income 3,288 2,300 2,132
--------------------------------
OTHER EXPENSES:
Salaries and employee benefits 8,151 7,663 5,986
Occupancy and equipment 2,744 2,335 1,621
Professional fees 738 420 408
Advertising 370 353 342
Amortization of goodwill 720 255
Interest on redeemable preferred securities 437
Other 3,915 3,419 2,809
--------------------------------
Total other expenses 16,355 14,910 11,421
--------------------------------
INCOME BEFORE INCOME TAXES 5,936 4,340 6,636
--------------------------------
INCOME TAXES:
Current 2,236 969 1,508
Deferred (1,202) (317) (73)
--------------------------------
Total income taxes 1,034 652 1,435
--------------------------------
NET INCOME $ 4,902 $ 3,688 $ 5,201
================================
BASIC EARNINGS PER SHARE $ 0.90 $ 0.58 $ 0.76
================================
DILUTED EARNINGS PER SHARE $ 0.89 $ 0.57 $ 0.75
================================
See notes to consolidated financial statements
22
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 Pain-in Benefit Treasury Income Partially holders'
Stock Capital Plans Stock (Loss) Restricted Equity
--------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2000 $ 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) $ 18,390 $ 85,455
===============================================================================
Comprehensive income:
Net income 4,902 4,902
Other comprehensive income, net of tax:
Net unrealized gain on investment and
mortgage-backed securities available for
sale, net of reclassification adjustment (1) 4,550 4,550
--------
Comprehensive income - - - - - - 9,452
--------
ESOP stock committed to be released 419 419
Excess of fair value of ESOP shares committed
to be released above cost 36 36
Purchase of treasury stock (17,695) (17,695)
Restricted stock plan amortization 427 427
Exercise of stock options (41) 253 212
Dividends paid (1,907) (1,907)
-------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 900 $ 92,884 $(5,537) $ (39,068) $ 5,836 $ 21,384 $ 76,399
===============================================================================
2002 2001 2000
-----------------------
(1) Disclosure of reclassification amount, net of tax for the years ended:
Net unrealized appreciation (depreciation) arising during the year $4,361 $4,707 $8,759
Net gains (losses) included in net income 189 22 334
-----------------------
Net unrealized gain (loss) on securities $4,550 $4,729 $9,093
=======================
See notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
2002 2001 2000
------------------------------------
OPERATING ACTIVITIES:
Net income $ 4,902 $ 3,688 $ 5,201
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 702 847 480
Depreciation 1,301 1,043 717
Amortization of stock benefit plans 904 850 821
Loans held for sale originated
Amortization of:
Goodwill 720 255
Net premiums (discounts) on:
Loans purchased 122 76 17
Investments (397) (1,061) (1,361)
Mortgage-backed securities 4,612 1,882 803
Loss (gain) on sale and writedown of investments 537 215 (333)
(Gain) loss on sale of loans (257) 11 (23)
Gain on sale of mortgage-backed securities (823) (249) (173)
Gain on sale of property and equipment (33)
Loss on sale and writedown of real estate owned 602 33
Net (increase) decrease in trading securities (29,453) 13,773 (28,034)
Increase in other assets (4,733) (3,622) (10,104)
Decrease (increase) in other liabilities 27,712 (11,413) 29,103
------------------------------------
Net cash provided by (used in) operating activities 5,731 6,760 (2,631)
------------------------------------
INVESTING ACTIVITIES:
Principal collected on:
Mortgage-backed securities 159,591 116,124 24,441
Loans 118,866 70,314 36,557
Loans originated (176,746) (114,340) (82,578)
Loans acquired (991) (12,365)
Increase in loans resulting from branch acquisitions (340)
Purchases of:
Investments (6,265) (2,193) (5,268)
Mortgage-backed securities (322,976) (195,452) (89,683)
Property and equipment (1,307) (1,448) (1,327)
FHLB stock (3,653) (250) (1,399)
Decrease (increase) in property and equipment resulting from branch acquisitions 985 (3,534)
Maturities and calls of investments 4,895 39,632
Proceeds from the sale of:
Loans 15,267 3,199 23
Real estate owned 102 54
Property and equipment 110
Mortgage-backed securities 93,725 39,994 17,617
Investments 17,101 17,330 833
FHLB stock 1,500
------------------------------------
Net cash used in investing activities (102,391) (26,105) (115,359)
------------------------------------
24
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in Thousands)
Year Ended December 31,
2002 2001 2000
-----------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 61,297 24,899 19,088
Increase in deposits resulting from branch acquisitions 94,977
Net increase in advances from borrowers for taxes and insurance 40 37 62
Net increase (decrease) in FHLB borrowings 44,000 5,000 (5,000)
Net (decrease) increase in other borrowings 2,650 (750) (1,250)
Issuance of trust preferred securities 10,000
Purchase of treasury stock (17,695) (5,390) (4,858)
Net proceeds from exercise of stock options 212
Cash dividends (1,907) (2,048) (1,906)
-----------------------------------
Net cash provided by financing activities 98,597 21,748 101,113
-----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,937 2,403 (16,877)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 22,723 20,320 37,197
-----------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,660 $ 22,723 $ 20,320
===================================
SUPPLEMENTAL DISCLOSURES:
Interest paid on deposits and funds borrowed $ 23,304 $ 27,299 $ 25,534
Income taxes paid 1,745 967 1,209
Noncash transfers from loans to real estate owned 3,164 47 85
Noncash transfer of investments held to maturity to available for sale 51,385
Noncash transfer of investments available for sale to held to maturity 75,446
Notes to Consolidated Financial Statements
25
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 (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,
Thistle Group Holdings Capital Trust I, a company used to issue trust preferred
securities, 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 held 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, www.RMBgo.com, and investing
these deposits, together with funds from borrowings and operations, primarily in
single-family residential loans, commercial real estate loans and
mortgage-backed securities, and to a lesser extent in secured consumer, home
improvement and commercial non-mortgage loans and investment securities. The
Bank's primary regulator is the Office of Thrift Supervision ("OTS").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The 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.
Loans Held for Sale - The Company originates loans for portfolio investment or
for sale in the secondary market. During the period of origination, loans are
designated as held for sale or held for investment. Loans held for sale are
carried at the lower of cost or fair value, determined on an aggregate basis.
Loans receivable designated as held for portfolio have been so designated due to
management's intent and ability to hold such loans until maturity or pay-off.
26
Provisions for Losses - Provisions for losses include charges to reduce the
recorded balances of loans receivable to their estimated net realizable value or
fair value, as applicable. Such provisions are based on management's estimate of
net realizable value and/or fair value of the collateral, as applicable,
considering the current and currently anticipated future operating or sales
conditions, thereby causing these estimates to be particularly susceptible to
changes that could result in a material adjustment to results of operations in
the near term. Recovery of the carrying value of such loans and real estate is
dependent to a great extent on economic, operating and other conditions that are
beyond the Company's control.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosure. The Company values impaired loans
using the fair value of the collateral. Any reserves determined under SFAS No.
114 would be included in the allowance for loan losses.
Real Estate Acquired Through Foreclosure - Real estate acquired through
foreclosure is carried at the lower of fair value or balance of the loan on the
property at date of acquisition less estimated selling costs. Costs relating to
the development and improvement of property are capitalized, and those relating
to holding the property are charged to expense. The amounts recoverable from
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 (SBIC's),
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 through a charge to
operations of $772. As of December 31, 2002, the service corporation has exited
all SBIC investments.
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, 2002, the Company's assets consist
primarily of assets that earned interest at fixed interest rates. Those assets
were funded primarily with short-term liabilities that have interest rates that
vary with market rates over time.
The shorter duration of the interest-sensitive liabilities indicates that the
Company is exposed to interest rate risk because, in a rising rate environment,
liabilities will be repricing faster at higher interest rates, thereby reducing
the market value of long-term assets and net interest income.
Loan Fees - The Company defers all loan fees, net of certain direct loan
origination costs, and recognizes income as a yield adjustment over the
contractual life of the loan considering prepayments using the interest method.
Unearned Discounts and Premiums - Unearned discounts and premiums are accreted
over the expected average lives of the loans purchased using the interest
method.
Income Taxes - Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Accounting for Stock-Based Compensation - The Company accounts for stock options
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, which
allows an entity to choose between the intrinsic value method, as defined in
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, 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 December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, Accounting for Stock-Based Compensation --Transition and Disclosure, an
amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123 to
27
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company has provided the required disclosures in these footnotes.
Earnings Per Share - Basic earnings per share 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 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 are
as follows:
Year Ended December 31,
2002 2001 2000
---------------------------------
Average common shares outstanding - basic 5,428,519 6,382,478 6,866,018
Increase in shares due to dilutive options 90,276 34,434 34,431
---------------------------------
Adjusted shares outstanding - diluted 5,518,795 6,416,912 6,900,449
=================================
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. 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.
Accounting for Goodwill - In June 2001, the FASB issued SFAS No. 142, Goodwill
and Other Intangible Assets. 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
did 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.
On October 1, 2002, the Company adopted SFAS No. 147, Acquisitions of Certain
Financial Institutions, which allows financial institutions meeting certain
criteria to reclassify their unidentifiable intangible asset balances to
goodwill and retroactively cease amortization beginning as of January 1, 2002.
The Company will be required to annually review the asset for impairment. As
required by the standard, the Company has restated earnings for the quarterly
periods ended March 31, 2002, June 30, 2002 and September 30, 2002 (See note
22).
A summary of net income and basic and diluted earnings per share, pro forma net
income and pro forma basic and diluted earnings per share (computed as if SFAS
No. 142 had been effective in 2001 and 2000) follows:
Year Ended December 31,
2002 2001 2000
--------------------------------
Net income as reported $ 4,902 $ 3,688 $ 5,201
Amortization of goodwill, net of tax 612 199
--------------------------------
Pro forma net income $ 4,902 $ 4,300 $ 5,400
================================
Basic earnings per share $ 0.90 $ 0.58 $ 0.76
Amortization of goodwill 0.10 0.03
--------------------------------
Pro forma basic earnings per share $ 0.90 $ 0.68 $ 0.79
Diluted earnings per share $ 0.89 $ 0.57 $ 0.75
Amortization of goodwill 0.10 0.03
--------------------------------
Pro forma diluted earnings per share $ 0.89 $ 0.67 $ 0.78
================================
28
Recent Accounting Pronouncements - In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. The provisions of this statement related to
the rescission of SFAS No. 4 are effective for fiscal years beginning after May
15, 2002. Certain provisions of the statement relating to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. All other provisions of
the statement are effective for financial statements issued on or after May 15,
2002. This statement had no impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation also incorporates, without change,
the guidance in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which is being superseded. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company currently has no guarantees
that would be required to be recognized, measured or disclosed under this
Interpretation.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. The Interpretation clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The Company is not a party to any variable interest
entities covered by the Interpretation.
Reclassifications - Certain items in the 2001 and 2000 consolidated financial
statements have been reclassified to conform with the presentation in the 2002
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 was 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.
As noted previously, the Company adopted SFAS No. 147 on October 1, 2002. As a
result, the Company reclassified the excess of cost over fair value of net
assets acquired of $7,680 to goodwill and ceased amortization. In 2002, the
Company, utilizing an independent third party specialist, tested the goodwill
for impairment. Based on this analysis, no impairment existed.
29
4. INVESTMENTS HELD TO MATURITY
In 2002, the Company sold $15,600 of FHLB and FHLMC bonds, representing its
entire portfolio of zero coupon agency securities, previously classified as held
to maturity, at a net loss of $709. The Company executed the transaction to
improve the interest-rate risk characteristics of the Bank's balance sheet. The
Company reclassified its remaining held to maturity investments to available for
sale.
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, 2002
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------
Municipal bonds - 1 to 5 years $ 511 $ 30 $ 541
Municipal bonds - 5 to 10 years 255 1 256
Municipal bonds more than 10 years 50,651 839 $ 162 51,328
Mutual funds 1,569 1,569
Capital trust securities 7,457 789 6,668
Equity investments 3,864 1,222 5,086
Other 791 791
-----------------------------------------
Total $65,098 $ 2,092 $ 951 $66,239
=========================================
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
===========================================
Proceeds from the sale of investments available for sale during the year ended
December 31, 2002 were $17,101 resulting in gross gains of $172 and gross losses
of $709. 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.
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. No additional charges were taken on such
investments during the year ended December 31, 2002.
30
6. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows:
Available for Sale
December 31, 2002
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------
Agency pass-through certificates $294,095 $ 7,301 $ 20 $301,376
Agency real estate mortgage investment conduits 38,362 342 11 38,693
Non-agency collateralized mortgage obligations 29,412 163 73 29,502
---------------------------------------------
Total $361,869 $ 7,806 $ 104 $369,571
=============================================
Available for Sale
December 31, 2001
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------------------------------------------
Agency pass-through certificates $287,503 $ 3,707 $ 671 $290,539
Agency collateralized mortgage obligations 3,904 3,904
Agency real estate mortgage investment conduits 4,591 182 4,773
---------------------------------------------
Total $295,998 $ 3,889 $ 671 $299,216
=============================================
Proceeds from the sale of mortgage-backed securities during the year ended
December 31, 2002 were $93,725 resulting in a gain of $823. 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.
7. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31,
2002 2001
-----------------------
Mortgage loans:
1-4 Family residential $ 125,827 $ 125,504
Commercial real estate 92,760 62,532
Home equity lines of credit and improvement loans 28,525 20,923
Commercial loans 26,557 28,866
Construction loans - net 28,446 23,677
Loans on savings accounts 505 637
Consumer loans 1,034 879
-----------------------
Total loans 303,654 263,018
Plus unamortized premiums 144 267
Less:
Net discounts on loans purchased and
loans acquired through merger (12) (13)
Deferred loan fees (1,614) (1,541)
Allowance for loan losses (2,209) (2,511)
-----------------------
Total $ 299,963 $ 259,220
======================
The Company originates loans to customers in its local market area, principally
Philadelphia, Pennsylvania and the four adjoining counties and the state of
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.
31
Originated or purchased commercial real estate loans totaled $92,760 and $62,532
at December 31, 2002 and 2001, respectively. Of the commercial real estate
loans, as of December 31, 2002 and 2001, $28,759 and $20,935 are collateralized
by multi-family residential property; $64,001 and $41,597 by other commercial
use property, respectively.
At December 31, 2002, 2001 and 2000, the Company was servicing loans for others
amounting to $32,059, $15,624 and $8,745, 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. Such income amounted to $41, $23 and $19 for the years ended
December 31, 2002, 2001 and 2000, respectively. In connection with these loans
serviced for others, the Company held borrower's escrow balances of
approximately $458, $296 and $168 at December 31, 2002, 2001 and 2000,
respectively.
Following is a summary of changes in the allowance for loan losses:
Year Ended December 31,
2002 2001 2000
-----------------------------
Balance, beginning $ 2,511 $ 1,682 $ 1,234
Provision 702 847 480
Charge-offs, net (1,004) (18) (32)
-----------------------------
Balance, ending $ 2,209 $ 2,511 $ 1,682
=============================
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, 2002 and 2001, 100% of the
impaired loan balance was measured for impairment based on the fair value of the
loans' collateral. Impairment losses are included in the provision for loan
losses. SFAS Nos. 114 and 118 do not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include consumer loans and residential real estate
loans and are not included in the data that follows:
December 31,
2002 2001
------------------
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,
2002 2001 2000
----------------------
Average impaired loans $1,179 $2,830 $303
Interest income recognized on impaired loans - - 27
No cash basis interest income was recognized in 2002, 2001 or 2000 for the
impaired loans included above. Nonaccrual loans for which interest has been
fully reserved totaled approximately $506 and $3,178 at December 31, 2002 and
2001, 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, 2002 fixed rate loans and
mortgage-backed securities were approximately $444,300, and adjustable interest
rate loans and mortgage-backed securities were approximately $225,200.
32
As of December 31, 2002, the Company had approximately $38,703 in outstanding
loan commitments with interest rates ranging from 3.75% 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 $711,
$1,099 and $1,088 at December 31, 2002, 2001 and 2000, respectively.
Originations to these persons were $88, $95 and $28 for the years ended December
31, 2002, 2001 and 2000, respectively. Loan repayments for the years ended
December 31, 2002, 2001 and 2000 were $476, $84 and $107, respectively.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
December 31,
2002 2001
--------------------
Land $ 1,668 $ 1,668
Buildings 4,188 4,188
Furniture and equipment 6,630 5,596
Leasehold improvements 639 439
--------------------
Total 13,125 11,891
Accumulated depreciation and amortization (6,779) (5,551)
--------------------
Net $ 6,346 $ 6,340
====================
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, 2002 are as follows:
December 31:
2003 $ 188
2004 134
2005 125
2006 112
2007 108
Thereafter 439
------
Total minimum future rental payments $1,106
======
The leases contained options to extend for periods from five to fourteen years.
The cost in such rentals is not included in the above. Leasehold expense was
approximately $231, $229 and $94 for the years ended December 31, 2002, 2001 and
2000, respectively.
9. DEPOSITS
Deposits consist of the following major classifications:
December 31,
2002 2001
--------------------------------------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
--------------------------------------------
Checking accounts $ 91,584 1.32% $ 47,372 1.08%
Money Market accounts 44,191 1.46 40,029 2.17
Passbook accounts 124,660 1.58 109,257 2.48
Certificate accounts 232,445 3.55 234,925 4.38
--------------------------------------------
Total $492,880 2.45% $431,583 3.33%
============================================
At December 31, 2002 and 2001, the Company had deposits of $100 or greater
totaling approximately $115,840 and $72,450, respectively. Deposits in excess of
$100 may not be federally insured.
33
While frequently renewed at maturity rather than paid out, certificate accounts
were scheduled to mature contractually within the following periods:
December 31,
2002 2001
-------------------
1 year or less $154,382 $169,258
1 year - 3 years 43,007 41,022
3 years - 5 years 35,056 24,645
-------------------
Total $232,445 $234,925
===================
Interest expense on deposits is as follows:
Year Ended December 31,
2002 2001 2000
--------------------------------
Checking and Money Market accounts $ 1,860 $ 1,620 $ 996
Passbook accounts 2,409 2,982 3,215
Certificate accounts 9,144 12,875 11,687
Early withdrawal penalties (20) (27) (32)
--------------------------------
Total $ 13,393 $ 17,450 $ 15,866
================================
10. FHLB ADVANCES AND OTHER BORROWINGS
A summary of advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh
follows:
December 31,
2002 2001
--------------------------------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
--------------------------------------
Advances from FHLB due by December 31, 2003 $ 44,000 1.37 %
Advances from FHLB due by December 31, 2007 and thereafter 176,884 5.32 % $176,884 5.32 %
--------------------------------------
Total $220,884 4.53 % $176,884 5.32 %
======================================
The advances are collateralized under a blanket collateral lien agreement.
Advances due by December 31, 2003 include $39,000 borrowed under an overnight
line of credit. Advances due by December 31, 2007 and thereafter for December
31, 2002 and 2001 include $175,000 of 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. At December 31, 2002, $105,000
are convertible quarterly at the option of the FHLB.
The Company has other borrowings of $3,650 and $1,000 at December 31, 2002 and
2001 respectively, from an unaffiliated lender. The borrowing carries a variable
interest rate, which was 5% at December 31, 2002 and is payable on demand.
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, 2002 and 2001 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
--------------------------------
2002 $1,014 $20 $1,034
2001 628 24 652
2000 1,435 1,435
34
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,
2002 2001 2000
-------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------
Tax at federal tax rate $ 2,018 34.0 % $ 1,476 34.0 % $ 2,257 34.0 %
Tax-exempt income (1,035) (17.4) (880) (20.3) (864) (13.0)
State income tax expense,
net of federal income tax 12 0.2 15 0.3
Other 39 0.6 41 1.0 42 0.6
-----------------------------------------------------
Total $ 1,034 17.4 % $ 652 15.0 % $ 1,435 21.6 %
=====================================================
Items that give rise to significant portions of the deferred tax accounts are as
follows:
December 31,
2002 2001
------------------
Deferred tax assets:
Deferred loan fees $ 549 $ 524
Allowance for loan losses 1,304 869
Reserve for uncollected interest 10 99
Supplemental pension and other retirement accruals 748 660
Capital loss carryforward 314
Partnership investments 91
------------------
3,016 2,152
------------------
Deferred tax liabilities:
Unrealized gain on investments and mortgage-backed securities (3,007) (899)
Office properties and equipment (8) (138)
Other (164) (371)
------------------
(3,179) (1,408)
------------------
Total $ (163) $ 744
==================
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). As of December 31, 2002, the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 2002, 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.
35
Well-Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-----------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------
At December 31, 2002:
Tangible $54,349 6.93 % $11,770 1.5 % N/A N/A
Core (Leverage) 54,349 6.93 31,387 4.0 $39,235 5.0 %
Tier 1 risk-based 54,349 14.44 N/A N/A 47,082 6.0
Total risk-based 56,559 15.03 30,108 8.0 37,635 10.0
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
Capital at December 31, 2002 for financial statement purposes differs from
tangible, core (leverage), and Tier 1 risk-based capital amounts by $8,411
representing the exclusion of unrealized gains on securities available for sale,
the exclusion of goodwill, intangible and other disallowed assets of $6,019 and
$7,620 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, 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.
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 earnings
of the Bank for the year to date plus retained earnings for the prior two fiscal
years net of any prior capital distributions, 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.
13. PROFIT-SHARING PLAN
The Company maintains a 401(k) profit-sharing plan for eligible employees, which
provides for employee pre-tax contributions with matching contributions at the
discretion of the Board of Directors. Matching contributions were $82, $75 and
$60 for the years ended December 31, 2002, 2001 and 2000, respectively.
14. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
As part of the conversion and reorganization, in July 1998, the ESOP borrowed
$6,285 from the Company in order to purchase 628,509 shares of the common stock
of the Company. Since the Company's ESOP is internally leveraged, the Company
does not report the loan receivable from the ESOP as an asset and does not
report the ESOP as a liability. The Company accounts for its ESOP in accordance
with AICPA Statement of Position 93-6, Employers' Accounting for
36
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, 2002, 188,550 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 $477,
$390 and $303 for the years ended December 31, 2002, 2001 and 2000 respectively.
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 732,985 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, 2002, 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, 2000 668,608 $ 1.80- $8.94 $ 8.07
----------------------------------
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 662,647 $ 2.07- $ 9.55 $ 8.77
----------------------------------
Granted 94,000 $10.86- $11.71 $11.60
----------------------------------
Exercised 25,667 $ 6.25- $ 7.00 $ 6.69
----------------------------------
Outstanding at December 31, 2002 711,536 $ 2.07- $11.71 $ 9.18 88 months
----------------------------------------------
Exercisable at December 31, 2002 653,535 $ 2.07- $11.71 $ 8.97
----------------------------------
The Company applies APB Opinion No. 25 and related interpretations 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,
2002 2001 2000
-------------------------------
Net income, as reported $ 4,902 $ 3,688 $ 5,201
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (310) (4) (72)
-------------------------------
Pro forma net income $ 4,592 $ 3,684 $ 5,129
===============================
Earnings per share:
Basic-as reported $ 0.90 $ 0.58 $ 0.76
Basic-pro forma 0.85 0.58 0.75
Diluted-as reported 0.89 0.57 0.75
Diluted-pro forma 0.83 0.57 0.74
Weighted average fair value of options granted during the period $ 3.98 $ 2.69 $ 2.04
37
The Black-Scholes option-pricing model was used to determine the grant date fair
value of options. Significant assumptions used to calculated the above fair
value of the awards are as follows:
Year Ended December 31,
2002 2001 2000
------------------------------
Risk free interest rate of return 4.02% 4.90% 5.15%
Expected option life (months) 120 120 120
Expected volatility 31.21% 26.07% 21.83%
Expected dividends 3.07% 3.20% 3.00%
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, 2002 and 2001, 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, 2002 and
2001, the deferred cost of the unearned RSP shares totaled $1,137 and $1,565,
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, 2002, 2001
and 2000, the Company recognized compensation and employee benefit expense of
$428, $460 and $518, 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 $65, $69
and $207 for the years ended December 31, 2002, 2001 and 2000, 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 than Rights owned by such person or
group), in whole or in part, at an exchange ratio of one share of common stock
(or one one-hundredth of a share of the new series of junior participating
preferred stock) per Right.
17. CAPITAL SECURITIES
On March 26, 2002, the Company formed a wholly-owned subsidiary, Thistle Group
Holdings Capital Trust I, a Delaware business trust (the "Trust"). On April 10,
2002, the Trust sold $10.0 million of pooled floating rate capital securities
(the "Capital Securities") to MM Community Funding III, Ltd., an unaffiliated
entity, with a stated value and liquidation preference of $1,000 per share. The
obligations of the Trust under the Capital Securities are fully and
unconditionally guaranteed by the Company and the Trust has no independent
operations. The entire proceeds from the sale of the Capital Securities were
used by the Trust to invest in floating rate junior subordinated debt securities
of the Company (the "Junior Subordinated Debt"). The Junior Subordinated Debt is
unsecured and ranks subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The Junior
Subordinated Debt is the sole asset of the Trust.
38
Interest on the Capital Securities is cumulative and payable semi-annually in
arrears. The Capital Securities mature in April 2032. The Company has the right
to optionally redeem the Junior Subordinated Debt prior to the maturity date,
but no sooner than five years after the issuance, at 100% of the stated
liquidation amount, plus accrued and unpaid distributions, if any, on the
redemption date. Upon the occurrence of certain events, the Company has the
right to redeem the Junior Subordinated Debt in whole, but not in part, at a
special redemption price before five years have elapsed. Proceeds from any
redemption of the Junior Subordinated Debt will cause a mandatory redemption of
Capital Securities having an aggregate liquidation amount equal to the principal
amount of the Junior Subordinated Debt redeemed.
Additionally, under the terms of the Junior Subordinated Debt, the Company will
have the right, with certain limitations, to defer the payment of interest on
the Junior Subordinated Debt at any time for a period not exceeding twenty
consecutive quarterly periods. Consequently, distributions on the Capital
Securities would be deferred and accumulate interest, compounded quarterly. The
Capital Securities were issued without registration under the Securities Act of
1933, as amended, in reliance upon an exemption from registration as provided by
Regulation S. At December 31, 2002, the interest rate on the capital securities
and junior subordinated debt was 5.32%.
18. TENDER OFFER
The Company completed an Issuer Tender Offer, repurchasing 1,129,000 shares at a
price of $13.00 per share, during the year ended 2002. Shares acquired have been
retained as treasury stock and will be available to issue for purposes
including, without limitation, acquisitions, raising additional capital and the
satisfaction of obligations under existing or future employee benefit or
compensation programs or stock plans or compensation programs for Directors.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
December 31,
2002 2001
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------
Assets:
Cash and cash equivalents $ 24,660 $ 24,660 $ 22,723 $ 22,723
Investments held to maturity 63,824 62,558
Investments available for sale 66,239 66,239 16,078 16,078
Mortgage-backed securities available for sale 369,571 369,571 299,216 299,216
Trading securities 43,714 43,714 14,261 14,261
Loans receivable 299,963 305,002 259,220 263,526
Federal Home Loan Bank stock 12,497 12,497 8,844 8,844
Liabilities:
Checking, Money Market
and Passbook accounts 260,435 260,435 196,658 196,658
Certificate accounts 232,445 236,172 234,925 240,825
FHLB Advances 220,884 243,649 176,884 185,579
Other borrowings 3,650 3,650 1,000 1,000
Cash and Cash Equivalents - For cash and cash equivalents, the carrying amount
is a reasonable estimate of fair value.
Investment, Mortgage-backed and Trading Securities - Fair values are based on
quoted market prices or dealer quotes.
Loans Receivable - 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.
Checking, Money Market, Passbook and Certificate Accounts - The fair value of
Checking, Money Market 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 similar maturities.
39
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, 2002 and 2001. 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.
20. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of Thistle Group Holdings, Co. are as follows:
Condensed Statements of Financial Condition
December 31,
2002 2001
-------------------
Assets:
Cash and cash equivalents $ 2,047 $ 1,324
Investments available-for-sale 2,973 3,623
Investment in subsidiaries 90,234 82,344
Loans receivable 5,536 6,383
Prepaid expenses and other assets 418 237
-------------------
Total assets $101,208 $ 93,911
===================
Liabilities and Stockholders' Equity:
Subordinated debt $ 10,310
Other borrowings 12,937 $ 7,000
Dividends payable 473 528
Other liabilities 1,089 928
-------------------
Total liabilities 24,809 8,456
Stockholders' equity 76,399 85,455
-------------------
Total liabilities and stockholders' equity $101,208 $ 93,911
===================
Condensed Statements of Income
Year Ended December 31,
2002 2001 2000
----------------------------
Income:
Interest on loans $ 535 $ 512 $ 615
Interest and dividends on investments 59 118 202
Gain on sale of investments 195
Other miscellaneous income 182 178 8
----------------------------
Total income 776 1,003 825
----------------------------
Interest on other borrowings 896 332 275
----------------------------
Operating expenses 923 351 354
----------------------------
(Loss) income before income taxes and
equity in undistributed income of subsidiaries (1,043) 320 196
Income tax (benefit) expense (363) 87 80
----------------------------
(Loss) income before equity in undistributed
income of subsidiaries (680) 233 116
Equity in undistributed income
of subsidiaries 5,582 3,455 5,085
----------------------------
Net income $ 4,902 $ 3,688 $ 5,201
============================
40
Condensed Statements of Cash Flows
Year Ended December 31,
2002 2001 2000
--------------------------------
Operating activities:
Net income $ 4,902 $ 3,688 $ 5,201
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of subsidiary (5,582) (3,455) (5,085)
Gain on sale of investments (195)
Increase in other assets (181) (60) (266)
Increase in other liabilities 18 427 139
--------------------------------
Net cash provided by (used in) operating activities (843) 405 (11)
--------------------------------
Investing activities:
Purchase of investments 847 (50)
Decrease in loans receivable 879 937
Proceeds from the sale of investments 795
Return of capital and calls of investments 910
Dividends received from subsidiaries 3,262 2,431 3,000
--------------------------------
Net cash provided by investing activities 5,019 4,105 3,887
--------------------------------
Financing activities:
Issuance of trust preferred securities 10,310
Net increase in other borrowings 5,937 3,250 750
Capital contribution to subsidiary (310) (2,000)
Purchase of treasury stock (17,695) (5,390) (4,857)
Dividends paid (1,907) (2,048) (1,906)
Net proceeds from exercise of stock options 212
--------------------------------
Net cash used in financing activities (3,453) (4,188) (8,013)
--------------------------------
Increase (decrease) in cash 723 322 (4,137)
Cash, beginning of year 1,324 1,002 5,139
--------------------------------
Cash, end of year $ 2,047 $ 1,324 $ 1,002
================================
21. 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.
During 2002, the Company executed a Standstill Agreement with a shareholder
group (the "Group Members"). The primary terms of the agreement include the
following. The Company made a cash payment of $75 to the Group Members. The
Group Members withdrew and released two lawsuits that were pending in the Court
of Common Pleas, Philadelphia, Pennsylvania, against the Company and each of its
directors. Additionally, each Group Member agreed to enter into the agreement
and to refrain from purchasing or otherwise acquiring the beneficial ownership
of any shares of capital stock of the Company for a period of five years. The
Company agreed to repurchase approximately 97,000 shares of its common stock
held by Group Members at $12.50 per share. In connection with the agreement and
repurchase of shares, the Company recognized a charge of $116 net of tax in
2002. Such agreement will remain in effect for a period of five years.
41
22. QUARTERLY FINANCIAL DATA (Unaudited)
Unaudited quarterly financial data for the years ended December 31, 2002 and
2001 is as follows:
2002 2001
--------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter(1) Quarter(1) Quarter(1) Quarter Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------
Interest income $ 10,528 $ 10,778 $ 11,125 $ 10,636 $ 11,650 $ 11,295 $ 11,186 $ 10,897
Interest expense 5,830 5,920 5,876 5,736 7,155 7,052 6,716 6,308
--------------------------------------------------------------------------------------
Net interest income 4,698 4,858 5,249 4,900 4,495 4,243 4,470 4,589
Provision for loan losses 150 200 150 202 120 120 187 420(2)
--------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,548 4,658 5,099 4,698 4,375 4,123 4,283 4,169
--------------------------------------------------------------------------------------
Non-interest income (loss) 602 949 1,041 696 432 876 1,210 (218)(2)
Non-interest expense 3,781 4,013 4,492 4,069 3,652 3,598 3,853 3,807
--------------------------------------------------------------------------------------
Income before taxes 1,369 1,594 1,648 1,325 1,155 1,401 1,640 144
Provision for income taxes 238 278 287 231 179 256 372 (155)
--------------------------------------------------------------------------------------
Net income $ 1,131 $ 1,316 $ 1,361 $ 1,094 $ 976 $ 1,145 $ 1,268 $ 299
=====================================================================================
Amortization of goodwill (net of tax) 153 148 139 180
-----------------------------------------
Pro forma net income $ 1,129 $ 1,293 $ 1,407 $ 479
-----------------------------------------
Per share:
Earnings per share - basic $ 0.18 $ 0.22 $ 0.28 $ 0.23 $ 0.15 $ 0.17 $ 0.20 $ 0.05
Earnings per share - diluted 0.18 0.22 0.27 0.22 0.15 0.17 0.20 0.05
Pro forma earnings per share - basic 0.16 0.19 0.21 0.07
Pro forma earnings per share - diluted 0.17 0.20 0.22 0.08
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) As required by SFAS No. 147, the Company retroactively ceased amortization
beginning as of January 1, 2002 and restated earnings for the quarterly
periods ended March 31, 2002, June 30, 2002 and September 30, 2002. The
Company previously reported net income for the quarterly periods ended
March 31, 2002, June 30, 2002, and September 30, 2002 of $992, $1,135, and
$1,210, respectively, which included amortization, net of tax of $149,
$144, and $148, respectively.
(2) During the fourth quarter of 2001, 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.
42
STOCK MARKET INFORMATION
Shares of the Company's common stock have been quoted on the Nasdaq National
Market under the symbol "THTL" since July 14, 1998. The following table sets
forth the high and low closing sale prices and cash dividends paid for the
common stock for the calendar quarters indicated. The prices reflect
inter-dealer prices, without retail markup, markdown, or commission, and may not
represent actual transactions.
2002 2001
--------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------------------------------------------------
Common stock price
range of the Company:
High 12.59 13.05 11.65 12.00 9.81 9.65 10.40 9.90
Low 9.50 11.25 10.26 10.13 7.94 9.20 8.10 9.01
Dividend paid per share 0.08 0.08 0.08 0.09 0.07 0.07 0.07 0.08
There were 848 holders of record of the Company's common stock as of February
24, 2003. This number does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. The
Company's ability to pay dividends to stockholders is largely dependent upon the
dividends it receives from the Bank. The Bank's ability to pay dividends to the
Company is restricted by federal banking regulations. See note 12 to the
Consolidated Financial Statements.
43